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Explain the following adjustment and their treatment in Final Accounts: (i) Loss of stock by fire (ii) Goods given away as charity and samples. (iii) Goods were taken by the proprietor for personal use.
By BYJU'S Exam Prep
Updated on: September 25th, 2023
The explanation of the adjustments and their treatment:
(i) Atypical losses of products include those brought on by fire, theft, or accident. If the corporation had insured these products, the insurance company may have paid all or part of the claim. The following will be the impact of this modification on the final accounts:
(A) The cost of lost or destroyed products is either subtracted from purchases or recorded on the trading account’s credit side.
(a) Net loss, or gross loss less any accepted insurance claims, must be displayed on the debit side of the profit and loss account.
The balance sheet’s assets side will reflect any accepted insurance claims.
(ii) Products are occasionally given away as free samples for testing and marketing purposes. It should be handled as follows in the final accounts:
(a) On the one hand, it took money out of the trading account’s purchases.
(b) On the other hand, it appears as advertising on the debit side of the profit and loss sheet.
(iii) Items taken for personal use will be listed as a capital item on the balance sheet and debited from the purchase account in the trading account.
Summary:
Explain the following adjustment and their treatment in Final Accounts: (i) Loss of stock by fire (ii) Goods given away as charity and samples. (iii) Goods were taken by the proprietor for personal use.
The adjustment and their treatment in Final Accounts:
(i) Loss of goods due to fire, theft, or accident is known as an abnormal loss of goods. If such goods were insured by the firm, then an insurance claim may be received in full or part from the insurance company.
(ii) Sometimes goods are distributed as a free sample for the purpose of trial and advertisement.
(iii) The trading account will show goods taken for personal use as a deduction from the purchase account and the balance sheet will show the item as a capital deduction.
