Financial Statements - II

The necessary adjustment in respect of prepaid expenses is made by recording The effect of the above adjustment entry is that the amount of prepaid part is deducted from the total of the particular expense, and the new account of prepaid expense is shown on the liabilities side of the balance sheet. For example, in Ankit’s trial balance, let us assume that the amount of salary paid by him to the employees includes an amount of Rs. , which was paid in advance to one of his employees upon his joining the office. This implies that Ankit has overpaid his staff by Rs.

, on account of his salary. Hence, correct expense on account of salary during the current period will be Rs. , instead of Rs. , .

Ankit must show Rs. , expense on account of salary in the profit and loss account and recognise a current asset of Rs. , as an advance salary to the employee. It will be termed as prepaid salary account and will be recorded by the following journal entry : The account of prepaid salary will be shown in the trading and profit and