50

ADJUSTMENT
JOURNAL ENTRIES
FOR FINAL
ACCOUNTS.
By Muhammad Imran

MI Muhammad Imran
Accounting MI
Finance (Pakistan +
UAE Experience)
 ﷽
In the Name of Allah, the
Most Compassionate,
the Ever-Merciful.

BY MUHAMMAD
IMRAN MI

Page | 2
50 Common adjustment
entries for final accounts.
Common adjustment entries for final accounts, categorized for
clarity, with detailed examples and their impact on the Trading
& Profit & Loss Account and Balance Sheet.

Understanding the Process

Every adjustment typically affects two accounts: one in the

Profit & Loss Account (to determine correct profit/loss) and
one in the Balance Sheet (to show the correct financial
position).

Category 1: Expenses-Related Adjustments

1. Outstanding/Accrued Expenses

Expenses incurred during the year but not yet paid.

Example: Salaries for the month of March amounting to

₹50,000 are to be paid in April.


 Journal Entry:
Debit: Profit & Loss A/c (as an expense) - ₹50,000
Credit: Outstanding Salaries A/c (a liability) - ₹50,000
o

Effect:
o

P&L A/c: Salaries expense increases, reducing profit.

Balance Sheet: Shown as a liability under "Current
o

Liabilities."
o

2. Prepaid Expenses

Expenses paid in advance for the next accounting period.

Page | 3
 Example: An annual insurance premium of ₹12,000 was
paid on Jan 1. The financial year ends on March 31.


Calculation: Prepaid amount = ₹12,000 * 9/12 = ₹9,000.

Expense for the year = ₹3,000.


 Journal Entry:
Debit: Prepaid Insurance A/c (an asset) - ₹9,000
Credit: Insurance Premium A/c (an expense) - ₹9,000
o

Effect:
o

P&L A/c: Insurance expense reduced to ₹3,000, increasing

profit.
o

o Balance Sheet: Shown as an asset under "Current Assets."

3. Depreciation

The systematic reduction in the value of a fixed asset due to

wear and tear.

Example: Depreciation on machinery costing ₹1,00,000 at

10% per annum.


Calculation: ₹1,00,000 * 10% = ₹10,000.

Journal Entry:


Debit: Depreciation A/c (an expense) - ₹10,000

Credit: Machinery A/c (or Accumulated Depreciation A/c)
o

- ₹10,000
o

 Effect:
P&L A/c: Depreciation expense reduces profit.
Balance Sheet: Value of Machinery is reduced from
o

₹1,00,000 to ₹90,000.
o

Category 2: Income-Related Adjustments

4. Accrued Income

Income earned during the year but not yet received.

Page | 4
 Example: Interest on a fixed deposit of ₹5,000 for the last
quarter is due but not received.


 Journal Entry:
Debit: Accrued Interest A/c (an asset) - ₹5,000
Credit: Interest Received A/c (an income) - ₹5,000
o

Effect:
o

P&L A/c: Interest income increases, raising profit.

Balance Sheet: Shown as an asset under "Current Assets."
o

5. Income Received in Advance (Unearned Revenue)

Money received for services to be provided in the next

accounting period.

Example: A magazine company receives a ₹6,000 annual

subscription on Dec 1. The year-end is March 31.


Calculation: Income earned (4 months: Dec-Mar) =

₹2,000. Income received in advance (8 months) = ₹4,000.


 Journal Entry:
Debit: Subscription Received A/c (an income) - ₹4,000
Credit: Subscription Received in Advance A/c (a liability) -
o

₹4,000
o

 Effect:
P&L A/c: Subscription income is reduced to ₹2,000,
decreasing profit.
o

Balance Sheet: Shown as a liability under "Current

Liabilities."
o

Category 3: Inventory & Cost of Goods Sold

6. Closing Stock

The value of unsold goods at the end of the year.

Page | 5
 Example: Closing stock is valued at ₹75,000.
Journal Entry: (This is often made only in the final


accounts, not in the journal proper)



Debit: Closing Stock A/c (an asset) - ₹75,000

Credit: Trading A/c (a reduction in cost of goods sold) -
o

₹75,000
o

 Effect:
Trading A/c: Added on the Credit side, increasing Gross
Profit.
o

o Balance Sheet: Shown as an asset under "Current Assets."

