Financial Statements II Class 11: Final Accounts with Adjustments

What Financial Statements - II is about

Weightage: This chapter is part of Unit 3, Financial Statements of Sole Proprietorship (Part B: Financial Accounting-II), which carries 24 of the 80 theory marks in the school annual exam together with Financial Statements - I and Accounts from Incomplete Records.Source: CBSE Accountancy (055) syllabus 2026-27, Class XI course structure, Unit 3 Financial Statements of Sole Proprietorship

Key concepts

Need for adjustments and closing stock

NCERT section 9.1 and 9.2

Adjustments are needed so that the statements show the true profit (matching revenue and expenses of the year, under the accrual basis) and a true and fair financial position. They cover items that are not recorded or are recorded wrongly or incompletely in the trial balance.

Closing stock is the value of goods unsold at the year-end, valued at cost or net realisable value, whichever is lower. Because it is found after the books are closed, it is usually given outside the trial balance.

Adjustment entry: Closing Stock A/c Dr; To Trading A/c.
Effect: (1) shown on the credit side of the Trading Account; (2) shown as a current asset in the Balance Sheet.

If closing stock appears inside the trial balance, purchases have already been adjusted for it ("adjusted purchases"), so it goes only to the Balance Sheet.

Worked example

Closing stock is ₹95,000 and is given outside the trial balance. Where does it appear?

Try it first, then show the solutionSolution

1. Credit side of the Trading Account (it reduces the cost of goods sold)
2. Current assets in the Balance Sheet

Answer: Twice: Trading Account (Cr) and Balance Sheet (asset).

Outstanding expenses and prepaid expenses

NCERT section 9.3 and 9.4

Outstanding expenses: expenses of the current year that are due but not paid (salary for March unpaid; rent for one month unpaid).

• Entry: Expense A/c Dr; To Outstanding Expense A/c.
• Effect: (1) added to that expense in the Trading or P&L Account; (2) shown as a current liability.

Prepaid expenses: expenses paid in advance for the next year (insurance premium paid for 12 months on 1st January).

• Entry: Prepaid Expense A/c Dr; To Expense A/c.
• Effect: (1) deducted from that expense; (2) shown as a current asset.

Watch the wording: "rent paid for 11 months ₹33,000" means one month (₹3,000) is outstanding; "insurance of ₹12,000 paid on 1st January for one year" means 9 months (₹9,000) is prepaid at 31st March.

Worked example

An annual insurance premium of ₹12,000 is paid on 1st July 2025. Accounts close on 31st March 2026. Find the prepaid amount and show its two effects.

Try it first, then show the solutionSolution

1. Premium covers 1st July 2025 to 30th June 2026
2. April, May and June 2026 belong to next year: 3/12 × 12,000 = ₹3,000
3. P&L: insurance 12,000 − 3,000 = ₹9,000; Balance Sheet: prepaid insurance ₹3,000 (asset)

Answer: Prepaid ₹3,000; expense shown ₹9,000; prepaid shown as a current asset.

Accrued income and income received in advance

NCERT section 9.5 and 9.6

Accrued income: income earned in the current year but not yet received (interest on investments due for six months, commission earned but not received).

• Entry: Accrued Income A/c Dr; To Income A/c.
• Effect: (1) added to that income in the P&L Account; (2) shown as a current asset.

Income received in advance (unearned income): income received this year for work or a period of next year (rent received for April in March).

• Entry: Income A/c Dr; To Income Received in Advance A/c.
• Effect: (1) deducted from that income; (2) shown as a current liability.

A useful check for investments: if 10% investments are ₹40,000, the year's interest is ₹4,000; if only ₹2,000 has been received, ₹2,000 is accrued even if the question does not say so.

Worked example

10% investments of ₹40,000 have earned interest of ₹2,000 so far (shown in the trial balance). Find the accrued interest and its effects.

Try it first, then show the solutionSolution

1. Interest for the year = 10% × 40,000 = ₹4,000
2. Accrued = 4,000 − 2,000 = ₹2,000
3. P&L: interest ₹4,000; Balance Sheet: accrued interest ₹2,000 (asset)

Answer: Accrued interest ₹2,000; income shown ₹4,000.

Depreciation as an adjustment

NCERT section 9.7

Depreciation for the year, if not already charged, is given as an adjustment ("Depreciate machinery at 10% p.a.").

