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Financial Statements – II – Class 11 Accountancy notes, important questions and MCQs

NCERT Class 11 Accountancy, chapter 9. Notes, key terms, important questions with answers and MCQs.

Chapter overview

To show the true profit and financial position, financial statements must include adjustments for items that relate to the current year but are not yet recorded, or that are recorded but relate to another year. Each adjustment affects two places in the financial statements, following the dual aspect and matching concepts.

Common adjustments

Closing stock: credited to the trading account and shown as a current asset.
Outstanding expenses: added to the expense in the profit and loss account and shown as a liability.
Prepaid expenses: deducted from the expense and shown as an asset.
Accrued income: added to the income and shown as an asset; income received in advance: deducted from the income and shown as a liability.

Adjustments for depreciation and debts

Depreciation: debited to the profit and loss account and deducted from the asset in the balance sheet.
Bad debts: debited to the profit and loss account and deducted from debtors.
Provision for doubtful debts: a new provision is charged to profit and loss and deducted from debtors (after further bad debts).
Provision for discount on debtors is calculated on good debtors after deducting the provision for doubtful debts.

Other adjustments

Interest on capital: debited to the profit and loss account and added to capital.
Interest on drawings: credited to the profit and loss account and deducted from capital.
Manager's commission on net profit, goods taken by the owner for personal use (drawings) and goods lost by fire are also adjusted.

Key terms

Outstanding expense: an expense of the current year that has not yet been paid
Prepaid expense: an expense paid in advance for a future period
Accrued income: income earned during the year but not yet received
Income received in advance: income received during the year that relates to a future period
Provision for doubtful debts: an amount set aside out of profit for debts that may not be recovered

Important questions with answers

What is the treatment of outstanding expenses in final accounts?2 marks

Outstanding expenses are added to the concerned expense on the debit side of the trading or profit and loss account, so that the full expense of the year is charged, and they are shown as a current liability on the liabilities side of the balance sheet.

Why are adjustments needed while preparing final accounts?3 marks

Adjustments are needed so that the financial statements show the true profit and true financial position. They ensure that all incomes and expenses of the current year, whether received or paid, are included, and that items relating to other years are excluded, following the accrual and matching concepts. They also account for depreciation, bad debts, provisions and closing stock.

Explain the treatment of any five adjustments in the preparation of financial statements.5 marks

Each adjustment affects two places in the financial statements. First, closing stock is credited to the trading account and shown as a current asset in the balance sheet. Second, outstanding expenses are added to the concerned expense in the trading or profit and loss account and shown as a liability, because the expense belongs to the current year though not paid. Third, prepaid expenses are deducted from the concerned expense and shown as an asset, because they relate to a future period. Fourth, accrued income is added to the concerned income in the profit and loss account and shown as an asset, while income received in advance is deducted from the income and shown as a liability. Fifth, depreciation on fixed assets is debited to the profit and loss account and deducted from the asset's value in the balance sheet. Sixth, bad debts and the provision for doubtful debts are debited to the profit and loss account and deducted from debtors; for example, if debtors are ₹50,000, further bad debts ₹2,000 and a 5 per cent provision is required, the provision is 5 per cent of ₹48,000 = ₹2,400 and debtors are shown at ₹45,600. Interest on capital is debited to the profit and loss account and added to capital, and interest on drawings is credited to the profit and loss account and deducted from capital. These adjustments ensure that profit is measured correctly and the balance sheet shows the true position.

Quick revision

Outstanding expense: add to expense, show as liability.
Prepaid expense: deduct from expense, show as asset.
Accrued income: add to income, show as asset; advance income: deduct, show as liability.
Depreciation, bad debts, provisions, interest on capital and drawings.

Exam tips

For every adjustment write two effects: one in the trading or P&L account and one in the balance sheet.
When bad debts are given in the adjustments, deduct them before calculating the new provision.

Practice MCQs

An expense of the current year not yet paid is
1. prepaid expense
2. accrued income
3. outstanding expense
4. capital expenditure
Show answer
Answer: (c) outstanding expense. It is a liability.
Prepaid expenses are shown in the balance sheet as
1. an asset
2. a liability
3. capital
4. income
Show answer
Answer: (a) an asset. The benefit is still to come.
Closing stock given in adjustments is shown in the trading account and
1. the balance sheet as an asset
2. the profit and loss account
3. the capital account
4. nowhere else
Show answer
Answer: (a) the balance sheet as an asset. Every adjustment has two effects.
Income earned but not yet received is
1. income received in advance
2. accrued income
3. outstanding expense
4. drawings
Show answer
Answer: (b) accrued income. It is shown as an asset.
Interest on drawings is
1. debited to P&L and added to capital
2. ignored
3. shown as an asset alone
4. credited to P&L and deducted from capital
Show answer
Answer: (d) credited to P&L and deducted from capital. It is income for the business.
Depreciation on machinery is shown in the P&L account and
1. added to machinery
2. shown as income
3. added to capital
4. deducted from machinery in the balance sheet
Show answer
Answer: (d) deducted from machinery in the balance sheet. The asset value falls.
Debtors ₹50,000; further bad debts ₹2,000; provision for doubtful debts at 5 per cent. The new provision is
1. ₹2,400
2. ₹2,500
3. ₹2,000
4. ₹4,500
Show answer
Answer: (a) ₹2,400. 5 per cent of (50,000 − 2,000).
Rent paid ₹12,000 includes ₹2,000 for next year. The rent charged to the P&L account is
1. ₹10,000
2. ₹12,000
3. ₹14,000
4. ₹2,000
Show answer
Answer: (a) ₹10,000. Prepaid rent is deducted.

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Written by Kundali IQ from standard, well-established facts to help with revision. This is not an official NCERT publication; always read your textbook too.