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Stock/Goods used for Advertisement Purposes :: Adjustments

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Stock may be used for the purposes of advertisement. Say, for example a trader who sells medicines may give away some of the medicines as samples to doctors. This effort is made to improve sales. Though this is an expenditure relating to the business, it would amount to selling expenditure which is an indirect expenditure.

Since these are also goods used for the organisation, they have to be valued at cost and not at their selling prices.
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Recording » Journal Entry

We know that ledgers provide the information we need in accounting and anything that gets into the ledger should be through the journal. Even this forms a transaction that should be recorded through the journal.
  • Debit » Advertisement Expenses a/c

    Using goods for advertisement purposes, amounts to bearing a certain amount of expenditure by the organisation which is paid out in kind. Generally, a ledger account by name "Advertisement Expenses a/c" is used for this purpose. The value of goods that have been used for advertisement purposes has to be debited to the "Advertisement Expenses a/c".
    [Advertisement Expenses a/c Nominal a/c Debit all expenses and losses.]
  • Credit »

    The value of goods used for advertisement purposes represents the value of stock that has not been used for trading purposes. To reveal the cost of goods sold, the value of stock unused for trading activity is to be deducted from the total value of goods.

    For this the following ledger account would be credited depending on the time of recording the transaction, what comprises the value of stock drawn and the account in which the related value exists at the time of recording the entry.

    • Trading a/c

      Generally, at the end of the accounting period, the balances (amounts) in all the ledger accounts which go into the value of goods/stock, are closed by transfer to the "Trading a/c". This amounts to debiting the "Trading a/c" with the total value of goods/stock.

      Thus the value of stock used for advertisement purposes has to be credited to the "Trading a/c" in which the total value of goods/stock is existing as a debit balance.

      Journal/Ledger » Hide/Show

      Journal in the books of M/s __ for the period from ____ to _____
      Date V/R
      No.
      L/F Debit Amount
      (in Rs)
      Credit Amount
      (in Rs)
      Dec 31st Dr
      46,000
      46,000
      [For the value of goods used up within the organisation for the purpose of advertisements.]

      DrAdvertisement Expenses a/cCr
      Date Particulars J/F Amount
      (in Rs)
      Date Particulars J/F Amount
      (in Rs)
      1st-31st
      31/12/05
      To Cash/Bank a/c
      To Trading a/c
      1,23,000
      46,000
      31/12/05 By P/L a/c 1,69,000
            1,69,000       1,69,000
                     

      DrTrading a/cCr
      Particulars Amount
      (in Rs)
      Particulars Amount
      (in Rs)
      To Opening Stock
      To Purchases
      To Direct Expenses
      To Gross Profit
      xx
      xx
      xx
      xx
      By Sales
      By Advt. Exp
      By Closing Stock
      xxx
      46,000
      xxx
        xxxx   xxx

    • Goods Consumed a/c

      Where the "Goods Consumed a/c" is used, the balances (amounts) in all the ledger accounts which go into the value of goods/stock (including opening stock) are transferred to it. Thus the "Goods Consumed a/c" would hold the total value of stock (as a debit balance).

      Thus the value of goods used up for advertisement purposes has to be credited to the "Goods Consumed a/c" in which the total value of goods/stock is existing as a debit balance.

      Journal/Ledger » Hide/Show

      Journal in the books of M/s __ for the period from ____ to _____
      Date V/R
      No.
      L/F Debit Amount
      (in Rs)
      Credit Amount
      (in Rs)
      Dec 31st Dr
      46,000
      46,000
      [For the value of goods used up within the organisation for the purpose of advertisements.]

      DrAdvertisement Expenses a/cCr
      Date Particulars J/F Amount
      (in Rs)
      Date Particulars J/F Amount
      (in Rs)
      1st-31st
      31/12/05
      To Cash/Bank a/c
      To Goods Consumed a/c
      1,23,000
      46,000
      31/12/05 By P/L a/c 1,69,000
            1,69,000       1,69,000
                     

      DrGoods Consumed a/cCr
      Particulars Amount
      (in Rs)
      Particulars Amount
      (in Rs)
      To Opening Stock
      To Purchases
      To Direct Expenses
      xx
      xx
      xx
      xx
      By Advt. Exp
      By Closing Stock
      By Trading a/c(?)
      46,000
      xxx
      xxx
        xxxx   xxx

    • Purchases a/c

      Where the following conditions exist, we can credit "Purchases a/c" with the value of stock drawings.
      • The stock used up for advertisement purposes is physically relatable to the stock that has been purchased during the current period.
      • There are no direct expenses in relation to the stock purchased during the current period
        (Or)
        The value of stock used up does not include the direct expenses incurred during the current period

      Journal/Ledger » Hide/Show

      Journal in the books of M/s __ for the period from ____ to _____
      Date V/R
      No.
      L/F Debit Amount
      (in Rs)
      Credit Amount
      (in Rs)
      1st - 31st Dr
      46,000
      46,000
      [For the value of goods used up within the organisation for the purpose of advertisements.]

      DrAdvertisement Expenses a/cCr
      Date Particulars J/F Amount
      (in Rs)
      Date Particulars J/F Amount
      (in Rs)
      1st-31st
      31/12/05
      To Cash/Bank a/c
      To Purchases a/c
      1,23,000
      46,000
      31/12/05 By P/L a/c 1,69,000
            1,69,000       1,69,000
                     

      DrPurchases a/cCr
      Particulars Amount
      (in Rs)
      Particulars Amount
      (in Rs)
      To cash/Bank/Crs
      xx
      By Advt. Exp
      By Trading a/c (?)
      (Or) Goods Cons a/c
      46,000
      xxx
        xxxx   xxx

    • Stock used for Advertisements a/c

      Where such transactions occur frequently, the organisation may create a controlling account by name "Stock used for Advertisements a/c". This is a nominal account that gives the information relating to the total value of stock that has been used up this way during the accounting period.

