Transactions after the Trial Balance Date

There might be a number of accounting transactions which might not have been taken into consideration by the time the Trial Balance has been prepared. Some of the reasons for the presence of such transactions are • Transactions which do not occur in the normal course of business There are a number of transactions relating to the business which do not occur in the normal course of business. These transactions unless deliberately recorded do not get into the books of accounts. Examples for such transactions Stock taken away by the proprietor for personal use Abnormal loss of stock • Transactions which have to be recorded only towards the end There are a number of transactions relating to the business which have to be recorded only at the end of the accounting period. If the trial balance has been prepared before all such transactions into consideration have been taken into consideration, then they stay unrecorded in the books of accounts. Depreciation on Assets Expenses - Outstanding/Prepaid Incomes - Outstanding/Pre-received • Transactions relating to Error Rectifications The agreement of a Trial Balance is not a conclusive proof of absence of errors in accounting. Even in case where the trial balance agrees, there may still be errors existing in the books of accounts. These errors if identified subsequent to the preparation of the Trial Balance, need to be rectified which needs journal entries to be passed for rectification.

What are Adjustments?

The transactions which have not yet been journalised, appended to the trial balance are what we call adjustments. Thus we can say that Adjustments are transactions relating to the business which have not been journalised by the end of the accounting period. • Illustration Trial Balance of M/s Azaya Traders" as on 30th June 2006. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) Opening Stock Purchases Salaries Wages Carriage Inwards Trading Charges Carriage Outwards Rent received Cash Capital Bank (Overdraft) Comission Creditors Sales Debtors Machinery – – – – – – – – – – – – – – – – 86,000 11,36,000 1,53,000 18,000 26,900 64,000 52,500 62,500 42,780 2,56,000 4,80,000 1,78,300 3,44,700 37,980 2,68,000 15,48,700 Total   23,77,680 23,77,680 » Adjustments The following additional information is available A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the books. Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries. The additional information presented after the trial balance contains information relating to accounting transactions, which are to be identified from the wordings.

Why are they called Adjustments? Why not Additional Transactions?

Since adjustments are also transactions relating to the business, we need to bring them into the accounting books by journalising them. The trial balance is used for final accounting, so as to eliminate a lot of physical work (in manual accounting) in the form of recording transactions for making up final accounts, posting them into respective ledger accounts, balancing of ledger accounts effected by these transactions. Therefore even for the purpose of bringing the transactions represented by the adjustments into books a method has been designed which would not require us to record these transaction, post them and balance the ledger accounts affected. This method incorporates the effect of the transactions into the final accounts without having to go through the regular process of recording, posting, balancing etc. • Accounting for the Transactions Recording the transactions represented by adjustments normally would result in the existing balance in the affected ledger accounts to either increase or decrease. » Transaction Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries. This represents an error of principle whereby an expenditure that was to be debited in a particular account has been debited to another account. To bring the effect of this transaction into books, the journal entry to rectify this error has to be recorded. » Journal/Ledger Hide/Show Journal in the books of M/s Azaya Traders for the year ending 30th June 2006 Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) 30/06/06 – Wages a/c       To Salaries a/c Dr – – 2,00,000 2,00,000 [For the transfer of wages erroneously treated as salaries from the "salaries a/c" to the "Wages a/c".] The transaction posted into the relevant ledger accounts Dr Salaries a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs) 30/06/06 To Bal b/d – – 1,53,000 30/06/06 30/06/06 By Wages Bal c/d – 43,000 1,10,000       1,53,000       1,53,000 01/07/06 To Balance b/d – 1,10,000         Dr Wages a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs) 30/06/06 To Salaries a/c – 43,000 30/06/06 By Bal c/d – 43,000       43,000       43,000 01/07/06 To Balance b/d – 43,000         • The Method of Adjustment This method involves identification of the effect and making mathematical adjustments in the figures that we consider in final accounting (i.e. at the time of showing them in the Trading a/c or Profit & Loss a/c or the Balance Sheet.). » Effect of the Transaction The effect of the journal entry to be recorded in the above case can be analysed as (−) From Salaries on the debit side of P/L a/c The Salaries a/c which already has a debit balance is credited which will result in a decrease in the existing debit balance. To bring the effect of this transaction, the amount involved in the transaction (Rs. 43,000) is deducted from the Salaries a/c balance (Rs. 1,53,000) shown on the debit side of the "Profit & Loss a/c". (+) To Wages on the debit side of Trading a/c The Wages a/c which already has a debit balance is debited resulting in an increase in the existing debit balance. To bring the effect of this transaction, the amount involved in the transaction (Rs. 43,000) is added to the Wages a/c balance (Rs. 18,000) shown on the debit side of the "Trading a/c". These are the adjustments to be made to bring the affect of the above transaction into the books of accounts. • Why call them Adjustment? Why not Additional Transactions? Since the affect of these transactions is incorporated by mathematical adjustments, they are called Adjustments rather than just Additional Transactions.