• Entry: Depreciation A/c Dr; To Asset A/c.
• Effect: (1) debited to the Profit and Loss Account; (2) deducted from the asset in the Balance Sheet.

If an asset was bought during the year, charge depreciation only for the months it was used (if the date is given). If the question says "depreciation on machinery at 10% p.a." and a part was added on 1st October, charge 6 months on that part.

Worked example

Machinery ₹2,00,000 and furniture ₹50,000 are depreciated at 10% and 5%. Show the effects.

Try it first, then show the solutionSolution

1. Depreciation = 20,000 + 2,500 = ₹22,500, debited to P&L
2. Balance Sheet: machinery ₹1,80,000; furniture ₹47,500

Answer: P&L charge ₹22,500; assets shown net.

Bad debts and provision for doubtful debts

NCERT section 9.8 and 9.9

Bad debts: amounts that cannot be recovered from debtors. Bad debts in the trial balance are already deducted from debtors; further bad debts given as an adjustment must be (1) debited to P&L and (2) deducted from debtors.

Provision for doubtful debts: a provision for debts that may not be recovered, usually a percentage of debtors (after deducting further bad debts). The new provision replaces the old one. The old provision (in the trial balance, a credit balance) is used first against bad debts.

Amount charged to P&L = Bad debts (in trial balance) + Further bad debts + New provision − Old provision.
If the result is negative, the excess old provision is credited to the P&L Account.

Balance Sheet: Debtors − further bad debts − new provision.

Bad Debts Account

Dr: Particulars	₹	Cr: Particulars	₹
To Balance b/d	3,000	By Provision for Doubtful Debts A/c	5,000
To Debtors (further bad debts)	2,000
Total	5,000	Total	5,000

Provision for Doubtful Debts Account

Dr: Particulars	₹	Cr: Particulars	₹
To Bad Debts A/c	5,000	By Balance b/d (old provision)	4,000
To Balance c/d (new provision)	5,900	By Profit and Loss A/c (balancing figure)	6,900
Total	10,900	Total	10,900

Worked example

Debtors ₹1,20,000; bad debts in the trial balance ₹3,000; further bad debts ₹2,000; old provision ₹4,000; new provision 5% on debtors. Find the P&L charge and the debtors in the Balance Sheet (before the provision for discount).

Try it first, then show the solutionSolution

1. New provision = 5% of (1,20,000 − 2,000) = ₹5,900
2. Charge = 3,000 + 2,000 + 5,900 − 4,000 = ₹6,900
3. Debtors = 1,20,000 − 2,000 − 5,900 = ₹1,12,100

Answer: P&L charge ₹6,900; debtors ₹1,12,100.

Provision for discount on debtors

NCERT section 9.10

Good debtors who pay early may claim cash discount. A provision for discount on debtors is made for this expected discount.

It is calculated on good debtors: Debtors − further bad debts − provision for doubtful debts. Doubtful debtors will not pay early, so no discount is expected on them.

• Entry: the Profit and Loss Account is debited and the discount provision account credited.
• Effect: (1) debited to P&L (with any old provision for discount deducted); (2) deducted from debtors in the Balance Sheet.

Order of deductions from debtors: further bad debts → provision for doubtful debts → provision for discount.

Worked example

Debtors after further bad debts are ₹1,18,000; provision for doubtful debts ₹5,900; provision for discount 2%. Find the provision for discount.

Try it first, then show the solutionSolution

1. Good debtors = 1,18,000 − 5,900 = ₹1,12,100
2. Provision for discount = 2% × 1,12,100 = ₹2,242

Answer: ₹2,242

Abnormal loss, goods taken by the owner and free samples

NCERT section 9.1

Abnormal loss (goods lost by fire, theft or accident) is not part of the normal cost of goods sold.

• Loss of goods: Loss by Fire A/c Dr; To Trading A/c (or To Purchases A/c): credited to the Trading Account (or deducted from purchases).
• Insurance claim admitted: Insurance Claim A/c Dr; Profit and Loss A/c Dr (loss not covered); To Loss by Fire A/c.
• Effect: Trading Account credit side; P&L debit for the uninsured part; the claim receivable is a current asset.

Goods taken by the owner for personal use: Drawings A/c Dr; To Purchases A/c (at cost). Deduct from purchases in the Trading Account and add to drawings (deducted from capital).

Goods given as free samples (or for staff welfare or charity): Advertisement (or Staff Welfare, Charity) A/c Dr; To Purchases A/c. Deduct from purchases and show the expense in the P&L Account.

