**Definition:** Adjustments are modifications made to accounts at the time of preparing financial statements to ensure they reflect the true and fair view of profitability and financial position based on the **accrual concept of accounting**.
**Why Adjustments are Necessary:**
**Example:** Insurance premium of ₹1,200 paid on July 1, 2016 for 12 months. By March 31, 2017 (end of accounting year), only 9 months' benefit has been received. Three months' premium (₹300) belongs to the next financial year 2017-18. Therefore, insurance expense for 2016-17 should be ₹900, not ₹1,200.
**Another Example:** Salaries for March 2017 paid on April 7, 2017 represent **outstanding expenses** for the year 2016-17 and must be included in that year's P&L account.
**Items Requiring Adjustments:**
1. Closing stock
2. Outstanding expenses
3. Prepaid/Unexpired expenses
4. Accrued income
5. Income received in advance
6. Depreciation
7. Bad debts
8. Provision for doubtful debts
9. Provision for discount on debtors
10. Manager's commission
11. Interest on capital
**Key Principle:** All adjustments affect the financial statements in TWO places to maintain the double-entry system—one side of Trading A/c or P&L A/c and one side of Balance Sheet.
---
**Definition:** Closing stock represents the cost of unsold/unconsumed goods lying in the stores/warehouse at the end of the accounting period.
**Accounting Treatment:**
**Method 1: Adjustment Through Trading Account**
Journal Entry:
```
Closing Stock A/c Dr. [Amount]
To Trading A/c [Amount]
```
**Method 2: Adjustment Through Purchases Account**
Journal Entry:
```
Closing Stock A/c Dr. [Amount]
To Purchases A/c [Amount]
```
**Important Distinction:**
**Example:** Ankit's trial balance shows opening stock of ₹10,000 and purchases of ₹75,000. Closing stock is ₹15,000.
Using Method 1:
```
Trading Account (Dr. side shows):
Purchases 75,000
Closing Stock (Cr. side) (15,000)
Adjusted Cost of Goods Sold 60,000
```
**Balance Sheet Treatment:** Closing stock is displayed under **Current Assets** section.
---
**Definition:** Outstanding expenses (or accrued expenses) are expenses that have been **incurred during the accounting period but remain unpaid** at the end of that period. They relate to the current year's revenue earning.
**Examples:** Unpaid wages, unpaid salaries, unpaid interest on loans, unpaid rent, unpaid electricity bills.
**Journal Entry Format:**
```
Concerned Expense A/c Dr. [Amount]
To Outstanding [Expense Name] A/c [Amount]
```
**Accounting Treatment:**
1. **In P&L Account (Debit Side):**
2. **In Balance Sheet (Liability Side):**
**Worked Example:**
Assume Ankit's trial balance shows Wages = ₹8,000. Additional information states wages of ₹500 for March 2017 were paid in April 2017.
Journal Entry:
```
Wages A/c Dr. 500
To Wages Outstanding A/c 500
```
**P&L Account Treatment:**
```
Expenses side:
Wages 8,000
Add: Outstanding Wages 500
8,500
```
**Balance Sheet Treatment:**
```
Current Liabilities:
Wages Outstanding 500
```
**Effect on Profit:** Outstanding expenses **decrease net profit** because they increase total expenses recognized in the accounting period.
**Important Note:** Only the portion relating to the current accounting year should be outstanding. For example, if salaries from February and March 2017 are unpaid but paid in April, only the March amount (₹X) is outstanding for year 2016-17, not February's.
---
**Definition:** Prepaid expenses (or unexpired expenses) are **expenses paid during the current accounting period but the benefits of which will be received in future accounting periods**. The portion relating to future periods should not be charged to the current year.
**Examples:** Insurance premiums paid in advance, rent paid in advance, subscriptions paid for future periods, salaries paid in advance.
**Journal Entry Format:**
```
Prepaid [Expense Name] A/c Dr. [Amount]
To Concerned Expense A/c [Amount]
```
**Accounting Treatment:**
1. **In P&L Account (Expense Side):**
2. **In Balance Sheet (Asset Side):**
**Worked Example:**
Ankit's trial balance shows Salary = ₹25,000. Additional information states ₹5,000 of this was paid in advance to an employee for future services (not yet rendered).
