Financial Accounting · Final Accounts of Commercial Organisations

Adjustments in Final Accounts: Treatment and Solved Problems

Updated 10 October 2026 · Fact-checked

Adjustments are year-end entries that bring the trial balance in line with the accrual basis. Each adjustment is recorded twice in the final accounts: once in the Trading or Profit and Loss Account, and once in the Balance Sheet. Handle every item with this double effect and your accounts will balance.

Understand Adjustments in Final Accounts

A trial balance shows what was recorded during the year. It does not show what is still owed, what was paid in advance, or what has been earned but not yet received. Under the accrual basis, income and expenses belong to the year they relate to, not the year cash moves.

So at the year end you adjust. Outstanding expenses are expenses incurred but unpaid. You add them to the expense and show them as a liability. Prepaid expenses are paid for a future period. You deduct them from the expense and show them as a current asset.

Accrued income is earned but not received. You add it to the income and show it as an asset. Income received in advance is received for a future period. You deduct it from the income and show it as a liability.

Other adjustments follow the same logic. Depreciation spreads the cost of an asset over its life. Bad debts are debts that will never be collected. A provision for doubtful debts is an estimate of loss on debtors still outstanding. Drawings by the owner are not an expense. They reduce capital.

The key habit: an item in the trial balance is shown once, in the account where it belongs. An item given as an adjustment needs both a Profit and Loss or Trading effect and a Balance Sheet effect. Bad debts already in the trial balance go only to the Profit and Loss Account. Further bad debts given as an adjustment need both effects: they are charged to the Profit and Loss Account and deducted from debtors in the Balance Sheet.

Key rules to remember

Expense charged to P&L: Expense for the year = Paid + Outstanding at end − Outstanding at start + Prepaid at start − Prepaid at end; Use this to find the correct charge when opening and closing balances are both given.
Income credited to P&L: Income for the year = Received + Accrued at end − Accrued at start + Advance at start − Advance at end; Same logic as expenses, applied to income.
Bad debts charged: Total charge = Bad debts written off + New provision − Old provision; If the old provision is larger than the new one plus bad debts, the net result is a credit (gain).
Provision for doubtful debts base: Provision for doubtful debts = Rate % × (Debtors − Further bad debts); Deduct further bad debts first. Calculate the provision for doubtful debts on the balance after that. The provision for discount is calculated afterwards.
Provision for discount on debtors: Provision = Rate % × (Debtors − Further bad debts − Provision for doubtful debts); Discount is expected only on good debtors, so deduct the doubtful provision first.
Depreciation (straight line): Annual depreciation = (Cost − Residual value) ÷ Useful life; For the reducing balance method, apply the rate to the written down value.
Drawings: Closing capital = Opening capital + Net profit + Additional capital − Drawings; For goods drawn, credit Purchases (Trading Account) and debit Drawings, which is deducted from Capital in the Balance Sheet. Do not credit Sales. Interest on drawings is income of the business.

How to solve Adjustments in Final Accounts questions

Use the same method for every adjustment question. It stops you from missing the second effect.

1Read all adjustments first and tick each one off as you use it.
2For each adjustment, ask: is it already in the trial balance? If not, it needs a double effect.
3Decide the first effect: which account in the Trading or P&L Account changes, and does it increase or decrease?
4Decide the second effect: which asset or liability appears in the Balance Sheet, or which existing balance is adjusted?
5Prepare the Trading Account, then the Profit and Loss Account, adjusting each line (for example: Rent paid 12,000 add outstanding 1,000).
6Prepare the Balance Sheet. Deduct provisions from debtors and show outstanding or prepaid items in their groups.
7Check that the totals agree. Keep working notes for depreciation and provisions to earn step marks.

Quickest way: Write-in-the-margin method

When to use it: Use it when you have little time, especially for MCQs and for long adjustment lists.

Write the effect next to each adjustment: for example, 'Outstanding rent: P&L +, B/S liability'.
Mark each adjustment as P&L only, B/S only or both.
For expenses: add outstanding, subtract prepaid. For income: add accrued, subtract advance.
For provisions, compute the bad debt and the provision in one line using the base rule.
Reconcile at the end: assets total must equal capital plus liabilities.

Common mistakes in Adjustments in Final Accounts

Adding prepaid expenses to the expense instead of deducting them.
Students mix up outstanding and prepaid because both are called adjustments.
Fix: Outstanding means still to pay, so add. Prepaid means paid for the future, so deduct. Show prepaid as an asset.
Calculating the provision for doubtful debts on the gross debtors figure.
Students skip the step of removing further bad debts.
Fix: Deduct further bad debts first, then apply the provision rate to the remaining debtors.
Calculating the provision for discount on debtors before deducting the doubtful debts provision.
Both provisions seem to apply to the same base.
Fix: Discount can be expected only on good debts. Deduct further bad debts and the provision for doubtful debts first.
Showing drawings as an expense in the P&L Account.
Drawings look like payments out of the business.
Fix: Deduct drawings from capital in the Balance Sheet. For goods taken as drawings, credit Purchases in the Trading Account and debit Drawings.
Showing an item in the wrong place: putting bad debts already in the trial balance through the Balance Sheet as well, or showing further bad debts only in the P&L.
Students do not distinguish items inside the trial balance from those given as adjustments.
Fix: Bad debts in the trial balance go only to the P&L, once. Further bad debts given as an adjustment need both effects: add them to the P&L charge and deduct them from debtors in the Balance Sheet.
Forgetting to deduct the old provision when creating the new one.
The opening provision is already in the trial balance, so students overlook it.
Fix: Charge only the difference: new provision minus old provision. Show the final provision against debtors in the Balance Sheet.