Worked example

Goods costing ₹8,000 were destroyed by fire; the insurance company admitted a claim of ₹6,000. Show the effects.

Try it first, then show the solutionSolution

1. Trading Account (Cr): loss of goods by fire ₹8,000
2. P&L (Dr): loss by fire 8,000 − claim 6,000 = ₹2,000
3. Balance Sheet: insurance claim receivable ₹6,000 (asset)

Answer: Three effects: Trading Cr ₹8,000, P&L Dr ₹2,000, asset ₹6,000.

Interest on capital and manager's commission

NCERT section 9.11 and 9.12

Interest on capital: the owner may allow interest on his capital to see whether the business earns more than the capital would earn elsewhere.

• Entry: Interest on Capital A/c Dr; To Capital A/c.
• Effect: (1) debited to the P&L Account (an expense to the business); (2) added to capital in the Balance Sheet.

Usually calculated on the opening capital for the year (with time for additions, if given).

Manager's commission is a percentage of net profit, as agreed:

• On net profit before charging the commission: Commission = Net profit (before commission) × Rate ÷ 100.
• On net profit after charging the commission: Commission = Net profit (before commission) × Rate ÷ (100 + Rate).
• Entry: Manager's Commission A/c Dr; To Manager's Commission Payable A/c. Effect: P&L debit; current liability if unpaid.

Manager's commission is the last item charged, after all other adjustments (including interest on capital, if given).

Worked example

Net profit before the manager's commission is ₹2,52,000. The manager gets 5%. Find the commission if it is (a) on profit before charging it, (b) on profit after charging it.

Try it first, then show the solutionSolution

1. (a) 5% × 2,52,000 = ₹12,600
2. (b) 2,52,000 × 5 ÷ 105 = ₹12,000

Answer: (a) ₹12,600; (b) ₹12,000.

Financial Statements - II in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Bad Debts, Provision for Doubtful Debts and Provision for Discount on Debtors
• Adjustments: Outstanding and Prepaid Expenses, Accrued Income and Income Received in Advance

Financial Statements - II: key facts

Outstanding expense

Expense shown = Paid + Outstanding; liability = Outstanding

Added in P&L, current liability.

Prepaid expense

Expense shown = Paid − Prepaid; asset = Prepaid

Months of next year ÷ 12 × annual amount.

Accrued income

Income shown = Received + Accrued; asset = Accrued

E.g. interest due on investments.

Income received in advance

Income shown = Received − Advance; liability = Advance

Unearned income.

Bad debts and provision charge

P&L charge = Bad debts + Further bad debts + New provision − Old provision

If negative, credit the P&L Account.

Provision for doubtful debts

New provision = Rate × (Debtors − Further bad debts)

Replaces the old provision.

Provision for discount on debtors

Rate × (Debtors − Further bad debts − Provision for doubtful debts)

Only good debtors get discount.

Manager's commission

Before charging: NP × r%; after charging: NP × r ÷ (100 + r)

NP here is before the commission.

Abnormal loss

P&L charge = Loss − Insurance claim admitted

Full loss credited to the Trading Account; claim shown as an asset.

How the school exam asks Financial Statements - II

The question patterns to expect, and the method that works for each.

Tricks to remember Financial Statements - II

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Two-place rule

  "Every adjustment visits twice": once in the Trading/P&L Account, once in the Balance Sheet.

  Use it when: Every adjustment.

• OPAA

  Outstanding: Plus expense, liability. Prepaid: minus expense, asset. Accrued: plus income, asset. Advance: minus income, liability.

  Use it when: The four timing adjustments.

• Debtor deduction order

  "Bad, Doubtful, Discount": write off bad debts, then provision for doubtful debts, then provision for discount.

  Use it when: Debtors in the Balance Sheet.

• After charging = 100 + r

  If the commission is inside the profit it is based on, divide by 100 + rate.

  Use it when: Manager's commission.

Financial Statements - II: exam-level solved questions

Ordered from exam level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In a school exam set on the board pattern this is a 4-mark question split into 1 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Financial Statements - II

The slips examiners see most often, and what to write instead.

• ✗Mistake: Showing an adjustment in only one place

  Students treat adjustments like trial balance items.

  Wrong working

  Outstanding salary ₹6,000 added to salary in P&L, but no liability shown

  Right working

  Salary ₹72,000 in P&L and outstanding salary ₹6,000 under current liabilities

  ✓Do this: Every adjustment (except a few explained ones) has two effects; write both.