Journal Entry:
```
Prepaid Salary A/c Dr. 5,000
To Salary A/c 5,000
```
**P&L Account Treatment:**
```
Salary 25,000
Less: Prepaid Salary (5,000)
Salary Expense (current period) 20,000
```
**Balance Sheet Treatment:**
```
Current Assets:
Prepaid Salary 5,000
```
**Effect on Profit:** Prepaid expenses **increase net profit** by reducing the expenses charged to the current period.
**Distinction from Outstanding Expenses:**
---
**Definition:** Accrued income (or outstanding income) is **income earned during the current accounting period but not yet received in cash** by the end of that period. It belongs to the current year's revenue.
**Examples:** Accrued interest on loans given, accrued commission from agents, accrued rent from property, accrued professional fees.
**Journal Entry Format:**
```
Accrued [Income Name] A/c Dr. [Amount]
To Concerned Income A/c [Amount]
```
**Accounting Treatment:**
1. **In P&L Account (Credit Side):**
2. **In Balance Sheet (Asset Side):**
**Worked Example:**
Ankit's trial balance shows Commission Received = ₹5,000. Additional information states commission of ₹1,500 from another businessman was earned in March 2017 but received in April 2017.
Journal Entry:
```
Accrued Commission A/c Dr. 1,500
To Commission A/c 1,500
```
**P&L Account Treatment:**
```
Commission Received 5,000
Add: Accrued Commission 1,500
Total Income (current period) 6,500
```
**Balance Sheet Treatment:**
```
Current Assets:
Accrued Commission 1,500
```
**Effect on Profit:** Accrued income **increases net profit** because income earned is recognized even though cash is not received.
**Important Distinction:**
---
**Definition:** Income received in advance (or unearned income) is **income received in cash during the current accounting period but the benefit/service has not yet been provided**. It relates to future periods' revenue.
**Examples:** Advance rent received from tenants, advance subscription fees received, advance commission received before services rendered.
**Journal Entry Format:**
```
Concerned Income A/c Dr. [Amount]
To Income Received in Advance A/c [Amount]
```
**Accounting Treatment:**
1. **In P&L Account (Credit Side):**
2. **In Balance Sheet (Liability Side):**
**Worked Example:**
Ankit subleted part of the building from March 31, 2017 at ₹1,000 per month. The tenant gave advance rent for April, May, and June 2017 = ₹3,000, which was credited to rent received account.
Journal Entry:
```
Rent Received A/c Dr. 3,000
To Rent Received in Advance A/c 3,000
```
**P&L Account Treatment:**
```
Rent Received 3,000
Less: Rent Received in Advance (3,000)
Rent Earned (current period) 0
```
**Balance Sheet Treatment:**
```
Current Liabilities:
Rent Received in Advance 3,000
```
**Effect on Profit:** Income received in advance **decreases net profit** (or keeps it unchanged) by excluding unearned income from current year's revenue.
**Distinction from Accrued Income:**
| Accrued Income | Income in Advance |
|---|---|
| Earned in current year | Received in current year |
| Received in future | Earned in future |
| Increases current profit | Decreases current profit |
| Current Asset | Current Liability |
---
**Definition:** **Depreciation is the systematic reduction in the book value (or cost) of a fixed asset due to wear and tear, passage of time, obsolescence, or change in market demand.** It is a non-cash expense charged against revenue each accounting period.