7. Stock of Stationery

To account for unused office supplies.

Example: Stationery purchased during the year was

₹10,000. Unused stationery at year-end is ₹1,500.


 Journal Entry:
Debit: Closing Stock of Stationery A/c (an asset) - ₹1,500
Credit: Stationery Expense A/c - ₹1,500
o

Effect:
o

P&L A/c: Stationery expense reduced to ₹8,500,

increasing profit.
o

o Balance Sheet: Shown as an asset under "Current Assets."

Category 4: Bad Debts & Provision for Doubtful Debts

8. Bad Debts

Amounts owed by customers that are confirmed to be

uncollectible.

Example: A customer, Mr. X, who owed ₹5,000, is

declared bankrupt.


Page | 6
  Journal Entry:
Debit: Bad Debts A/c (an expense) - ₹5,000
Credit: Mr. X (Sundry Debtors) A/c - ₹5,000
o

Effect:
o

P&L A/c: Bad debt expense reduces profit.

Balance Sheet: The value of Debtors (Accounts
o

Receivable) is reduced by ₹5,000.

o

9. Provision for Bad & Doubtful Debts

An estimated amount set aside for potential future bad debts.

Example: Debtors at year-end are ₹1,00,000. A provision

of 5% is to be maintained.


Calculation: ₹1,00,000 * 5% = ₹5,000. If an old provision

of ₹3,000 exists, only the additional ₹2,000 is charged this


year.
 Journal Entry:
Debit: Profit & Loss A/c - ₹2,000
Credit: Provision for Bad Debts A/c - ₹2,000
o

Effect:
o

P&L A/c: Additional provision is an expense, reducing

profit.
o

Balance Sheet: Debtors are shown at their net realizable

value: ₹1,00,000 - ₹5,000 = ₹95,000.
o

10. Provision for Discount on Debtors

An estimate of the discount likely to be allowed to debtors for

early payment.

Example: After creating the provision for bad debts,

debtors stand at ₹95,000. A 2% provision for discount is to


be created.
 Calculation: ₹95,000 * 2% = ₹1,900.
Page | 7
  Journal Entry:
Debit: Profit & Loss A/c - ₹1,900
Credit: Provision for Discount on Debtors A/c - ₹1,900
o

Effect:
o

P&L A/c: Expense increases, reducing profit.

Balance Sheet: Shown as a deduction from Debtors.
o

Category 5: Capital & Drawings

11. Interest on Capital

Interest allowed on the owner's capital investment.

Example: The proprietor's capital is ₹5,00,000. Interest is

allowed at 6% p.a.


Calculation: ₹5,00,000 * 6% = ₹30,000.

Journal Entry:


Debit: Interest on Capital A/c (an expense) - ₹30,000

Credit: Capital A/c - ₹30,000
o

Effect:
o

P&L A/c: An expense, reducing profit.

Balance Sheet: Capital account increases by ₹30,000.
o

12. Interest on Drawings

Interest charged on the amount withdrawn by the proprietor

for personal use.

Example: Total drawings during the year were ₹60,000.

Interest is charged at 10% p.a.


Calculation: (Assuming average period) ₹60,000 * 10% =

₹6,000.


 Journal Entry:
o Debit: Drawings A/c - ₹6,000
Page | 8
 Credit: Interest on Drawings A/c (an income) - ₹6,000
Effect:
o

P&L A/c: An income, increasing profit.

Balance Sheet: Drawings are increased, which reduces the
o

Capital balance.
o

Category 6: Other Important Adjustments

13. Loss of Stock by Fire

When inventory is destroyed, and it was not insured.

Example: Goods costing ₹25,000 were destroyed by fire.

There was no insurance.


 Journal Entry:
Debit: Profit & Loss A/c - ₹25,000
Credit: Purchases A/c / Trading A/c - ₹25,000
o

Effect:
o

Trading A/c: Purchases are reduced, so the loss does not

affect Gross Profit directly. The loss is transferred to P&L.
o

o P&L A/c: Shown as an abnormal loss, reducing net profit.

