1. Need for Adjustments
To ascertain the true profit/loss and financial position, adjustments are made for transactions related to the current accounting period but not recorded or partially recorded.
Rule: Every adjustment has a dual effect (Double Entry System).
2. Important Adjustments
| Adjustment | Trading/P&L A/c | Balance Sheet |
|---|---|---|
| Closing Stock | Credit Side (Trading) | Asset Side |
| Outstanding Expenses | Add to Expense (P&L) | Liability Side |
| Prepaid Expenses | Deduct from Expense (P&L) | Asset Side |
| Accrued Income | Add to Income (P&L) | Asset Side |
| Income Received in Advance | Deduct from Income (P&L) | Liability Side |
| Depreciation | Debit Side (P&L) | Deduct from Asset |
3. Bad Debts and Provision for Doubtful Debts
- Bad Debts (Trial Balance): Debit P&L Only.
- Bad Debts (Adjustment): Debit P&L AND Deduct from Debtors.
- Prov. for Doubtful Debts: Debit P&L (New Provision) AND Deduct from Debtors (Assets).