**Key Characteristics:**
**Why Depreciation is Charged:**
1. To match the cost of asset with the revenue it generates
2. To show the true financial position by reducing asset value on Balance Sheet
3. To comply with the **matching concept** of accounting
4. For tax purposes (depreciation is tax-deductible)
**Methods of Calculating Depreciation (as per CBSE syllabus):**
**Formula:**
```
Annual Depreciation = (Cost of Asset – Scrap Value) / Useful Life in Years
```
**Or:**
```
Annual Depreciation = (Original Cost – Residual Value) / Life of Asset
```
**Characteristics:**
**Worked Example:**
Cost of Furniture = ₹15,000
Scrap Value = ₹3,000
Useful Life = 4 years
Annual Depreciation = (15,000 – 3,000) / 4 = **₹3,000 per year**
Year 1: Book Value = 15,000 – 3,000 = ₹12,000
Year 2: Book Value = 12,000 – 3,000 = ₹9,000
Year 3: Book Value = 9,000 – 3,000 = ₹6,000
Year 4: Book Value = 6,000 – 3,000 = ₹3,000 (Scrap Value)
**Formula:**
```
Annual Depreciation = Book Value at Beginning of Year × Rate of Depreciation %
```
**Characteristics:**
**Worked Example:**
Cost of Machine = ₹10,000
Rate of Depreciation = 20% per annum (Diminishing Balance)
Year 1: Depreciation = 10,000 × 20% = ₹2,000
Book Value at end = 10,000 – 2,000 = ₹8,000
Year 2: Depreciation = 8,000 × 20% = ₹1,600
Book Value at end = 8,000 – 1,600 = ₹6,400
Year 3: Depreciation = 6,400 × 20% = ₹1,280
Book Value at end = 6,400 – 1,280 = ₹5,120
**Journal Entry for Depreciation:**
```
Depreciation A/c (or Depreciation Expense A/c) Dr. [Amount]
To Asset A/c (or Provision for Depreciation A/c) [Amount]
```
**Two Methods of Recording Depreciation in Books:**
**Method A: Direct Reduction of Asset**
```
Depreciation A/c Dr. 3,000
To Furniture A/c 3,000
```
**Method B: Using Provision/Accumulated Depreciation Account (Preferred)**
```
Depreciation A/c Dr. 3,000
To Provision for Depreciation A/c 3,000
```
**Treatment in Financial Statements:**
**P&L Account (Debit Side):**
```
Depreciation 3,000
```
**Balance Sheet (Asset Side):**
```
Non-Current Assets:
Furniture 15,000
Less: Provision for Depreciation (3,000)
Net Book Value 12,000
```
**Or simply:**
```
Furniture (at Net Book Value) 12,000
```
**Important Points:**
**Distinction: Depreciation vs. Repairs**
| Depreciation | Repairs |
|---|---|
| Decline in asset value | Restoration of asset value |
| Non-cash charge | Cash outflow |
| Capitalized over asset's life | Expensed immediately |
| Debited to P&L A/c | Debited to Repairs A/c |
---
**Definition:** **Bad debts are debts (amounts owed by debtors) that are considered uncollectible and are irrecoverable.** They arise when customers fail to pay their dues despite reasonable collection efforts.
**Examples:** A customer goes bankrupt and cannot pay outstanding bill; a customer dies leaving no estate; a customer disappears and cannot be traced.
**Journal Entry for Bad Debt Write-off:**
```
Bad Debts A/c Dr. [Amount]
To Debtors A/c [Amount]
```
**Or:**
```
Bad Debts A/c Dr. [Amount]
To [Customer Name] A/c [Amount]
```
**Accounting Treatment:**
1. **In P&L Account (Debit/Expense Side):**
2. **In Balance Sheet (Asset Side):**
**Worked Example:**
Ankit's trial balance shows Debtors = ₹15,500 and Bad Debts = ₹4,500.
These figures indicate:
**P&L Account Treatment:**
```
Bad Debts (Expense) 4,500
```
**Balance Sheet Treatment:**
```
Current Assets:
Debtors 15,500
Less: Bad Debts (4,500)
11,000
```
**Or alternative format:**
```
Current Assets:
Debtors (Net of Bad Debts) 11,000
```
**Key Point:** When bad debts appear in the trial balance, they are:
**Types of Bad Debt Scenarios:**
**Scenario 1: Bad Debt Already Recorded**
**Scenario 2: Additional Bad Debt (as adjustment)**
**Difference from Provision for Doubtful Debts:**
---
**Definition:** **Provision for Doubtful Debts is a reserve created to cover anticipated losses from debts that may become irrecoverable but whose non-recovery has not yet been confirmed.** It is a prudent accounting practice based on the **concept of conservatism**.
**Why it is Created:**
1. Some debtors may become insolvent in future
2. Some customers may not pay dues completely
3. To show a realistic figure of debtors' asset value
4. To comply with **conservatism principle** (don't overstate assets)
5. To match bad debt losses with the period in which credit was granted
**Journal Entry for Creating/Maintaining Provision:**
```
Provision for Doubtful Debts A/c Dr. [Amount]
To Debtors A/c [Amount]
```
**Or:**
```
Bad Debts (or Doubtful Debts) A/c Dr. [Amount]
To Provision for Doubtful Debts A/c [Amount]
```
**Accounting Treatment:**
1. **In P&L Account (Debit/Expense Side):**
2. **In Balance Sheet (Asset Side):**
**Worked Example:**
Assume Debtors in trial balance = ₹15,500. No provision has been created. Additional information states: "Make provision for doubtful debts @ 5% on debtors."