14. Loss of Stock by Fire (Insured)

When inventory is destroyed, and it was insured.

Example: Goods costing ₹50,000 were destroyed. The

insurance company admitted a claim of ₹45,000.


 Journal Entry:
1. For the full loss:
Debit: Insurance Claim Receivable A/c (an asset) -
₹45,000


Debit: Profit & Loss A/c (loss not covered) - ₹5,000

Credit: Purchases A/c / Trading A/c - ₹50,000


Page | 9
  Effect:

o Trading A/c: Purchases are reduced by ₹50,000.

o P&L A/c: A loss of ₹5,000 is recorded.
o Balance Sheet: Insurance Claim Receivable of ₹45,000 is
shown as an asset.

15. Commission on Profit

Commission to managers/employees based on net profit.

Example: The manager is entitled to a 10% commission on

net profit before charging such commission. Net profit


before commission is ₹1,10,000.

Calculation: Commission = ₹1,10,000 * 10/100 = ₹11,000.
Journal Entry:


Debit: Commission A/c (an expense) - ₹11,000

Credit: Outstanding Commission A/c (a liability) - ₹11,000
o

Effect:
o

P&L A/c: Expense increases, reducing final profit to

₹99,000.
o

o Balance Sheet: Shown as a current liability.

16. Deferred Revenue Expenditure

A large expense whose benefit lasts for several years is written

off over time.

Example: A heavy advertising campaign cost ₹60,000. The

company decides to write it off over 3 years.


Calculation: Yearly write-off = ₹60,000 / 3 = ₹20,000.

Journal Entry:


Debit: Profit & Loss A/c - ₹20,000

Credit: Deferred Advertising Expenditure A/c (a fictitious
o

asset) - ₹20,000
o

Page | 10
  Effect:
P&L A/c: ₹20,000 is expensed this year.
Balance Sheet: The remaining ₹40,000 is shown as a
o

"Fictitious Asset" or "Deferred Expenditure."

o

17. Goods Distributed as Free Samples

Goods taken for promotional purposes.

Example: Goods costing ₹8,000 were distributed as free

samples.


 Journal Entry:
Debit: Advertising A/c (an expense) - ₹8,000
Credit: Purchases A/c - ₹8,000
o

Effect:
o

Trading A/c: Purchases are reduced by ₹8,000.

P&L A/c: Advertising expense increases by ₹8,000.
o

18. Goods taken for Personal Use (Drawings)

When the proprietor takes goods for personal use.

Example: The proprietor took goods costing ₹4,000 for

personal use.


 Journal Entry:
Debit: Drawings A/c - ₹4,000
Credit: Purchases A/c - ₹4,000
o

Effect:
o

Trading A/c: Purchases are reduced by ₹4,000.

Balance Sheet: Drawings increase, reducing the Capital
o

balance.
o

19. Accrued Commission Income

Similar to accrued interest, but for commission earned.

Page | 11
 Example: A commission of ₹7,000 for sales made in March
is due to be received in April.


 Journal Entry:
Debit: Accrued Commission Receivable A/c (an asset) -
₹7,000
o

Credit: Commission Received A/c (an income) - ₹7,000

Effect:
o

P&L A/c: Income increases, raising profit.

Balance Sheet: Shown as a current asset.
o

20. Creation of Reserve

Setting aside a portion of profit for a specific future purpose.

Example: The company decides to create a General

Reserve of ₹25,000.


 Journal Entry:
Debit: Profit & Loss Appropriation A/c - ₹25,000
Credit: General Reserve A/c - ₹25,000
o

Effect:
o

P&L A/c: No direct effect on net profit, but it is an

appropriation of profit.
o

Balance Sheet: Shown under "Reserves and Surplus" on

the liabilities side.
o

These adjustments are fundamental for presenting a "true and

fair view" of a company's financial performance and position.
Always remember the dual effect of each entry.

21. Depreciation on Different Fixed Assets

Applying depreciation to various types of assets, often at

different rates.

Page | 12
 Example: Provide Depreciation: 10% on Furniture (Cost:
₹80,000) and 15% on Vehicles (Cost: ₹2,00,000).