  Usually costs: Balance Sheet will not agree; 1-2 marks.

• ✗Mistake: Calculating provision for doubtful debts before deducting further bad debts

  Using the trial balance debtors directly.

  Wrong working

  5% of 1,20,000 = ₹6,000

  Right working

  5% of (1,20,000 − 2,000) = ₹5,900

  ✓Do this: Further bad debts first, then the provision.

  Usually costs: 1 mark and a chain of wrong figures.

• ✗Mistake: Charging the full new provision without deducting the old provision

  Forgetting the trial balance credit balance.

  Wrong working

  P&L: bad debts 5,000 + provision 5,900 = 10,900

  Right working

  P&L: 5,000 + 5,900 − 4,000 = ₹6,900

  ✓Do this: The old provision is used first; only the difference is charged.

  Usually costs: 1 mark.

• ✗Mistake: Using r% instead of r/(100 + r) for commission after charging

  The words "after charging" are missed.

  Wrong working

  5% of 1,34,358 = 6,718

  Right working

  1,34,358 × 5 ÷ 105 = ₹6,398

  ✓Do this: Underline "after charging such commission" and use r ÷ (100 + r).

  Usually costs: 1 mark and the net profit.

• ✗Mistake: Treating interest on capital as income

  It is "interest".

  ✓Do this: It is an expense to the business (P&L debit) and an addition to the owner's capital.

  Usually costs: 1 mark.

• ✗Mistake: Showing the whole loss by fire in the P&L and nothing in the Trading Account

  Students skip the Trading Account effect.

  ✓Do this: Credit the Trading Account with the full cost of goods lost; charge only the uninsured part in the P&L; show the claim as an asset.

  Usually costs: 1-2 marks.

NCERT exercise guide: Financial Statements - II

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Practice questions on Financial Statements - II

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQExam level

   Outstanding salary is shown in the Balance Sheet as:
   (a) a current asset
   (b) a current liability
   (c) a deduction from salary
   (d) not at all

   Hint

   It is owed.

   Answer

   (b) a current liability

2. Q2 · 1 mark · MCQExam level

   Provision for discount on debtors is calculated on:
   (a) total debtors
   (b) debtors after bad debts only
   (c) debtors after bad debts and provision for doubtful debts
   (d) creditors

   Hint

   Only good debtors pay early.

   Answer

   (c)

3. Q3 · 1 mark · Very short answerExam level

   Give the adjustment entry for accrued commission of ₹2,500.

   Hint

   Asset Dr, income Cr.

   Answer

   Accrued Commission A/c Dr 2,500; To Commission A/c 2,500.

4. Q4 · 3 marks · Short answerExam level

   Explain the two effects each of (a) prepaid insurance ₹3,000 and (b) rent received in advance ₹5,000.

   Hint

   Statement and Balance Sheet.

   Answer

   (a) Deduct ₹3,000 from insurance in P&L; show ₹3,000 as a current asset. (b) Deduct ₹5,000 from rent received in P&L; show ₹5,000 as a current liability.

5. Q5 · 3 marks · Short answerHarder exam level

   Debtors ₹80,000; bad debts in the trial balance ₹1,500; further bad debts ₹1,000; old provision ₹3,000; new provision 5% on debtors. Find the P&L charge and the Balance Sheet debtors.

   Hint

   Provision on 79,000.

   Answer

   New provision = 5% × 79,000 = ₹3,950. Charge = 1,500 + 1,000 + 3,950 − 3,000 = ₹3,450. Debtors = 80,000 − 1,000 − 3,950 = ₹75,050.

6. Q6 · 3 marks · Short answerHarder exam level

   Net profit before charging the manager's commission is ₹1,26,000. Find the commission at 5% (a) on profit before charging it, (b) on profit after charging it.

   Hint

   r ÷ (100 + r) for the second.

   Answer

   (a) ₹6,300; (b) 1,26,000 × 5 ÷ 105 = ₹6,000.

7. Q7 · 3 marks · Short answerHarder exam level

   Goods costing ₹15,000 were destroyed by fire; the insurer admitted ₹9,000. Pass entries and show the effects in the final accounts.

   Hint

   Three effects.

   Answer

   Loss by Fire A/c Dr 15,000; To Trading A/c 15,000. Insurance Claim A/c Dr 9,000; P&L A/c Dr 6,000; To Loss by Fire A/c 15,000. Trading Cr ₹15,000; P&L Dr ₹6,000; claim ₹9,000 as a current asset.