To make the Adjustment » Know the Journal Entry

Adjustments are transactions relating to business which have not yet been journalised. Therefore, to make the adjustments one should have an idea of the journal entry related to the transaction indicated by the adjustment. If we know the Journal entry, we can identify the effect of the same on the ledger accounts and thus be able to identify the adjustments to be made. The adjustments are made at the time of making up the final accounts within the three parts that make up the final accounting, i.e. the "Trading a/c", "Profit & Loss a/c" and the "Balance Sheet".

Illustration » Problem

Draw up the final accounts from the following trial balance and the additional information that follows it. Trial Balance of M/s Azaya Traders" as on 30th June 2006. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) Opening Stock Purchases Salaries Wages Carriage Inwards Trading Charges Carriage Outwards Rent received Cash Capital Bank (Overdraft) Comission Creditors Sales Debtors Machinery – – – – – – – – – – – – – – – – 86,000 11,36,000 1,53,000 18,000 26,900 64,000 52,500 62,500 42,780 2,56,000 4,80,000 1,78,300 3,44,700 37,980 2,68,000 15,48,700 Total   23,77,680 23,77,680 The following additional information is available A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the books. Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries.

Illustration » Working Notes

An analysis of the various ledger accounts in the trial balance would enable us to decide what to be done with each item in the trial balance. Trial Balance of M/s Azaya Traders as on 30/06/06 » Statement of Analysis Account Description Account Type Balance Nature Where What Side Amount Opening Stock Purchases Salaries Wages Carriage Inwards Trading Charges Carriage Outwards Rent received Cash Capital Bank (Overdraft) Comission Creditors Sales Debtors Machinery Direct Expenses Direct Expenses Indirect Expenses Direct Expenses Direct Expenses Indirect Expenses Indirect Expenses Indirect Incomes Asset Liability Liability Indirect Expense Liability Direct Incomes Asset Asset Nominal Nominal Nominal Nominal Nominal Nominal Nominal Nominal Real Personal Personal Nominal Personal Nominal Personal Real Debit Debit Debit Debit Debit Debit Debit Credit Debit Credit Credit Debit Credit Credit Debit Debit Trading a/c Trading a/c P/L a/c Trading a/c Trading a/c P/L a/c P/L a/c P/L a/c B/S B/S B/S P/L a/c B/S B/S B/SB/S Debit Debit Debit Debit Debit Debit Debit Credit Assets Liabilities Liabilities Debit Liabilities Credit Assets Assets 86,000 11,36,000 1,53,000 18,000 26,900 64,000 52,500 1,78,300 62,500 3,44,700 37,980 42,780 2,68,000 15,48,700 2,56,000 4,80,000 An analysis of the additional transactions would enable us to identify what is to be done to incorporate their effect in accounting. A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the books. Entry Effect Dr. Machinery a/c Cr. Ramsay Machine Tools a/c     1. (+) To Machinery a/c on the Assets side of the Balance Sheet 2. (+) To Ramsay Machine Tools a/c on the Liabilities side of the Balance Sheet Detailed Explanation Hide/Show » Transaction A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the books. This represents an error of omission whereby a transaction has been omitted from being recorded in the books. To bring the effect of this transaction into books, the relevant journal entry has to be recorded. » Journal/Ledger Journal in the books of M/s Azaya Traders for the year ending 30th June 2006 Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) 30/06/06 – Machinery a/c       To M/s Ramsay Machine Tools a/c Dr – – 2,00,000 2,00,000 [For the value of machine purchased on credit.] The transaction posted into the relevant ledger accounts Dr Machinery a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs) 30/06/06 To Bal b/d To Ramsay Machine Tools – – 4,80,000 2,00,000 30/06/06 By Bal c/d – 6,80,000       6,80,000       6,80,000 01/07/06 To Balance b/d – 6,80,000         Dr Ramsay Machine Tools a/c Cr Date Particulars J/F Amount (in Rs) Date Particulars J/F Amount (in Rs) 30/06/06 To Bal c/d – 2,00,000 30/06/06 By Machine a/c – 2,00,000       2,00,000       2,00,000         01/07/06 By Balance b/d – 2,00,000 » Effect of the Transaction The effect of the journal entry to be recorded in the above case can be analysed as (+) To Machinery a/c on the assets side of the Balance Sheet The Machinery a/c which already has a debit balance is debited resulting in an increase in the existing debit balance. To bring the effect of this transaction, the amount involved in the transaction (Rs. 2,00,000) is added to the Machinery a/c balance (Rs. 4,80,000) shown on the assets side of the "Balance Sheet". (+) To Ramsay Machine Tools a/c on the Liabilities side of the Balance Sheet Ramsay Machine Tools a/c (which is not present in the books i.e. it has no balance in it) is credited resulting in the "Ramsay Machine Tools a/c" being created anew resulting in a credit balance in the account. Ramsay Machine Tools a/c is a personal account since it relates to an organisation. It has a credit balance and therefore is an equivalent of a creditor. Thus it is to be shown on the liabilities side of the Balance Sheet. To bring the effect of this transaction, the amount involved in the transaction (Rs. 2,00,000) is shown on the name of Ramsay Machine Tools on the liabilities side of the balance sheet. We can also interpret this as adding the amount to the existing nil balance. These are the adjustments to be made to bring the affect of the above transaction into the books of accounts. Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries. Entry Effect Dr. Wages a/c Cr. Salaries a/c     1. (+) To Wages a/c on the Debit side of the Trading a/c 2. (−) From Salaries a/c on the Debit side of the Profit and Loss a/c Detailed Explanation Above