 Calculation:
Furniture: ₹80,000 * 10% = ₹8,000
Vehicles: ₹2,00,000 * 15% = ₹30,000
o

Journal Entry:
o

Debit: Depreciation A/c - ₹38,000

Credit: Furniture A/c - ₹8,000
o

Credit: Vehicles A/c - ₹30,000

o

Effect:
o

P&L A/c: Depreciation expense of ₹38,000 reduces profit.

Balance Sheet: The book value of Furniture reduces to
o

₹72,000 and Vehicles to ₹1,70,000.

o

22. Bad Debts Recovered

When an amount that was previously written off as a bad debt

is unexpectedly received.

Example: A payment of ₹3,000 is received from Mr. Y,

whose debt was written off as bad in the previous year.


 Journal Entry:
Debit: Cash/Bank A/c - ₹3,000
Credit: Bad Debts Recovered A/c - ₹3,000
o

Effect:
o

P&L A/c: Bad Debts Recovered is treated as an income,

increasing profit.
o

o Balance Sheet: Increases the Cash/Bank balance.

23. Interest on Loan Owed but Not Paid

Interest on a loan that has accrued but the payment date falls
after the year-end.
Page | 13
 Example: A business has a term loan on which quarterly
interest of ₹15,000 is due. The year ends before the


payment date.
 Journal Entry:
Debit: Interest on Loan A/c - ₹15,000
Credit: Interest Accrued but Not Due on Loan A/c (a
o

liability) - ₹15,000
o

 Effect:
P&L A/c: Interest expense increases, reducing profit.
Balance Sheet: Shown as a liability under "Current
o

Liabilities." It's distinct from "Outstanding Expenses" as

o

the payment is not legally due yet.

24. Amortization of Intangible Assets

The process of writing off the cost of an intangible asset (like

patents, copyrights, goodwill) over its useful life.

Example: Amortize the patent value by ₹10,000 for the

year.


 Journal Entry:
Debit: Amortization Expense A/c - ₹10,000
Credit: Patent A/c (or Accumulated Amortization A/c) -
o

₹10,000
o

 Effect:
P&L A/c: Amortization expense reduces profit.
Balance Sheet: The book value of the Patent is reduced.
o

25. Provision for Discount on Creditors

An estimate of the discount the business is likely to receive

from its suppliers (creditors) for early payment. This is less
common than the provision on debtors.
Page | 14
 Example: Creditors at year-end are ₹1,50,000. The
company expects to receive a 2% discount for prompt


payment.
Calculation: ₹1,50,000 * 2% = ₹3,000.
Journal Entry:


Debit: Provision for Discount on Creditors A/c - ₹3,000

Credit: Profit & Loss A/c - ₹3,000
o

Effect:
o

P&L A/c: Treated as an income, thus increasing profit.

Balance Sheet: The amount is deducted from the total
o

Creditors on the liabilities side.

o

26. Manager's Commission on Net

Profit after Charging Such Commission

A more complex calculation where the commission itself is an

expense that reduces the base profit on which it is calculated.

Example: Net Profit before manager's commission is

₹1,10,000. The commission rate is 10% after charging the


commission.
 Calculation:
Let Commission = X
Profit after Commission = 1,10,000 - X
o

X = 10% of (1,10,000 - X)
o

X = 11,000 - 0.1X
o

1.1X = 11,000
o

X = ₹10,000
o

Journal Entry:
o

Debit: Manager's Commission A/c - ₹10,000

Credit: Outstanding Commission A/c - ₹10,000
o

Effect:
o

Page | 15
 P&L A/c: Expense of ₹10,000 reduces final profit to
₹1,00,000.
o

o Balance Sheet: Shown as a current liability.

27. Write-off of Additional Bad Debts

Identifying and writing off specific bad debts after creating the
general provision for doubtful debts.

Example: After preparing the trial balance, it is discovered

that a debtor, Mr. Z (who owes ₹4,000), has fled the


country. A 5% provision for doubtful debts already exists

on the remaining debtors.
 Journal Entry:
Debit: Bad Debts A/c - ₹4,000
Credit: Sundry Debtors (Mr. Z) A/c - ₹4,000
o

Effect:
o

P&L A/c: Bad debt expense increases.