8. Q8 · 3 marks · Short answerHarder exam level

   A firm's capital on 1st April 2025 is ₹4,00,000. It allows interest on capital at 8% p.a., and additional capital of ₹1,00,000 was brought in on 1st October 2025. Find the interest and show its effects.

   Hint

   Six months on the addition.

   Answer

   4,00,000 × 8% = ₹32,000 + 1,00,000 × 8% × 6/12 = ₹4,000; total ₹36,000. Debited to P&L; added to capital in the Balance Sheet.

9. Q9 · 4 marks · Long answerHarder exam level

   Explain why adjustments are needed before preparing final accounts. Give four examples with their effect on profit.

   Hint

   Accrual and matching.

   Answer

   To follow the accrual and matching concepts so that profit and position are true and fair. Outstanding expenses (reduce profit), prepaid expenses (increase profit), accrued income (increase profit), income received in advance (reduce profit); also depreciation and provisions (reduce profit).

10. Q10 · 4 marks · Short answerHarder exam level

    Suppose a trial balance shows debtors ₹50,000 and provision for doubtful debts ₹2,500. Adjustments: bad debts ₹1,000; maintain the provision at 5% on debtors; create a provision for discount at 2%. Prepare the provision for doubtful debts account and show debtors in the Balance Sheet.

    Hint

    New provision on 49,000.

    Answer

    New provision = 5% × 49,000 = ₹2,450. Account: Dr To Bad Debts 1,000, To Balance c/d 2,450 = 3,450; Cr By Balance b/d 2,500, By P&L 950 = 3,450. Discount provision = 2% × 46,550 = ₹931. Debtors in BS = 50,000 − 1,000 − 2,450 − 931 = ₹45,619.

11. Q11 · 3 marks · Short answerHarder exam level

    Show the treatment in final accounts: (a) goods worth ₹6,000 distributed as free samples; (b) goods worth ₹2,000 given for staff welfare; (c) goods ₹5,000 taken by the owner.

    Hint

    All reduce purchases.

    Answer

    All three are deducted from purchases in the Trading Account. (a) P&L debit as advertisement ₹6,000; (b) P&L debit as staff welfare ₹2,000; (c) added to drawings ₹5,000 and deducted from capital.

12. Q12 · 4 marks · Short answerHOTS / competency

    Suppose a shop has net profit of ₹96,000 after all adjustments except two discovered late: rent of ₹12,000 for next year was included in rent paid, and commission of ₹4,500 earned has not been received or recorded. Find the corrected net profit and show the Balance Sheet effects.

    Hint

    Both increase profit.

    Answer

    Prepaid rent ₹12,000 reduces expenses: +12,000. Accrued commission adds income: +4,500. Corrected NP = ₹1,12,500. Balance Sheet: prepaid rent ₹12,000 and accrued commission ₹4,500 as current assets; capital higher by ₹16,500.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Where is accrued income shown in the Balance Sheet?Show answer

   Current assets.

2. 2.Entry for depreciation as an adjustment?Show answer

   Depreciation A/c Dr; To Asset A/c.

3. 3.Formula for the bad debts and provision charge?Show answer

   Bad debts + further bad debts + new provision − old provision.

4. 4.On what is provision for discount on debtors calculated?Show answer

   Debtors less further bad debts and provision for doubtful debts.

5. 5.How are goods taken by the owner valued?Show answer

   At cost.

6. 6.Where is the insurance claim admitted shown?Show answer

   As a current asset (claim receivable) in the Balance Sheet.

7. 7.Is interest on capital an expense or income for the business?Show answer

   An expense (debited to P&L), added to capital.

8. 8.Commission at 10% after charging on profit of ₹1,10,000?Show answer

   ₹10,000.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you state both effects of each timing adjustment?
• ☐Can you find prepaid amounts from dates?
• ☐Can you find accrued interest on investments without being told?
• ☐Can you compute the bad debts and provision charge, including a write-back?
• ☐Can you compute provision for discount on good debtors?
• ☐Can you treat loss by fire with a partial insurance claim?
• ☐Can you treat goods taken by the owner and free samples?
• ☐Can you compute interest on capital with an addition during the year?
• ☐Can you compute manager's commission before and after charging?
• ☐Can you prepare full final accounts and make the Balance Sheet agree?

Financial Statements - II: frequently asked questions