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C H A P T E R

Final Accounts—With Adjustments

MEANING OF KEY TERMS USED IN THE CHAPTER

1. Adjusting Entry It is an entry passed in the books of account to give effect to transactions
that should have been recorded in the books of account but are not
recorded.
2. Closing Stock It is the value of stock in hand at the end of the accounting year. It is valued
at cost or net realisable value (market value), whichever is less.
3. Outstanding Expenses They are expenses incurred during the year the benefit of which is
consumed or exhausted during the year but have not been paid.
For example, salary payable for the month of March is provided being
not paid.
4. Prepaid or Unexpired They are the expenses that have been paid but the benefit of which
Expenses is not consumed or exhausted during the year.
5. Accrued Income It is the income which has been earned but not received.
6. Income Received in It is the income which has not been earned but received during the
Advance or Unearned accounting year.
Income.
7. Depreciation It is the fall in value of fixed asset due to usage, efflux of time, obsolescence
or accident.
8. Bad Debt It is the debt that has become irrecoverable.
9. Provision for Doubtful It is the amount set aside out of profit to meet possible bad debts.
Debts This provision is made due to the Prudence Concept.
10. Provision for Discount It is the amount set aside out of profit to allow discount to debtors
on Debtors in future. This provision is made following the Prudence Concept.
11. Normal Loss Normal loss means loss due to nature of the product which will happen and
cannot be prevented say, loss due to evaporation of petrol.
12. Abnormal Loss Abnormal loss means loss by any abnormal reason or cause say, due to
fire or accident or theft.

CHAPTER SUMMARY

• Accrual Concept is a fundamental concept of accounting. Therefore, expenses whether paid or not, incomes
whether received or not, prepaid expenses and unearned incomes need to be adjusted.
• Adjustments are made for: (i) Proper matching of cost with revenue for ascertaining true and fair
view of the profit earned or loss incurred by the business entity for the accounting period and (ii) for showing
true and fair value of assets and liabilities of the business as on the last date of the accounting period.
• Adjustment is recorded on the basis of the Dual Aspect Concept meaning every adjustment must appear
at two places, one representing the debit and the other representing the credit.