Calculation:
Provision = 15,500 × 5% = **₹775**
Journal Entry (at year-end):
```
Bad Debts/Doubtful Debts A/c Dr. 775
To Provision for Doubtful Debts A/c 775
```
**P&L Account Treatment:**
```
Bad Debts/Doubtful Debts (Expense) 775
```
**Balance Sheet Treatment:**
```
Current Assets:
Debtors 15,500
Less: Provision for Doubtful Debts (775)
Net Debtors 14,725
```
**When Provision Already Exists:**
Assume in the previous example, provision of ₹500 was already created last year and appears in the trial balance. New provision is to be ₹775.
**Required Adjustment = New Provision (₹775) – Old Provision (₹500) = ₹275**
Journal Entry:
```
Bad Debts/Doubtful Debts A/c Dr. 275
To Provision for Doubtful Debts A/c 275
```
**OR shown in P&L as:**
```
Add: Provision for Doubtful Debts 275
```
**When Provision Should Be Reduced:**
If old provision (₹500) is more than new required provision (₹300):
Reduction = ₹500 – ₹300 = ₹200 (credit to profit)
Journal Entry:
```
Provision for Doubtful Debts A/c Dr. 200
To Bad Debts/Doubtful Debts A/c 200
```
**Shown in P&L as:**
```
Less: Recovery of provision (200)
```
**Common Bases for Creating Provision:**
**Important Distinctions:**
| Bad Debts | Provision for Doubtful Debts |
|---|---|
| Known, certain loss | Estimated, uncertain loss |
| Already uncollectible | Possibly uncollectible |
| Written off completely | Reserve created |
| Amount is definite | Amount is estimate |
| Debtors account is reduced | Debtors not reduced; separate account |
| Appears in trial balance as expense | Created by adjustment entry |
---
**Definition:** **Provision for Discount on Debtors is a reserve created for discounts that may be granted to debtors for prompt payment.** It recognizes that some debtors may be allowed cash discount if they pay within a certain period.
**Why it is Created:**
1. To incentivize debtors to pay early
2. To provide for the expense of anticipated discounts
3. Based on the **conservatism principle**
4. To show realistic profit and financial position
5. Common in businesses offering trade discounts for early payment
**Journal Entry:**
```
Discount on Debtors A/c Dr. [Amount]
To Provision for Discount on Debtors A/c [Amount]
```
**Or:**
```
Profit & Loss A/c Dr. [Amount]
To Provision for Discount on Debtors A/c [Amount]
```
**Accounting Treatment:**
1. **In P&L Account (Debit/Expense Side):**
2. **In Balance Sheet (Asset Side):**
**Worked Example:**
Assume Debtors = ₹20,000. Additional information states: "Make provision for discount on debtors @ 2%."
Calculation:
Provision = 20,000 × 2% = **₹400**
Journal Entry:
```
Discount on Debtors A/c Dr. 400
To Provision for Discount on Debtors A/c 400
```
**P&L Account Treatment:**
```
Discount on Debtors (Expense) 400
```
**Balance Sheet Treatment:**
```
Current Assets:
Debtors 20,000
Less: Provision for Discount (400)
Net Debtors 19,600
```
**When Multiple Provisions Exist:**
If both bad debts provision and discount provision exist:
```
Debtors 20,000
Less: Bad Debts 500
Less: Provision for Doubtful Debts 300
Less: Provision for Discount 400
Net Debtors 18,800
```
**OR shown as:**
```
Debtors 20,000
Less: Provision for Bad Debts,
Doubtful Debts & Discount (1,200)
Net Debtors 18,800
```
**Adjustment When Provision Changes:**
If old provision = ₹300 and new required = ₹400:
Additional provision needed = ₹400 – ₹300 = ₹100
Journal Entry:
```
Discount on Debtors A/c Dr. 100
To Provision for Discount on Debtors A/c 100
```
**Key Differences:**
| Provision for Doubtful Debts | Provision for Discount on Debtors |
|---|---|
| For debts that may not be paid | For discounts that will be given |
| Loss due to non-recovery | Loss due to early payment discount |
| Based on debtor credit risk | Based on debtors' payment incentive |
| Reduces value of debtors | Reduces value of debtors |
| Higher percentage typically | Lower percentage typically |
---
**Definition:** **Manager's Commission is remuneration paid to the manager, usually calculated as a percentage of profit, for managing the business.** It is a charge against profit and reduces the net profit available to the owner.
