Question

Give adjustment entry and accounting treatment of Outstanding Expenses and
Accrued Interest while preparing financial statement

Answer 1

Answer:

When the final accounts of a firm are being finalized, necessary adjustment entries need to be incorporated at the close of the year, in order to prepare correct accounts. Without passing such adjustment entries, the correct value of the profit and loss for the year cannot be correctly determined. Hence, adjustment entries play a pivotal role while preparing the balance sheet at the end of the year. Let us understand more about closing stock and outstanding expenses.

The closing stock implies inventory held at the end of the year. Thus, to derive information relating to closing stock we maintain a real account by name Closing Stock. It provides data relating to the value of stock unsold at the end of the accounting period. The value of closing stock is ascertained by physical verification of stock and its valuation at cost or market price whichever is lower.

Usually, the closing stock does not appear in the Trial Balance when the accounts are being finalized as the closing stock is ascertained by physical verification, which takes time in bringing up the value. Thus it appears as part of adjustment entry, which has to be passed before the preparation of Final Accounts.

If the closing stock is shown in the trial balance it means the adjustment for the closing stock has already been done and it will be shown as a current asset on the right side of the balance sheet. From the accounting point of view, aspects covered while preparing the accounts are:

Closing Stocks as shown on the Credit Side of Trading Account

Closing Stocks as shown on the Asset Side of Balance Sheet

However, if the value of the adjusted purchase(the cost of goods sold) is given then, the trial balance will show figures of both adjusted purchases account and Closing Stock Account.

Adjusting entries are made before making the organization’s financial statement and after the preparation of trial balance. Adjusting entries are accounting journal entries in which we adjust the expenses and the company’s revenue and finance. At the end of the accounting period, ledger requires some alterations and adjustments which is done by adjusting journal entries. Types of Adjusting Entries are Outstanding Expenses, Prepaid Expenses, Accrued Income, Unearned Income, Inventory. In this article, we will learn about adjusting entries, types of adjusting entries, and accounting treatment.

Explanation:

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