Balance Sheet: The total value of Debtors is reduced by
o

₹4,000. The provision for doubtful debts will now be

o

calculated on the remaining debtors.

28. Adjustment for Unrecorded Purchases (Purchase of

Goods on Credit)

When goods have been received and included in closing stock,

but the supplier's invoice has not been recorded in the books.

Example: Goods worth ₹12,000 were received on the last

day of the year, but the invoice was recorded in the next


period. The goods are part of closing stock.

 Journal Entry:
Debit: Purchases A/c - ₹12,000
Credit: Creditors A/c - ₹12,000
o

o
Page | 16
  Effect:
Trading A/c: Purchases increase, reducing Gross Profit.
Balance Sheet: Creditors (liability) increase by ₹12,000,
o

and Closing Stock already includes these goods, so the

o

accounting equation remains balanced.

29. Adjustment for Unrecorded Sales (Sale of Goods on

Credit)

When goods have been dispatched and should be recognized as

revenue, but the invoice is not yet recorded.

Example: Goods with a sale value of ₹9,000 were

dispatched on the last day of the year. The sales entry was


missed.
 Journal Entry:
Debit: Debtors A/c - ₹9,000
Credit: Sales A/c - ₹9,000
o

Effect:
o

Trading A/c: Sales increase, increasing Gross Profit.

Balance Sheet: Debtors (asset) increase by ₹9,000.
o

30. Provision for Taxation

Setting aside an amount for the expected corporate income tax

liability for the year.

Example: The estimated tax liability for the current

financial year is ₹50,000.


 Journal Entry:
Debit: Profit & Loss A/c - ₹50,000
Credit: Provision for Taxation A/c - ₹50,000
o

Effect:
o

Page | 17
 P&L A/c: Tax expense is charged, reducing the net profit.
Balance Sheet: Shown as a non-current or current liability,
o

depending on when it is due for payment.

o

These additional entries demonstrate the depth and precision

required in accounting to ensure that financial statements are
complete and accurate, adhering to the matching
concept and accrual basis of accounting.

31. Change in Depreciation Method

When a company changes its method of calculating

depreciation (e.g., from Straight Line to Written Down Value).

Example: A machine (original cost: ₹1,00,000) had been

depreciated at 10% SLM for 3 years. This year, the


method is changed to WDV at 15%. Book value at start of

year: ₹70,000.
 Calculation:
WDV Depreciation = ₹70,000 × 15% = ₹10,500
Journal Entry:
o

Debit: Depreciation A/c - ₹10,500

Credit: Accumulated Depreciation A/c - ₹10,500
o

Effect:
o

P&L A/c: Higher depreciation expense reduces current

year's profit.
o

Balance Sheet: Machine value reduced to ₹59,500.

Disclosure required in notes about change in accounting
o

policy.

32. Capitalization of Borrowing Costs

Interest on loans taken specifically for construction or

acquisition of qualifying assets.
Page | 18
 Example: A company took a loan of ₹5,00,000 at 12%
interest to construct a building. Construction was ongoing


throughout the year.

 Calculation:
Interest to capitalize = ₹5,00,000 × 12% = ₹60,000
Journal Entry:
o

Debit: Building Under Construction A/c - ₹60,000

Credit: Interest on Loan A/c - ₹60,000
o

Effect:
o

P&L A/c: Interest not charged to P&L, so profit is higher.

Balance Sheet: Building cost increases by ₹60,000. The
o

asset's cost includes directly attributable borrowing costs.

o

33. Revaluation of Fixed Assets

Upward or downward adjustment of asset value to reflect fair

market value.

Example: Land purchased for ₹20,00,000 is revalued to

₹28,00,000.


 Journal Entry:
Debit: Land A/c - ₹8,00,000
Credit: Revaluation Reserve A/c - ₹8,00,000
o

Effect:
o

P&L A/c: No impact on profit (bypasses P&L).

Balance Sheet: Land value increases to ₹28,00,000.
o

Revaluation Reserve appears under Equity.

o

34. Provision for Warranties

Estimating future costs of repairing or replacing products

under warranty.

