Accounting · Final Accounts of Sole Proprietors

Adjustments in Final Accounts of Sole Proprietors

Updated 1 October 2026 · Fact-checked

Adjustments are year-end items not yet recorded in the trial balance. Each has a double effect: it changes the Trading or Profit and Loss Account and also appears in the Balance Sheet. Solve them by listing each adjustment, posting both effects, and then checking that the Balance Sheet tallies.

Understand Adjustments in Final Accounts

A trial balance shows balances as recorded during the year. But some expenses are unpaid, some are paid in advance, some income is earned but not received, and stock is still unsold. If you ignore these, profit and the Balance Sheet will be wrong. Adjustments fix this under the accrual basis: expenses and income belong to the year they relate to, not the year cash moves.

The key idea is the double effect. Every adjustment given outside the trial balance is shown twice. Once in the Trading or Profit and Loss Account (changing profit). Once in the Balance Sheet (as an asset or liability, or as a deduction from one). If an item is already inside the trial balance, it is shown only once, because its other effect is already recorded.

Think of each adjustment in two questions. First: how does it change this year's expense or income? Second: what is left over at the year end? Outstanding expense is added to the expense and shown as a liability. Prepaid expense is deducted from the expense and shown as an asset. Accrued income is added to income and shown as an asset. Income received in advance is deducted from income and shown as a liability.

Some adjustments are about the owner. Interest on capital is a notional expense for the business and income for the owner. Interest on drawings is income for the business and is charged to the owner. Both change the capital account in the Balance Sheet. Bad debts, provision for doubtful debts and depreciation reduce profit and reduce the related asset.

Key rules to remember

Outstanding expense: Expense for the year = Expense per trial balance + Outstanding; Show outstanding as a current liability. If it is the same expense shown in the trial balance, add it there.
Prepaid expense: Expense for the year = Expense per trial balance − Prepaid; Show prepaid as a current asset.
Accrued income: Income for the year = Income per trial balance + Accrued income; Show accrued income as a current asset.
Income received in advance: Income for the year = Income per trial balance − Advance income; Show it as a current liability.
Closing stock: Credit side of Trading Account; asset in Balance Sheet; If it is given in the trial balance, it is not shown in the Trading Account, only in the Balance Sheet.
Depreciation: Debit P&L Account; deduct from the asset in the Balance Sheet; Straight line: (Cost − Scrap value) ÷ Life. Reducing balance: Rate × Opening book value.
Bad debts and new provision: P&L charge = Bad debts (trial balance) + Additional bad debts + New provision − Old provision; If new provision is lower than old, the difference is a gain in P&L. Deduct the provision from debtors in the Balance Sheet.
Provision for doubtful debts base: Provision = Rate × (Debtors − Additional bad debts); Provision for doubtful debts is calculated on debtors after deducting additional bad debts. Provision for discount is then calculated on debtors after deducting additional bad debts and the doubtful debts provision.
Provision for discount on debtors: Provision = Rate × (Debtors − Additional bad debts − Provision for doubtful debts); Discount is allowed only on good debts.
Interest on capital: Interest = Capital × Rate × Time; Debit P&L, add to capital in the Balance Sheet. Use opening capital unless told otherwise.
Interest on drawings: Interest = Drawings × Rate × Time; Credit P&L, deduct from capital in the Balance Sheet. Time depends on dates of withdrawal.

How to solve Adjustments in Final Accounts questions

Use the same routine for every question. It keeps you from missing one half of an adjustment.

1Read all adjustments first and mark each one as outside or already inside the trial balance.
2Write a small table with columns: Adjustment, Trading/P&L effect, Balance Sheet effect.
3Calculate each amount (depreciation, provision, interest) separately on rough work and show the working.
4Prepare the Trading Account: add closing stock and adjust purchases, wages or carriage as needed. Find gross profit.
5Prepare the Profit and Loss Account: adjust each expense and income, and add depreciation, bad debts, provisions and interest. Find net profit.
6Prepare the Balance Sheet: show closing stock, prepaid and accrued items as assets, outstanding and advance items as liabilities, and fixed assets and debtors after deductions.
7Adjust capital: add net profit and interest on capital, deduct drawings and interest on drawings.
8Check that totals tally. If not, recheck the one-sided entries first.

Quickest way: Two-column adjustment grid

When to use it: Use this when there are six or more adjustments and you have limited time in a 3-hour paper.

Draw two columns: P&L effect and Balance Sheet effect. Fill one row for every adjustment before you start the accounts.
Use the sign rule: outstanding and accrued add to P&L item; prepaid and advance subtract.
Put the Balance Sheet side the opposite way: outstanding and advance are liabilities, prepaid and accrued are assets.
Tick each row off as you post it in the accounts. This protects your step marks.
Show working notes for depreciation, provision and interest in a clear box so the examiner can award marks even if the final figure is wrong.

