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Financial Statements 2 NCERT Textbook With Solution PDF Free Download
Chapter 10: Financial Statements – 2
you learnt about the preparation of simple final accounts in the format of trading and profit and loss account and balance sheet.
The preparation of simple final accounts pre-supposes the absence of any accounting complexities which are normal to business operations.
These complexities arise due to the fact that the process of determining income and financial position is based on the accrual basis of accounting.
This emphasises that while ascertaining the profitability, the revenues be considered on earned basis and not on receipt basis, and the expenses be considered on incurred basis and not on paid basis.
Hence, many items need some adjustment while preparing the financial statements.
In this chapter we shall discuss all items which require adjustments and the way these are brought into the books of account and incorporated in the final accounts.
10.1 Need for Adjustments According to accrual concept of accounting, the profit or loss for an accounting year is not based on the revenues realised in cash and the expenses paid in cash during that year.
There may exist some receipts and expenses in the current year which partially relate to the previous year or to the next year.
Also, there may exist incomes and expenses relating to the current year that still need to be brought into books of account. Such items duly adjusted, the final accounts will not reflect the true and fair view of the state of affairs of the business.
For example, an amount of ` 1,200 paid on July 01, 2016 towards insurance premium. Any general insurance premium paid usually covers a period of 12 months.
Suppose the accounting year ends on March 31,2017, it would mean that one fourth of the insurance premium is paid on July 01, 2016, relate to the next accounting year 2017-18.
Therefore, while preparing the financial statements for 2016-17, the expense on insurance premium that should be debited to the profit and loss account is 900 ( 1,200 – ` 300). Let us take another example.
The salaries for the month of March, 2017 were paid on April 07, 2017. This means that the salaries account of 2016-17 does not include the salaries for the month of March 2017.
Such unpaid salaries is termed as salaries outstanding which have to be brought into books of account and is debited to profit and loss account along with the salaries already paid for the month of April 2016 up to February 2017.
Similarly, adjustments may also become necessary in respect of certain incomes received in advance or those which have accrued but are still to be received.
Apart from these, there are certain items that are not recorded on a day-to-day basis such as depreciation on fixed assets, interest on capital, etc. These are adjusted at the time of preparing financial statements.
The purpose of making various adjustments is to ensure that the final accounts reveal the true profit or loss and the true financial position of the business.
The items which usually need adjustments are:
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 It may be noted that when we prepare the financial statements, we are provided with the trial balance and some other additional information in respect of the adjustments to be made.
All adjustments are reflected in the final accounts at two places to complete the double entry. Our earlier example in chapter 9 (Page no. 336) which represents the trial balance of Ankit is reproduced in figure
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NCERT Solutions Class 11 Accountancy Chapter 10 Financial Statements – 2
1. Why is it necessary to record the adjusting entries in the preparation of final accounts?
Recording adjusting entries in preparing final accounts is necessary because of the following reasons:
- It helps in assessing whether the final accounts reflect true profit or loss, it also shows true financial position of a business.
- It ensures accounts comply with the accrual basis of accounting.
- It makes sure that all financial transaction belong to current fiscal year. No transaction of past or future are taken into account.
- It provides the scope for introducing different provisions which can be made at year end, only after assessing the whole year’s performance.
2. What is meant by closing stock? Show its treatment in final accounts.
Cost of goods that remains unsold in the inventory after completion of the accounting period is referred to as the closing stock. The closing stock value is determined by comparing the realisable value and cost price. The lesser among two values is considered as the value of closing stock.
In final accounts the closing stock is adjusted by:
1) Crediting the closing stock to trading and profit and loss account.
2) Placing it on the asset part of the balance sheet.
Following entries need to be passed for adjustment
Closing Stock A/c Dr.
To Trading A/c
3. State the meaning of:
(a) Outstanding expenses
(b) Prepaid expenses
(c) Income received in advance
(d) Accrued income
(a) Outstanding Expenses: Such expenses are incurred in the present accounting period but are not paid. As expense is generated during accounting period it makes perfect sense to charge it against revenue earned to arrive at true profit or loss. These are liabilities and need to be paid.
(b) Prepaid Expenses: Those type of expenses in which the associated benefit has not been materialized, but the payment is already done in advance are known as prepaid expenses.
(c) Income received in advance: The income is received in the present accounting period and the benefits will be realised in the upcoming accounting period, such income is called income received in advance.
(d) Accrued Income: Income that is earned in the accounting period, but yet to be received by end of accounting period is known as accrued income. It is due to be received in the future accounting periods. It is shown on asset side of balance sheet.
NCERT Class 11 Accountancy Textbook Chapter 10 Financial Statements With Answer PDF Free Download