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CSEET · Fundamentals of Accounting · Preparation of Final Accounts for Sole Proprietorship

Salaries outstanding at the year end were ₹12,000. The effect of recording this adjustment in the final accounts is that:

Outstanding salaries are added to salaries expense in the Profit and Loss Account, lowering net profit, and are shown as a current liability in the Balance Sheet. This follows the accrual concept, which recognises expenses when incurred, not when paid.

  1. ASalaries expense increases and a current liability is shown in the Balance SheetCorrect
  2. BSalaries expense decreases and a current asset is shown
  3. COnly the Balance Sheet is affected, with no change in profit
  4. DSalaries expense increases and it is shown as a deduction from capital

Explanation

Under the accrual concept, expenses incurred but unpaid are added to the expense in the Profit and Loss Account, reducing profit by ₹12,000. The unpaid amount is a liability (outstanding expense) in the Balance Sheet. Showing it as an asset or affecting only the Balance Sheet is incorrect.

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