Goods in Transit
When the goods are sent or dispatched by the supplier but not received by the business till the end of the year, these goods are recorded as goods in transit.
Adjustment:
A. If Goods in Transit is given outside the trial balance
In such case, two effects will take place:
- Will be shown on the Assets side of the Balance Sheet.
- Added to the Creditors A/c on the Liabilities side of the Balance Sheet.
B. If Goods in Transit is given inside the trial balance
In such a case, it will be shown only once on the Assets side of the Balance Sheet.
Illustration:
Following is the trial balance of Mr. Rajan.
The following adjustments were noted:
- Goods to be used in business amounting to ₹10,000.
- The manager is entitled to commission @10% on net profit before charging such commission.
- Out of the total Advertisement expenditure incurred, only ₹4,000 belongs to the current year.
- Goods are sent to customers on a sale or return basis at cost plus 25% profit, the cost is ₹10,000.
- Goods in transit costs ₹2,000.
- Closing stock ₹4,500 to be taken into account.
Prepare Trading A/c, P & L A/c, and Balance sheet.
Solution:
Note: Contingent Liability will not be taken into account in the Balance sheet. It will be shown in Notes to Account.
Working Notes:
1. Calculation of Manager’s Commission
Manager’s Commission =
=
Financial Statement with Adjustment with Examples-V
Through adjustments in the financial statement, we consider all the accounting items which are relevant to the current financial year, but not recorded in the books due to any reason or wrongly recorded. This helps us in getting the actual profit or loss for the year and the accurate financial position of the company. Six basic adjustments, like Use of Goods in Business, Manager’s Commission on Profit, Deferred Revenue Expenditure, Contingent Liability, Sale of Goods on Sale or Return Basis, Goods in Transit are discussed below.