An effective Balance Sheet is one of the most crucial financial statements prepared by a business at the end of an accounting period. It represents the true and fair view of the organization’s financial position – showing what the business owns (Assets) and owes (Liabilities), along with the owner’s equity on a particular date. However, the accuracy of a Balance Sheet depends on the correctness
of all adjustments made to the accounts before its preparation. These accounting adjustments ensure that all …
Without proper adjustments, financial statements can be misleading – either overstating or understating profits and the financial position. Therefore, adjusting entries are an essential part of the accounting cycle, made after the trial balance and before the final accounts.

1. Outstanding Expenses: Expenses relating to the current period but unpaid at the end of the period. Example: unpaid rent or salaries.
Entry: Expense A/c Dr. To Outstanding Expense A/c
Effect: Added to expenses in the Profit & Loss Account and shown as a current liability in the Balance Sheet.

2. Prepaid Expenses: Payments made in advance for future benefits. Example: prepaid rent or insurance.
Entry: Prepaid Expense A/c Dr. To Expense A/c
Effect: Deducted from expenses in P&L and shown as a current asset.

3. Accrued Income: Income earned but not yet received. Example: interest accrued.
Entry: Accrued Income A/c Dr. To Income A/c
Effect: Added to income in P&L and shown as a current asset.

4. Income Received in Advance: Income received before it is earned. Example: rent received in advance.
Entry: Income A/c Dr. To Income Received in Advance A/c
Effect: Deducted from income in P&L and shown as a liability.

5. Depreciation on Fixed Assets: Decrease in value of fixed assets due to use or time.
Entry: Depreciation A/c Dr. To Asset A/c
Effect: Expense in P&L and deduction from asset in Balance Sheet.

6. Provision for Bad and Doubtful Debts: Estimated loss from non-recoverable debtors.
Entry: P&L A/c Dr. To Provision for Bad Debts A/c
Effect: Expense in P&L and deducted from debtors in Balance Sheet.

7. Provision for Discount on Debtors/Creditors: Estimated discount likely to be allowed or received.
Entries:
(a) P&L A/c Dr. To Provision for Discount on Debtors A/c
(b) Provision for Discount on Creditors A/c Dr. To P&L A/c

8. Interest on Capital and Drawings: Adjustment between business and owner.
(a) Interest on Capital: Interest on Capital A/c Dr. To Capital A/c
(b) Interest on Drawings: Drawings A/c Dr. To Interest on Drawings A/c

9. Closing Stock: Unsold goods at period end, valued at cost or market price (whichever is lower).
Entry: Closing Stock A/c Dr. To Trading A/c
Effect: Added in Trading A/c and shown as a current asset.

10. Outstanding Income: Income earned but not received.
Entry: Outstanding Income A/c Dr. To Income A/c

11. Goods Distributed as Free Samples: Goods given for promotion purposes.
Entry: Advertising A/c Dr. To Purchases A/c

12. Goods Taken for Personal Use: Goods withdrawn by proprietor.
Entry: Drawings A/c Dr. To Purchases A/c

13. Provision for Taxation: Expected tax liability for the period.
Entry: P&L A/c Dr. To Provision for Taxation A/c

14. Contingent Liabilities: Possible obligations depending on future events; shown as footnotes.

15. Adjustment for Accrued Expenses/Income: Ensures correct matching of revenues and expenses.