Page | 19
 Example: A company sells electronic goods with 1-year
warranty. Based on past experience, warranty costs are


2% of sales. Current year sales: ₹50,00,000.

 Calculation:
Warranty Provision = ₹50,00,000 × 2% = ₹1,00,000
Journal Entry:
o

Debit: Warranty Expense A/c - ₹1,00,000

Credit: Provision for Warranty A/c - ₹1,00,000
o

Effect:
o

P&L A/c: Expense recognized in same period as related

sales.
o

o Balance Sheet: Provision created as current liability.

35. Impairment Loss

When the recoverable amount of an asset falls below its

carrying value.

Example: A business segment has net assets of ₹25,00,000

but its recoverable amount is determined to be


₹21,00,000.
 Calculation:
Impairment Loss = ₹25,00,000 - ₹21,00,000 = ₹4,00,000
Journal Entry:
o

Debit: Impairment Loss A/c - ₹4,00,000

Credit: Relevant Assets A/c - ₹4,00,000
o

Effect:
o

P&L A/c: Impairment loss reduces profit significantly.

Balance Sheet: Asset values written down to recoverable
o

amount.
o

36. Deferred Tax Asset/Liability

Page | 20
Timing differences between accounting income and taxable
income.

Example: Depreciation for accounting purposes is

₹1,50,000 but for tax purposes is ₹2,00,000. Tax rate:


30%.
 Calculation:
Temporary Difference = ₹50,000
Deferred Tax Liability = ₹50,000 × 30% = ₹15,000
o

Journal Entry:
o

Debit: Tax Expense A/c - ₹15,000

Credit: Deferred Tax Liability A/c - ₹15,000
o

Effect:
o

P&L A/c: Higher tax expense reduces accounting profit.

Balance Sheet: DTL created as non-current liability.
o

37. Contingent Liability Provision

Recognizing a potential liability that is probable and can be

reasonably estimated.

Example: A company is facing a lawsuit where it is

probable they will lose, and the estimated settlement is


₹75,00,000.
 Journal Entry:
Debit: Lawsuit Settlement Expense A/c - ₹75,00,000
Credit: Provision for Lawsuit A/c - ₹75,00,000
o

Effect:
o

P&L A/c: Significant expense reduces profit.

Balance Sheet: Provision created as liability. If only
o

possible (not probable), disclosed in notes only.

o

38. Foreign Exchange Translation Loss

Page | 21
Loss due to exchange rate fluctuations on foreign currency
transactions.

Example: A company purchased goods worth $10,000

when exchange rate was ₹75/$. At year-end, rate is ₹78/$,


and payment is still due.

 Calculation:
Exchange Loss = $10,000 × (78 - 75) = ₹30,000
Journal Entry:
o

Debit: Foreign Exchange Loss A/c - ₹30,000

Credit: Creditors A/c - ₹30,000
o

Effect:
o

P&L A/c: Loss reduces profit.

Balance Sheet: Creditor balance increases to reflect
o

current exchange rate.

o

39. Employee Benefits Provision

Recognizing liability for accumulated leave, bonuses, or other

employee benefits.

Example: Employees have accumulated 500 leave days

that can be encashed. Average daily wage: ₹2,000.


 Calculation:
Leave Encashment Liability = 500 × ₹2,000 = ₹10,00,000
Journal Entry:
o

Debit: Employee Benefits Expense A/c - ₹10,00,000

Credit: Provision for Leave Encashment A/c - ₹10,00,000
o

Effect:
o

P&L A/c: Expense recognized.

Balance Sheet: Provision created as current liability.
o

Page | 22
40. Fair Value Adjustment for Investments

Marking investments to market value at balance sheet date.

Example: Equity investments (classified as FVTPL) were

purchased for ₹12,00,000. Market value at year-end:


₹15,00,000.
 Calculation:
Fair Value Gain = ₹15,00,000 - ₹12,00,000 = ₹3,00,000
Journal Entry:
o

Debit: Investments A/c - ₹3,00,000

Credit: Fair Value Gain A/c - ₹3,00,000
o

Effect:
o

P&L A/c: Gain increases profit.