      Journal/Ledger » Hide/Show

      Journal in the books of M/s __ for the period from ____ to _____
      Date V/R
      No.
      L/F Debit Amount
      (in Rs)
      Credit Amount
      (in Rs)
      Dec 31st Dr
      46,000
      46,000
      [For the value of goods used up within the organisation for the purpose of advertisements.]

      DrAdvertisement Expenses a/cCr
      Date Particulars J/F Amount
      (in Rs)
      Date Particulars J/F Amount
      (in Rs)
      1st-31st
      31/12/05
      To Cash/Bank a/c
      To Stock (Advt) a/c
      1,23,000
      46,000
      31/12/05 By P/L a/c 1,69,000
            1,69,000       1,69,000
                     

      DrStock used for Advertisements a/cCr
      Particulars Amount
      (in Rs)
      Particulars Amount
      (in Rs)
      To Trading a/c
      (Or) Goods Cons. a/c
      xx By Advt. Exp.
      By Advt. Exp
      By Advt. Exp
      xxx
      46,000
      xxx
        xxxx   xxx

      The multiple credits indicate the same type of transaction occurring a number of times during the accounting period.

      The "Stock used for Advertisements a/c" would be closed at the end of the accounting period by transfer to either the "Trading a/c" or "Goods Consumed a/c" or "Purchases a/c" depending on where the value related to the stock so used is included.

The "Advertisement Expenses a/c" is a nominal account indicating an indirect expenditure. This account is closed at the end of the accounting period by transfer to the "Profit & Loss a/c".

Adjustment during Final Accounting

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.
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Adjustments are generally required for transactions which are not yet recorded at the time of making up the final accounts i.e. towards the end of the accounting period.

Regular Entries Net Effect
1) Advertisement Expenses a/c   Dr
      To Trading a/c

2) Profit & Loss a/c   Dr
      To Advertisement Expenses a/c

Profit & Loss a/c   Dr
    To Trading a/c

Since adjustment is needed at the end of the accounting period, we assume that the journal entry to record the drawings of stock is
Dr. Advertisement Expenses a/c
Cr. Trading a/c

The net effect would give an understanding on where the amounts are to be adjusted.

The value of stock used up for advertisement purposes is to be

  1. Credited to the "Trading a/c"
    It is generally shown as a deduction from purchases on the debit side of the "Trading a/c"
  2. Added to the "Advertisement Expenses" on the debit side of the "Profit & Loss a/c".

DrTrading and Profit & Loss a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)

To Purchases
    (−) Advt. Exp


12,26,000
  46,000


11,80,000




           


To Advt. Expense
    (+) Stock used



1,23,000
  46,000


1,69,000




           

The stock that is used for advertisement purposes represents the stock that is used within the organisation. This is because the organisation and owners are treated one and the same for the purpose of identifying transactions that generate income. As such the drawings of stock have to be valued at cost based on the principle that "one cannot make a profit out of a transaction with one self".

Gross Profit is Effected :: Net Profit remains unaltered

Failing to recognise and record this transaction would not affect the Net Profit figure. Only the Gross profit figure is affected by this transaction.

The net effect indicates the ultimate influence of recording this transaction in the books of accounts. The net effect indicates a debit in "Profit & Loss a/c" which implies an increase in the indirect expenses and a credit to the "Trading a/c" which indicates a decrease in the direct expenses.

Illustration » Hide/Show

Before Advertisement Expense is recorded/adjusted

DrTrading and Profit & Loss a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)
To Opening Stock
To Purchases
To Direct Expenses
To Gross Profit

84,000
12,26,000
1,28,000
4,67,000
By Sales
By Closing Stock

18,00,000
1,05,000
    19,05,000     19,05,000
To Salaries
To Indirect Exp
To Advt. Expense
To Losses
To Net Profit

74,000
1,20,000
1,23,000
42,000
1,22,000
By Gross Profit
By Misc. Income

4,67,000
14,000
    5,27,000     5,27,000

After Advertisement Expense is recorded/adjusted

DrTrading and Profit & Loss a/cCr
Particulars Amount
(in Rs)
Amount
(in Rs)
Particulars Amount
(in Rs)
Amount
(in Rs)
To Opening Stock
To Purchases
    (−) Advt. Exp
To Direct Expenses
To Gross Profit

12,26,000
  46,000
84,000

11,80,000
1,28,000
5,13,000
By Sales
By Closing Stock

18,00,000
1,05,000
    19,05,000     19,05,000
To Salaries
To Indirect Exp
To Advt. Expense
    (+) Stock used
To Losses
To Net Profit


1,23,000
  46,000
74,000
1,20,000

1,69,000
42,000
1,22,000
By Gross Profit
By Misc. Income

5,13,000
14,000
    5,27,000     5,27,000

We can say that an expenditure equal to the value of stock used for advertisement purposes has been transferred from the "Trading a/c" to the "Profit & Loss a/c". This results in an increased gross profit figure. But at the same time, the indirect expenses are increased by the same amount which would set off the increased gross profit coming down to the profit and loss account.

Author Credit : The Edifier

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