Worked examples

Example 1

From the trial balance of Ramesh Traders for the year ended 31 March 2027: Salaries paid ₹1,20,000; Rent paid ₹48,000; Interest received ₹6,000. Adjustments: (a) Salaries outstanding ₹10,000. (b) Rent paid includes ₹8,000 for the next year. (c) Interest accrued but not received ₹2,000. Show the amounts charged or credited in the Profit and Loss Account and the Balance Sheet effect.

Show the solution

Salaries: add outstanding. ₹1,20,000 + ₹10,000 = ₹1,30,000 charged to P&L.
Rent: deduct prepaid. ₹48,000 − ₹8,000 = ₹40,000 charged to P&L.
Interest received: add accrued. ₹6,000 + ₹2,000 = ₹8,000 credited to P&L.
Balance Sheet: Outstanding salaries ₹10,000 under current liabilities.
Balance Sheet: Prepaid rent ₹8,000 and accrued interest ₹2,000 under current assets.

Answer: P&L: Salaries ₹1,30,000, Rent ₹40,000, Interest income ₹8,000. Balance Sheet: liability ₹10,000; assets ₹8,000 (prepaid rent) and ₹2,000 (accrued interest).

Example 2

Sundaram Stores has Sundry Debtors of ₹2,00,000 in the trial balance, before any adjustment. Bad debts written off earlier in the year: ₹5,000 (already in the trial balance). Provision for doubtful debts at the start of the year: ₹8,000. Adjustments: (a) Further bad debts ₹10,000. (b) Maintain a provision for doubtful debts at 5% on the remaining debtors. (c) Create a provision for discount on debtors at 2% on the good debtors. Show the charge to the Profit and Loss Account and the debtors in the Balance Sheet.

Show the solution

Debtors after further bad debts: ₹2,00,000 − ₹10,000 = ₹1,90,000.
New provision for doubtful debts: 5% × ₹1,90,000 = ₹9,500.
Debtors after the doubtful provision: ₹1,90,000 − ₹9,500 = ₹1,80,500.
Provision for discount: 2% × ₹1,80,500 = ₹3,610.
Bad debts charged: ₹5,000 (in trial balance) + ₹10,000 (further) = ₹15,000.
Provision charge: new ₹9,500 − old ₹8,000 = ₹1,500 added to the P&L.
Provision for discount: ₹3,610 charged to P&L (opening provision for discount is nil here).
Total P&L charge: ₹15,000 + ₹1,500 + ₹3,610 = ₹20,110.
Balance Sheet: Debtors ₹1,90,000 less provision for doubtful debts ₹9,500 and provision for discount ₹3,610 = ₹1,76,890.

Answer: P&L charges: bad debts ₹15,000, provision for doubtful debts ₹1,500 (net increase), provision for discount ₹3,610; total ₹20,110. Balance Sheet: Debtors ₹1,90,000 less provisions ₹9,500 and ₹3,610 = ₹1,76,890.

Exam tips

Read the trial balance and the adjustments together. Mark which items appear in both.
In MCQs, check whether the item is in the trial balance or given as an adjustment before choosing the answer.
In written answers, show the working for provisions, depreciation and outstanding amounts as separate notes. Examiners give step marks for working.
Show adjusted figures in the P&L, for example 'Rent 48,000 less prepaid 8,000', so the marker can follow your logic.
If goods are drawn by the owner, credit Purchases (Trading Account) and debit Drawings, which is deducted from Capital in the Balance Sheet. Keep it out of Sales.

Practice questions from Final Accounts of Commercial Organisations

Adjustments in Final Accounts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Adjustments in Final Accounts: frequently asked questions

How do I treat outstanding expenses in final accounts?

Add the outstanding amount to the expense in the Trading or Profit and Loss Account. Show the same amount as a current liability in the Balance Sheet.

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

A bad debt is a loss you are sure of, so you write it off. A provision is an estimate of loss on debtors still outstanding. You charge it to the P&L and deduct it from debtors in the Balance Sheet.

On what amount is the provision for discount on debtors calculated?

Calculate it on the good debtors. That means debtors less further bad debts and less the provision for doubtful debts. Discount cannot be expected on debts you already treat as bad or doubtful.

How are drawings treated in final accounts?

Drawings are not an expense. Deduct them from the owner's capital in the Balance Sheet. If goods are taken, credit Purchases in the Trading Account and debit Drawings.