Common mistakes in Adjustments in Final Accounts

Showing an adjustment only once
Students post it in the P&L Account and forget the Balance Sheet.
Fix: Tick both effects in your grid for every adjustment given outside the trial balance.
Adding prepaid expenses instead of deducting them
Mixing up the sign rule with outstanding expenses.
Fix: Remember: prepaid is paid for next year, so remove it from this year's expense and show it as an asset.
Calculating provision on the full debtors figure
Students forget to deduct additional bad debts first.
Fix: Deduct additional bad debts, then apply the rate. For discount provision, also deduct the doubtful debts provision.
Showing closing stock twice
Closing stock appears in the trial balance in some questions, and students treat it as an adjustment.
Fix: If it is in the trial balance, show it only in the Balance Sheet. If it is in adjustments, show it in the Trading Account and Balance Sheet.
Treating interest on drawings as an expense
Students confuse it with interest on capital.
Fix: Interest on capital is a charge to P&L. Interest on drawings is income to P&L. In capital, they have the opposite signs.
Ignoring the old provision for doubtful debts
The old provision is in the trial balance and is easily overlooked.
Fix: Charge only the net change: new provision minus old provision, along with all bad debts.

Worked examples

Example 1

From the trial balance of Ravi on 31 March 2025: Salaries ₹1,20,000; Insurance ₹18,000; Rent received ₹30,000. Adjustments: salaries outstanding ₹10,000; insurance prepaid ₹3,000; rent received in advance ₹5,000; accrued commission income ₹4,000. Show the amounts to be charged or credited in the P&L Account and the Balance Sheet items.

Show the solution

Salaries: 1,20,000 + 10,000 outstanding = ₹1,30,000 debited to P&L. Outstanding salaries of ₹10,000 is a liability.
Insurance: 18,000 − 3,000 prepaid = ₹15,000 debited to P&L. Prepaid insurance of ₹3,000 is an asset.
Rent received: 30,000 − 5,000 advance = ₹25,000 credited to P&L. Rent received in advance of ₹5,000 is a liability.
Commission: accrued ₹4,000 is income not in the trial balance, so ₹4,000 is credited to P&L and shown as an asset.

Answer: P&L: Salaries ₹1,30,000 (Dr); Insurance ₹15,000 (Dr); Rent received ₹25,000 (Cr); Commission ₹4,000 (Cr). Balance Sheet: liabilities are outstanding salaries ₹10,000 and rent received in advance ₹5,000; assets are prepaid insurance ₹3,000 and accrued commission ₹4,000.

Example 2

Sundry debtors per trial balance are ₹1,05,000. Bad debts already written off ₹2,000. Provision for doubtful debts (opening) ₹4,000. Adjustments: further bad debts ₹5,000; maintain provision for doubtful debts at 5% on debtors; create provision for discount at 2% on debtors. Show the P&L charge and the Balance Sheet value of debtors.

Show the solution

Debtors after further bad debts: 1,05,000 − 5,000 = ₹1,00,000.
New provision for doubtful debts: 5% × 1,00,000 = ₹5,000.
Debtors after that provision: 1,00,000 − 5,000 = ₹95,000.
Provision for discount: 2% × 95,000 = ₹1,900.
P&L: Bad debts 2,000 + 5,000 = ₹7,000. Provision for doubtful debts: new 5,000 − old 4,000 = ₹1,000 additional charge. Provision for discount ₹1,900 (assuming no opening balance given).
Total P&L charge = 7,000 + 1,000 + 1,900 = ₹9,900.
Balance Sheet: Debtors 1,00,000 less provision for doubtful debts 5,000 less provision for discount 1,900 = ₹93,100.

Answer: Total charge to P&L ₹9,900 (bad debts ₹7,000, additional provision ₹1,000, provision for discount ₹1,900). Debtors in the Balance Sheet: ₹93,100 net.

Exam tips

Write the full working for each adjustment on the answer sheet. Even if the final profit is wrong, you can still earn step marks.
Check if an item is in the trial balance before adding it. This single check decides whether you show the double effect or only one side.
Read words like 'on opening capital', 'for six months' and 'after adjusting' carefully, since they change the calculation base or time.
Use the proper order for provisions: bad debts first, then doubtful debt provision, then discount provision.
At the end, check whether the Balance Sheet tallies. A difference usually means one half of an adjustment is missing.

Practice questions from Final Accounts of Sole Proprietors

Adjustments in Final Accounts: frequently asked questions

What is the double effect of adjustments in final accounts?

Every adjustment given outside the trial balance is shown twice. First in the Trading or Profit and Loss Account, and second in the Balance Sheet. For example, outstanding rent increases the rent expense and also appears as a liability.

How do I treat outstanding and prepaid expenses?

Add outstanding expenses to the expense in the P&L Account and show them as a liability. Deduct prepaid expenses from the expense and show them as an asset. If the expense does not appear in the trial balance, debit the outstanding amount to P&L and show the same amount as a liability.

What is the difference between bad debts and provision for doubtful debts?

Bad debts are actual losses from customers who will not pay, and are written off. A provision is an estimate of future losses on the remaining debtors. Bad debts reduce debtors directly, while the provision is deducted from debtors in the Balance Sheet.

How are interest on capital and interest on drawings treated?

Interest on capital is debited to P&L and added to the capital account. Interest on drawings is credited to P&L and deducted from the capital account. The two have opposite effects on profit.