Adjustment Entries

c) Adjustment Entries:

           The value of the assets at the beginning of the year is not equal to that of the end of the year. It is because the constant use of assets throughout the year reduces their value. So, the value of an asset is either decreased (Depreciation) or increased (Appreciation) at the end of the year.  To provide for these changes in the value of assets, adjustment entries are passed.

          In order to write an entry for appreciation in the value of an asset, there should be an increase in the cash inflows as a result of the increase in the value of an asset. These adjustment entries should be first recorded in the journal proper and only then it should be posted in the ledger, these entries which are passed in the journal proper for adjusting the increase/decrease in the value of assets are called “Adjustment Entries”.

Example:

            Suppose a machinery costing Rs. 30,000/- is to be depreciated at the rate of 10%. The adjustment entry for this will be as follows:

Sol:                   Depreciation a/c….Dr       3000

                                   To Machinery a/c                    3000

                   (Being the Machinery is depreciated by 10%)

Similarly, interest on capital, outstanding expenses, income receivable, and bad debts provision require certain adjustments. If such adjustment entries are not passed.