Final Accounts

 Q.What are Final Accounts? Explain with major adjustments. 

Answer:- The main objective of preparing final accounts for any businessman is to gain knowledge of the profit and loss and the financial position of the business. 

Under this, to ascertain the profit and loss of the business, a Profit and Loss Account and to ascertain the financial position of business a Balance Sheet are prepared .

Furthermore, there are some items whose transactions cannot be fully or partially recorded by the end of the year. Thus, recording these transactions according to the rules is called adjustment. 

Major adjustments are as follows: 

1. Outstanding Expenses 
2. Prepaid Expenses
3. Accrued Income 
4. Unearned Income  
5. Interest on Capital 
6. Interest on Drawings 
7. Bad Debts 
8. Provision for Bad Debts 
9. Provision for Discount on Debtors 
10. Provision for Discount on Creditors 
11. Depreciation 
12. Closing Stock 

1.Outstanding Expenses: These are expenses for which payment has not been made, but services have been received. 

These are called outstanding expenses. 

These expenses are added to the relevant head and written on the liabilities side of the balance sheet. 

2. Prepaid Expenses: These are expenses for which payment has been made, but services have not yet been received. 

These are called prepaid expenses. 

These are deducted from the relevant head and written on the assets side of the balance sheet. 

3.Accrued Income: This is income that has been earned, but has not yet been received. This is called accrued income.

This is added to the relevant head and written on the assets side of the balance sheet. 

4.Unearned Income: This is income that has not been earned, but has been received. This is called unearned income. 

This is deducted from the relevant head and written on the liabilities side of the balance sheet. 

5. Interest on Capital: The money invested in a business is called capital. And the interest given on this capital is called interest on capital. 

This is a loss for the business, which is added to the capital and written in the debit side of the profit and loss account. 

6. Interest on Drawings: Money withdrawn from the business is called drawings. The interest received on these drawings is called interest on drawings. 

This is a profit for the business. It is added to the amount of drawings and written on the credit side of the profit and loss account. 

7. Bad Debts: An amount that cannot be recovered from debtors is called bad debts. This is a loss for the business.

 It is deducted from the amount of the debtor and written on the debit side of the profit and loss account. 

8. Provision for Bad Debts: This refers to a certain amount of money set aside by the businessman as a provision to avoid future losses, which is not recoverable from debtors and is a loss for the business. This is called provision for bad debts. 

It is deducted from the amount of the debtor and written on the debit side of the profit and loss account. 

9.Depreciation: Depreciation is the systematic and permanent decrease in the value of any asset.

It is deducted from the value of the related asset and written on the debit side of the Profit and Loss Account. 

10. Closing Stock:- closing Stock is the leftover goods at the end of the year. 

It is written on the asset side of the Balance Sheet and on the credit side of the Trading Account. 

11. Provision for Discount on Debtors 

12. Provision for Discount on Creditors