**Bases of Commission Calculation:**
1. **On Gross Profit:** Commission = Gross Profit × %
2. **On Net Profit (before commission):** Commission = Profit before commission × %
3. **On Net Profit (after commission):** Commission = Profit after commission × %
4. **Fixed Amount:** A predetermined fixed sum per period
5. **Combined:** Salary + Percentage of profit
**Accounting Treatment:**
**Case 1: Commission Already Paid (appears in trial balance)**
If Manager's Commission A/c appears in trial balance:
Journal Entry (already recorded):
```
Manager's Commission A/c Dr. [Amount]
To Cash/Bank A/c [Amount]
```
**Case 2: Commission to be Accrued (appears as additional information)**
Journal Entry (at year-end):
```
Manager's Commission A/c Dr. [Amount]
To Commission Payable A/c [Amount]
```
**Treatment in Financial Statements:**
**P&L Account (Debit/Expense Side):**
```
Manager's Commission [Amount]
```
If commission is accrued:
```
Manager's Commission (already paid) [Amount paid]
Add: Commission Outstanding [Accrued amount]
Total Commission Expense [Total]
```
**Balance Sheet:**
**Worked Example 1: Commission on Gross Profit**
Gross Profit = ₹50,000
Manager's Commission = 5% of Gross Profit
Commission = 50,000 × 5% = **₹2,500**
Journal Entry:
```
Manager's Commission A/c Dr. 2,500
To Commission Payable A/c 2,500
```
**P&L Account (after closing entry):**
```
Gross Profit b/d 50,000
Manager's Commission (5%) (2,500)
Net Profit 47,500
```
**Worked Example 2: Commission on Net Profit (before commission)**
Net Profit before commission = ₹40,000
Manager's Commission = 10% of Profit before Commission
Commission = 40,000 × 10% = **₹4,000**
Journal Entry:
```
Manager's Commission A/c Dr. 4,000
To Commission Payable A/c 4,000
```
**P&L Account:**
```
Profit before Commission 40,000
Manager's Commission (4,000)
Net Profit after Commission 36,000
```
**Worked Example 3: Commission on Net Profit (after commission)**
Profit before commission = ₹50,000
Commission = 10% of profit **after** commission
Let Commission = X
Then: X = (50,000 – X) × 10%
X = 5,000 – 0.10X
1.10X = 5,000
X = 5,000 / 1.10 = **₹4,545.45**
Or using formula:
```
Commission = (Profit before Commission × Rate) / (100 + Rate)
= (50,000 × 10) / 110
= ₹4,545.45
```
---
Q1. According to the accrual concept of accounting, profit for an accounting year is based on:
Answer: B — Accrual accounting records revenues when earned (not when cash is received) and expenses when incurred (not when cash is paid), regardless of actual cash transactions.
Q2. Salaries for March 2017 were paid on April 7, 2017. If the accounting year ends on March 31, 2017, how should this be treated?
Answer: B — Outstanding expenses must be accrued in the current year (debited to expense, credited as liability) to match expenses with the period they relate to, following accrual accounting.
Q3. Insurance premium of ₹1,200 was paid on July 1, 2016 for 12 months. If the accounting year ends March 31, 2017, the insurance expense for 2016-17 should be:
Answer: B — From July 1, 2016 to March 31, 2017 is 9 months; insurance expense = (9/12) × ₹1,200 = ₹900; remaining ₹300 is prepaid (asset for next year).
Q4. Which of the following statements about closing stock is correct?
Answer: B — Closing stock reduces cost of goods sold (credited to trading account) and represents unsold inventory (asset in balance sheet), demonstrating the double entry principle.
Q5. Accrued income of ₹2,000 has been earned but not yet received. The correct journal entry is:
Answer: A — Accrued income is an asset (debit accrued income account) earned but not received; the credit side recognizes revenue earned in the current year.
Q6. A business receives ₹6,000 in advance for services to be provided over the next 6 months. How should this be classified in the current year's balance sheet?
Answer: B — Income received in advance is a current liability because the business has an obligation to provide services; it is recognized as revenue only when earned.
Q7. Which adjustment item would INCREASE net profit in the current year?
Answer: B — Prepaid rent reduces current year rent expense (because part paid belongs to next year), thereby increasing net profit; outstanding items and bad debts decrease profit.
