The entries that we’ve covered earlier in special entries for goods may also appear as adjustments to the Purchases figure on the last day of the accounting year.
The first in this series of adjustments is Loss by Fire.
1. Loss by Fire Adjustment
Businesses always keep some amount of stock with them in the shop or in the warehouse. Till such time they are sold, there is always a risk of unfortunate incidents happening, such as a fire break-out.
There may be n number of situations that may give rise to fire, one being a short-circuit in monsoon season. The fire, if not controlled immediately, may result in loss of goods and other assets of the business.
In case the stock was insured, insurance claims follow and losses reduced to the extent of claim accepted.
Our job, as accountants, is to keep a proper record of all such events. Usually, the recording of loss and the acceptance of insurance claim happen over a course of multiple days. In case the accountant decides to record all these as adjustments on the last day, he would have to make the following entries.
Entries and Treatment in Financial Statements:
First, we’ll record the total extent of loss caused by the fire.
Loss by Fire A/c
Dr.
To Purchase A/c
(Adjustment for loss of purchased stock due to fire.)
After this adjustment, we close the accounts into Trading and P&L accounts.
Trading A/c
Dr.
To Purchase A/c
(Closing entry for purchase account.)
Profit & Loss A/c
Dr.
To Loss by Fire A/c
(Closing entry for purchase account.)
Then, we record the extent of claim accepted by the company.
Insurance Company A/c
Dr.
To Insurance Claim A/c
(Adjustment for loss of purchased stock due to fire.)
Next, we close the claim by crediting the Profit & Loss Account in the closing entry. This accepted claim helps reduce the loss to the company and hence, is recorded as a deduction to the concerned loss.
Insurance Claim A/c
Dr.
To Profit & Loss A/c
(Transferring insurance claim to Profit & Loss account.)
Alternatively…
After the first entry, we could hold off on closing the loss by fire account, adjust the claim directly against it and close only the remaining balance as the true loss incurred.
Insurance Claim A/c
Dr.
Profit & Loss A/c
Dr.
To Loss by Fire A/c
(Adjustment of insurance claim against Loss by Fire and true loss recorded in P&L account.)
2. Donation / Charity in Goods Adjustment
The concept of donation or charity is embedded in our Indian culture. Usually, during the big festivals and auspicious days, many people indulge in charity.
This charity may be in the form of cash or clothes for the needy. Taking the case of clothing shop, clothes are “goods” for such business and forms an ‘expense’ for the society. As such, any donation in goods also has to be accounted for.
Entry:
Donation A/c
Dr.
To Purchase A/c
(Adjustment for reduction of purchased stock due to donations.)
Treatment in Financial Statements:
3. Drawings in Goods Adjustment
Sometimes, the owner may withdraw some goods from the business (for e.g., a clothing store, bakery, dairy, etc.) for personal use.
Entry:
Drawings A/c
Dr.
To Purchase A/c
(Adjustment for reduction of purchased stock due to drawings made by proprietor.)
Treatment in Financial Statements:
4. Goods Distributed as Free Sample Adjustment
Many times, businesses provide free samples of their products to customers for advertisement and getting necessary feedback.
It is, of course, necessary to record this advertisement expense even if it arises on the last day of the year.
Entry:
Advertisement A/c
Dr.
To Purchase A/c
(Adjustment for reduction of purchased stock due to distribution of free samples for advertisement.)
Treatment in Financial Statements:
With this, we’ve discussed a total of 13 adjustments made to our financial statements. We now have only a few more adjustments left to discuss, which will all be covered in the next final post on adjustments.
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