Items of Adjustment
At the time of making adjustments or bringing any transaction into the books, you have to remember that the general principle of double entry must be followed. It means that you will have to ensure that the amount is debited to one account and credited to another. On the basis of it, while showing it in the Final Accounts the transaction would appear at two places; one representing the debit and credit as only then will the Balance Sheet agree. As a general rule, every adjustment appears in two accounts; First, in the Trading or Profit and Loss Account and second, in the Balance Sheet.
Let us now discuss the nature of such items of adjustment and its treatment in the Final Accounts.
We have discussed earlier that many times all goods purchased or produced during the accounting year are not completely sold out by the end of the year. The goods remaining unsold constitute the 'Closing Stock'. Since the 'Closing Stock' is known only at the end of the year, it is not included in the 'Trial Balance'. It is given after the Trial Balance in the form of additional information. In order to ascertain the gross profit or gross loss, closing stock has to be brought into the Final Account. Closing stock is valued at cost or market price whichever is lower and then incorporated in the accounts by passing the following adjustment entry:
Closing Stock A/c Dr.
To Trading A/c
Thereafter, the closing stock is treated in the Final Accounts as follows:
- On the Credit side of the Trading Account as a separate item and
- On the asset side of the Balance Sheet as a separate item under Current Assets.
By Closing Stock