Balance Sheet: Investments shown at fair value.
o

41. Adjustment for Contingent Assets

A potential asset that arises from past events, whose existence

will be confirmed only by the occurrence of one or more
uncertain future events not wholly within the entity's control.

Example: A company has a strong patent infringement

case against a competitor. If successful, the company is


likely to receive damages of ₹50,00,000. The case is still in

court, but the legal advisors believe it is probable the
company will win.
Accounting Treatment: Contingent Assets are not
recognized in the financial statements because this could


lead to the recognition of income that may never be

realized. However, if the inflow of economic benefits
is virtually certain, then it is no longer contingent and is
recognized as an asset.
 Journal Entry: No journal entry is passed.
Page | 23
  Effect:
P&L A/c: No effect.
Balance Sheet: No effect. It is disclosed in the notes to the
o

accounts unless the possibility of receipt is remote.

o

42. Sale and Leaseback (Finance Lease)

When a company sells an asset to a lessor and immediately

leases it back. If the lease terms indicate a "finance lease," the
seller-lessee has effectively borrowed money using the asset as
collateral.

Example: A company sells machinery with a book value of

₹80,000 for ₹1,00,000 and leases it back under a finance


lease for 5 years.

 Journal Entry at the time of sale:
Debit: Cash/Bank A/c - ₹1,00,000
Debit: Machinery (Under Finance Lease) A/c - ₹1,00,000
o

(to recognize the right-of-use asset)

o

Credit: Machinery A/c (original cost) - ₹1,20,000 (or its

net book value)
o

Credit: Finance Lease Liability A/c - ₹1,00,000

Credit: Profit on Sale and Leaseback A/c (if any) -
o

[Balancing Figure, which may need to be deferred]

o

 Effect:
P&L A/c: Any profit on the sale is typically deferred and
amortized over the lease term.
o

Balance Sheet: The asset remains on the books as a

"Right-of-Use Asset," and a corresponding "Lease
o

Liability" is created.

43. Provision for Site Restoration (Decommissioning

Liability)
Page | 24
An estimate of the future costs to restore a site after using it
for operations, such as in mining, oil drilling, or nuclear power.

Example: A mining company estimates it will cost

₹5,00,00,000 to restore the land after the mine is


exhausted. The mine has a useful life of 20 years.

 Calculation (Straight-line method):
Annual Provision = ₹5,00,00,000 / 20 = ₹25,00,000
Journal Entry (each year):
o

Debit: Site Restoration Expense A/c - ₹25,00,000

Credit: Provision for Site Restoration A/c - ₹25,00,000
o

Effect:
o

P&L A/c: Expense is recognized each year.

Balance Sheet: The provision is built up as a long-term
o

liability over the asset's life. The initial amount is also

o

added to the cost of the related asset.

44. Adjustment for Bill of Exchange Discounted

When a holder of a bill of exchange (received from a debtor)

discounts it with the bank for immediate cash, the holder
remains contingently liable until the bill is paid by the original
debtor.

Example: A ₹2,00,000 bill receivable from a customer was

discounted with the bank for ₹1,98,000.


 Initial Journal Entry (on discounting):

Debit: Bank A/c - ₹1,98,000
Debit: Discount on Bills A/c - ₹2,000 (expense)
o

Credit: Bills Receivable A/c - ₹2,00,000

o

Adjustment at Year-End: If the bill is not yet matured by

o

the year-end, the contingent liability must be disclosed.



 Effect:
Page | 25
 P&L A/c: Discount expense of ₹2,000 is recorded.
Balance Sheet: Bills Receivable is removed. A note is
o

added to the financial statements disclosing the

o

contingent liability for the discounted bill.

45. Capital Work-in-Progress (CWIP) to Fixed Asset

Transferring the cost of an asset from "under construction" to

"completed and ready for use." Depreciation starts from this
point.

Example: A new factory building constructed for

₹2,00,00,000 is completed and ready for use at the year-


end.
 Journal Entry:
Debit: Building A/c - ₹2,00,00,000
Credit: Capital Work-in-Progress A/c - ₹2,00,00,000
o

Effect:
o

P&L A/c: No immediate effect, but depreciation will begin.

