NCERT Solution
Class 11
Accountancy
Financial Statements - 2
what are adjusting entries why are they necessary...

Question:
What are adjusting entries? Why are they necessary for preparing final accounts?

Answer:

Entries which are given outside the trial balance are called adjustment entries, to record those entries a proper treatment is required according to the double entry system. Here it is to be remembered that all adjustments given outside the Trial Balance are posted at two places. Adjustment is generally done for those items which are omitted or entered with the wrong amount and/or recorded under wrong heads.

The following are reasons for recording or incorporating these adjustment entries in preparation of the final account.

(i) Through these adjustment entries we come to know the actual figure of profit or loss.
(ii) Because of these adjusting entries we can assess the true financial position of an organisation based on accrual basis of accounting.
(iii) These adjustment entries enable us to record the omitted entries and help in rectifying all those errors.
(iv) These adjusting entries help in providing depreciation and making different provisions, such as Bad Debts and Depreciation.

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Mr. Sunrise started a business for buying and selling of stationery with ₹ 5,00,000 as an initial investment. Of which he paid ₹ 1,00,000 for furniture, ₹ 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid ₹ 5,000 as their salaries. Out of the stationery bought he sold some stationery for ₹ 1,50,000 for cash and some other stationery for ₹ 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery items of ₹ 1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost ₹ 30,000 worth of stationery. A part of the machinery, which cost ₹ 40,000, was sold for ₹ 45,000.

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Question:
What are adjusting entries? Why are they necessary for preparing final accounts?

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Question:
What are adjusting entries? Why are they necessary for preparing final accounts?