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.
Recording » Journal EntryWe 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.
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 AccountingAdjustment 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.
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.
Since adjustment is needed at the end of the accounting period, we assume that the journal entry to record the drawings of stock is
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
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 unalteredFailing 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.
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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.
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