Account 1 Marks Question

Capital Expenditure because it is taken only at the time of starting a business.

₹ 1,000

Deducted from Purchases in Trading Account and shown on Dr. side of Profit & Loss Account.

Need of Adjustment:

1. To ascertain the true Net Profit or loss of the business.
2. To ascertain the true financial position of the business.
3. To make a record of the transactions omitted from the books.
4. To rectify the errors committed in the books of accounts.
5. To make a record of such expenses which have accrued but have not been paid.
6. To make a record of such incomes which have accrued but have not been received
7. To provide for depreciation and other provisions.

Prudence Concept.

		adjustment entry	Treatment in P & L A/C	Treatment in Balance Sheet
i.	Accrued Income.		Added in income on credit side of Profit & Loss A/c.	Shown on the Assets side.
ii.	Unearned Income.		Deducted from income on the credit side of Profit & Loss A/c.	Shown on the Liabilities side.

On the one hand, they will be added to the concerned expenses on the debit side of Trading or Profit and Loss Account and on the other hand, will also be shown on the Liabilities side of the Balance Sheet.

These are the expenses which have been paid in advance for the next period during the current period itself. In other words, benefit of such payments will be available in the next accounting period.

1. Purchase of Goods.
2. Salary, Rent etc.

Wags include ₹ 10,000 spent on the installation of New Machine, In order to rectify the mistake, ₹ 10,000 will be deducted from Wages and added in Machinery.

1. Profit and Loss Account will not show correct profit or loss and Balance Sheet will not show true financial position.
2. Accrual Concept and Matching Concept will be violated.

These are the expenses which have been incurred during the year but have been left unpaid on the date of preparing the final accounts.

Yes.

It is a capital expenditure because business premises is a fixed asset and it will result in increase in earning capacity of the business and will also be useful for more than one year.

Outstanding expenses are provided as per the accrual concept of accounting according to which all expenses for the year, whether paid or not, should be recorded.

1. Purchase of Machinery.
2. Expenditure on installation of Machinery.

Profit and Loss Account.

₹ 1,00,000 will be deducted from Purchases on the debit side of Trading A/c, ₹ 40,000 will be shown on the debit side of Profit and Loss A/c and ₹ 60,000 will be shown on the Assets side of the Balance Sheet.

These are provided as per the accrual concept of accounting according to which all incomes earned during the year should be recognised, whether received or not.

There are certain expenditures which are revenue in nature but the benefit of which is likely to be derived over a number of years. Such expenditures are termed as 'Deferred Revenue Expenditures'. Such as heavy expenditure on advertisement.

			Treatment in P & L a/c	Treatment in Balance Sheet
i.	Outstanding Salaries		Added in Salaries the Debit side of Profit & Loss a/c	Shown on the Liabilities side.
ii.	Accrued Interest		Added to Interest Received on the Credit side of Profit & Loss a/c	Shown on the Assets side.

A provision is created to cover any possible loss on account of bad-debts likely to occur in future. Such a provision is created at a fixed percentage on debtors every year and is called “Provision for Bad and Doubtful Debts'. The term “Provision should be used instead of “Reserve' because the aim is not to strengthen the financial position of the business but to cover an expected future loss. The amount of Provision for Doubtful Debts on the one hand, is shown on the debit side of the Profit and Loss Account and on the other hand, is deducted from Sundry Debtors on the assets side of the Balance Sheet, so that the debtors may appear at their realisable value in the Balance Sheet.

Prepaid Expenses on the one hand, will be deducted from the concerned expenses on the debit side of Trading or Profit and Loss Account and on the other hand, will also be shown on the Assets side of the Balance Sheet.

No. Provision for discount on debtors is calculated after deducting provision for doubtful debts from debtors.

It is based on the principle of prudence (or conservatism) according to which all anticipated losses should be taken into account, but all unrealized gains should be ignored.