Q8. The trial balance shows rent expense of ₹12,000. Additional information states that ₹2,000 rent was paid for the next year. The correct treatment is: Statement 1: Rent expense in P&L should be ₹10,000 Statement 2: Prepaid rent of ₹2,000 should appear as a current asset
Answer: A — Prepaid rent reduces the current year expense (₹12,000 – ₹2,000 = ₹10,000) and appears as a current asset in the balance sheet, following double entry principle.
Q9. A provision for doubtful debts is different from bad debts because: Statement 1: Bad debts are confirmed irrecoverable amounts already written off Statement 2: Provision for doubtful debts is an estimated reserve for debtors who might not pay
Answer: A — Bad debts are definite losses already identified, while provision is a prudent estimate for potential losses not yet confirmed, both affecting profit but treated differently.
Q10. Manager's commission is calculated at 5% of profit before commission. If profit before commission is ₹50,000, the commission is ₹2,500. What should be the final net profit after recording this adjustment? Statement 1: Final net profit = ₹50,000 – ₹2,500 = ₹47,500 Statement 2: Commission should be calculated on ₹47,500, making the calculation recursive
Answer: A — When commission is stated as 'on profit before commission,' it is simply deducted (₹47,500); if stated as 'on profit after commission,' a recursive formula applies (₹50,000 ÷ 1.05 = ₹47,619).
What is the fundamental reason adjustments are needed in financial statements?
Because accrual basis accounting requires revenues to be recorded when earned (not received) and expenses when incurred (not paid), necessitating adjustments for timing differences.
How is closing stock treated in the trading and profit and loss account?
Closing stock is credited to the trading account (reducing cost of goods sold) and shown as a current asset on the balance sheet.
What is the journal entry for outstanding salaries of ₹5,000?
Salaries Expense A/c Dr. 5,000 / To Salaries Payable A/c 5,000 (outstanding expenses increase current liabilities).
Where does prepaid insurance of ₹300 appear in the financial statements?
Prepaid insurance is shown as a current asset on the balance sheet and reduces the insurance expense in the profit and loss account.
What is accrued income and how is it recorded?
Accrued income is revenue earned but not yet received; it is debited to a current asset account and credited to revenue in the profit and loss account.
Define 'income received in advance' with an example.
Income received in advance is cash received before service is delivered (e.g., annual subscription received upfront); it is recorded as a current liability until earned.
What is the double entry principle for all adjustments?
Every adjustment affects two accounts—one in the profit and loss account (affecting profit) and one in the balance sheet (affecting financial position).
What is the key difference between provision for doubtful debts and bad debts?
Bad debts are debtors confirmed as irrecoverable (expense in P&L), while provision for doubtful debts is an estimated reserve for debtors who might not pay.
How does manager's commission calculated on profit affect financial statement preparation?
Manager's commission is deducted from profit before final net profit is calculated, so it must be recorded as an expense in the profit and loss account.
Why is it incorrect to show closing stock on the debit side of the trading account?
Closing stock represents unsold goods (an asset and reduction in cost of goods sold), so it must be credited to reduce the cost and increase gross profit.
Define 'outstanding expenses' and give one example. Where does it appear in the financial statements? [2 marks]
Outstanding expenses = incurred but unpaid by year-end (e.g., salaries, rent); shown as expense in P&L account and current liability in balance sheet.
Explain with a journal entry how prepaid insurance of ₹1,500 (paid for 18 months, with 12 months relating to next year) should be adjusted in the financial statements for the current year ended March 31. Show the impact on both P&L and balance sheet. [5 marks]
Current year expense = (6/18) × ₹1,500 = ₹500; journal entry: Insurance Expense A/c Dr. 500 / Prepaid Insurance A/c Dr. 1,000 / To Cash/Bank A/c 1,500; prepaid is a current asset.
From the trial balance provided (Ankit's trial balance with closing stock of ₹15,000), prepare the Trading and Profit & Loss Account for the year ended March 31, 2017 and explain how closing stock adjustment demonstrates the double entry principle. Also identify which items are shown in the balance sheet as a result of adjustments. [6 marks]
Closing stock: credited in trading account (increases gross profit by ₹15,000), debited in balance sheet as current asset; double entry = one in T&L, one in balance sheet; balance sheet shows closing stock as asset, creditors as liability, and capital plus net profit as equity.
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