Show the treatment of prepaid expenses depreciation, closing stock at the time of preparation of final accounts when: (a) When given inside the trial balance? (b) When given outside the trial balance?
When Given Inside the Trial Balance:
When items like prepaid expenses, depreciation, or closing stock appear inside the trial balance, it means the adjusting entries have already been recorded. Therefore, these items are shown at only one place in the final accounts:
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Prepaid Expenses: Shown only on the Assets side of the Balance Sheet.
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Depreciation: Shown only on the debit side of the Profit and Loss Account.
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Closing Stock: Shown only on the Assets side of the Balance Sheet.
When Given Outside the Trial Balance:
When these items are given as additional information outside the trial balance, they need to be recorded at two places to complete the double entry system:
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Prepaid Expenses:
- Journal Entry: Prepaid Expense A/c Dr. To Expense A/c
- Treatment: Deducted from the respective expense on the debit side of Trading/P&L Account and shown on the Assets side of the Balance Sheet.
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Depreciation:
- Treatment: Shown on the debit side of Profit and Loss Account and deducted from the respective asset on the Assets side of the Balance Sheet.
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Closing Stock:
- Journal Entry: Closing Stock A/c Dr. To Trading A/c
- Treatment: Shown on the credit side of Trading Account and on the Assets side of the Balance Sheet.
Explanation
This question tests the student's understanding of how adjustments are treated differently based on whether they appear inside or outside the trial balance. When items appear inside the trial balance, the double entry is already complete, so they appear only once in final accounts. When given as adjustments outside the trial balance, they must appear at two places to complete the double entry. The context clearly outlines these treatments in the adjustment table provided.