Balance Sheet: The amount is moved from "Capital Work-
o

in-Progress" (a non-current asset) to "Building" (a fixed

o

asset).

46. Adjustment for ESOP (Employee Stock Option

Plan)

Accounting for the cost of employee services received in

exchange for stock options.

Example: The company grants 10,000 stock options to

employees with a fair value of ₹50 per option, vesting over


4 years.
 Calculation (Year 1):
o Total Compensation Cost = 10,000 × ₹50 = ₹5,00,000
Page | 26
 Annual Expense = ₹5,00,000 / 4 years = ₹1,25,000
Journal Entry (for Year 1):
o

Debit: Employee Compensation Expense A/c - ₹1,25,000

Credit: Stock Options Outstanding A/c (Part of Equity) -
o

₹1,25,000
o

 Effect:
P&L A/c: Compensation expense reduces profit.
Balance Sheet: "Stock Options Outstanding" is shown
o

within the "Equity" section.

o

47. Treatment of Pre-Operating Expenses

Expenses incurred before a company 正式开始运营, such as

incorporation fees, initial advertising, and travel for setting up
business.

Example: A company incurred ₹15,00,000 in legal,

registration, and promotional expenses before the


commencement of commercial operations.

Accounting Treatment: These are not treated as regular
expenses but are capitalized as "Miscellaneous


Expenditure (to the extent not written off or adjusted)" or

"Deferred Revenue Expenditure."
 Journal Entry (to capitalize):
Debit: Deferred Revenue Expenditure A/c (a fictitious
asset) - ₹15,00,000
o

Credit: Various Expense A/cs - ₹15,00,000

Effect:
o

P&L A/c: No immediate expense hit; it is amortized over a

period (e.g., 3-5 years).
o

Balance Sheet: Shown as a "Fictitious Asset" and written

off annually.
o

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48. Adjustment for Proposed Dividend

When a company's board of directors recommends a dividend

for approval by shareholders after the year-end.

Example: The board proposes a final dividend of ₹10 per

share on 1,00,000 equity shares, totaling ₹10,00,000.


 Journal Entry:
Debit: Profit & Loss Appropriation A/c - ₹10,00,000
Credit: Proposed Dividend A/c - ₹10,00,000
o

Effect:
o

P&L A/c: No effect on the profit, but it is an appropriation

of profit.
o

o Balance Sheet: Shown as a current liability until it is paid.

49. Adjustment for Royalty Payable

A payment made for the right to use an asset, such as a patent,

copyrighted material, or natural resource.

Example: A publishing company agrees to pay an author a

royalty of 15% on all books sold. Book sales for the year


are ₹50,00,000.
 Calculation:
Royalty Payable = ₹50,00,000 × 15% = ₹7,50,000
Journal Entry:
o

Debit: Royalty Expense A/c - ₹7,50,000

Credit: Royalty Payable A/c - ₹7,50,000
o

Effect:
o

P&L A/c: Expense increases, reducing profit.

Balance Sheet: Shown as a current liability.
o

50. Transfer to Reserve Fund (Statutory Requirement)

Page | 28
A mandatory transfer of profit to a specific reserve as required
by law or regulations, common in banking and insurance
companies.

Example: A cooperative society's bylaws require that 20%

of net profit be transferred to a Statutory Reserve Fund


until it reaches a certain percentage of paid-up capital.

Net profit is ₹20,00,000.
 Calculation:
Transfer to Reserve = ₹20,00,000 × 20% = ₹4,00,000
Journal Entry:
o

Debit: Profit & Loss Appropriation A/c - ₹4,00,000

Credit: Statutory Reserve Fund A/c - ₹4,00,000
o

Effect:
o

P&L A/c: An appropriation of profit, not an expense.

Balance Sheet: The reserve is shown under "Reserves and
o

Surplus" in Equity. This reserve is typically not available

o

for dividend distribution.

This comprehensive list of 50 adjustments covers a wide

spectrum, from basic accruals to complex international
accounting standards, providing a robust foundation for
preparing accurate and compliant final accounts.

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