Illustration » Solution

Making up the final accounts would involve nothing more than putting the items from the trial balance in the right places i.e. in either the "Trading a/c" or "Profit and Loss a/c" or the "Balance Sheet" and making subsequent adjustments. Dr Trading and Profit & Loss a/c of M/s Azaya Traders for the year ending 30/06/06 Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Opening Stock To Purchases To Wages     (+) Salary (Tr) To Carriage Inwards To Gross Profit 18,000 43,000 86,000 11,36,000 61,000 26,900 2,38,800 By Sales   15,48,700     15,48,700     15,48,700 To Salaries     (−) Tr. to Wages To Trading Charges Carriage Outwards To Comission To Net Profit 1,53,000 43,000 1,10,000 64,000 52,500 42,780 1,47,820 By Gross Profit By Rent Received   2,38,800 1,78,300     4,17,100     4,17,100 Balance Sheet of M/s Azaya Traders as on 30th June 2006 Liabilities Amount Amount Assets Amount Amount Capital     (+) Net Profit Bank (Overdraft) Creditors     (+) Due to M/s Ramsay 3,44,700 1,47,820 2,68,000 2,00,000 4,92,520 37,980 4,68,000 Cash Debtors Machinery     (+) New Machine 4,80,000 2,00,000 62,500 2,56,000 6,80,000     9,98,500     9,98,500 The effect of the additional transactions (adjustments) are incorporated into the accounts by mathematical adjustments wherever needed.

Adjustments to be Dealt with at least Twice

• Dual Entity Concept Every transaction relating to business has its effect on two elements. Adjustments are transactions relating to the business which are yet to be journalised. We call them adjustments for the reason that they are dealt with by making mathematical adjustments to the figures of ledger account balances instead of passing the regular journal entries. Therefore, in making mathematical adjustments we have to ensure that we are adjusting the two elements that are affected by the transaction. Each item from the adjustments should be dealt with at least twice in Final Accounting. Where an item appears in the trial balance it is to be dealt with only once and where an adjustment is being dealt with it is to be dealt with at two or more places depending on the number of elements effected by the transaction. » Adjusting more than two accounts In most of the cases, the journal entry for recording the transaction given as adjustments is a simple entry involving two accounts (one being debited and the other being credited). However, in some cases, a complex entry involving more than two elements (accounts) is needed to record the additional transactions. In such cases more than two accounts may have to be adjusted.

Author Credit : The Edifier

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