Stock/Goods used for Advertisement Purposes :: Adjustments

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. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments 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. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) Dec 31st – Advertisement Expenses a/c       To Trading a/c Dr – – 46,000 46,000 [For the value of goods used up within the organisation for the purpose of advertisements.] Dr Advertisement Expenses a/c Cr 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                 Dr Trading a/c Cr 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. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) Dec 31st – Advertisement Expenses a/c       To Goods Consumed a/c Dr – – 46,000 46,000 [For the value of goods used up within the organisation for the purpose of advertisements.] Dr Advertisement Expenses a/c Cr 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                 Dr Goods Consumed a/c Cr 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. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) 1st - 31st – Advertisement Expenses a/c       To Purchases a/c Dr – – 46,000 46,000 [For the value of goods used up within the organisation for the purpose of advertisements.] Dr Advertisement Expenses a/c Cr 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                 Dr Purchases a/c Cr 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. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) Dec 31st – Advertisement Expenses a/c       To Stock used for Advertisements a/c Dr – – 46,000 46,000 [For the value of goods used up within the organisation for the purpose of advertisements.] Dr Advertisement Expenses a/c Cr 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                 Dr Stock used for Advertisements a/c Cr 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. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments 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 Credited to the "Trading a/c" It is generally shown as a deduction from purchases on the debit side of the "Trading a/c" Added to the "Advertisement Expenses" on the debit side of the "Profit & Loss a/c". Dr Trading and Profit & Loss a/c Cr 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 Dr Trading and Profit & Loss a/c Cr 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 Dr Trading and Profit & Loss a/c Cr 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