Before doing a negative adjustment in Accounting, you should know what are the negative adjustments? What is the necessity to do a negative adjustment in accounting?
Negative adjustments are those which are needed to correct any account or accounts. In simple word, it is the part of rectification of errors and mistakes. When we do a negative adjustment in accounting, it means, we are correcting our mistake. We also adjust the account if we did wrong adjustment in past.
Step to Follow :
1st Step. Make the List of Accounting Errors
If you are already expert in auditing, just check the ledger accounts, trial balance and financial statement and vouchers. You will find lots of accounting errors which can only be corrected by passing negative adjustment entries. So, do this by yourself.
2nd Step. Learn by Examples
You can also become expert in negative adjustment in accounting if you will understand that basic rule of accounting will apply just opposite in negative adjustment. You know that if there is any increase in asset, it will be debited but in negative adjustment, we will credit. We know that incomes are credited but in negative adjustment, incomes will be debited.
For this you have to learn by examples. Here, I am giving some examples.
(I) Adjustment of Wrong Amount Error
For example, you have done wrong adjustment of an outside expenses. At the end of period, Rs. 10,000 salary was payable. For this, you have passed wrong entry.
Expense account Dr. 20,000
Outstanding Expense Account Cr. 20,000
Now, for correcting this, we have to pass a negative adjustment entry of Rs. 10,000.
Outstanding Expense Account Dr. 10,000
Expense Account Cr. 10,000
(II) Negative Adjustment, when you have wrongly treated sale return or Rs. 20,000 as actual sale.
At that time, your book sale will not represent actual sale. So, you have to pass following negative adjustment entry.
Sale Account Dr. 20,000
Debtor Account Cr. 20,000
After this, we can pass the correct entry of sales return
Sales Return Account Dr. 20,000
Debtor Account Cr. 20,000
(III) Negative Adjustment of Inventory
Sometime, you may get high discount on inventory but you have recorded closing inventory on the list price. At that time, your closing stock will be overstated and your net profit will be less. So, you can stop this by just passing the negative adjustment of inventory.
For example, you have bought Rs. 2,00,000 inventory. You have paid just just Rs. 1,00,000. It means, you have got inventory at 50% discount. Suppose, at the end, you have recorded inventory at Rs. 30,000 which was the listed price. You have to pass negative adjustment entry.
Trading Account Dr. 15,000
Closing Inventory Account Cr. 15,000
Negative adjustments are those which are needed to correct any account or accounts. In simple word, it is the part of rectification of errors and mistakes. When we do a negative adjustment in accounting, it means, we are correcting our mistake. We also adjust the account if we did wrong adjustment in past.
Step to Follow :
1st Step. Make the List of Accounting Errors
If you are already expert in auditing, just check the ledger accounts, trial balance and financial statement and vouchers. You will find lots of accounting errors which can only be corrected by passing negative adjustment entries. So, do this by yourself.
2nd Step. Learn by Examples
You can also become expert in negative adjustment in accounting if you will understand that basic rule of accounting will apply just opposite in negative adjustment. You know that if there is any increase in asset, it will be debited but in negative adjustment, we will credit. We know that incomes are credited but in negative adjustment, incomes will be debited.
For this you have to learn by examples. Here, I am giving some examples.
(I) Adjustment of Wrong Amount Error
For example, you have done wrong adjustment of an outside expenses. At the end of period, Rs. 10,000 salary was payable. For this, you have passed wrong entry.
Expense account Dr. 20,000
Outstanding Expense Account Cr. 20,000
Now, for correcting this, we have to pass a negative adjustment entry of Rs. 10,000.
Outstanding Expense Account Dr. 10,000
Expense Account Cr. 10,000
(II) Negative Adjustment, when you have wrongly treated sale return or Rs. 20,000 as actual sale.
At that time, your book sale will not represent actual sale. So, you have to pass following negative adjustment entry.
Sale Account Dr. 20,000
Debtor Account Cr. 20,000
After this, we can pass the correct entry of sales return
Sales Return Account Dr. 20,000
Debtor Account Cr. 20,000
(III) Negative Adjustment of Inventory
Sometime, you may get high discount on inventory but you have recorded closing inventory on the list price. At that time, your closing stock will be overstated and your net profit will be less. So, you can stop this by just passing the negative adjustment of inventory.
For example, you have bought Rs. 2,00,000 inventory. You have paid just just Rs. 1,00,000. It means, you have got inventory at 50% discount. Suppose, at the end, you have recorded inventory at Rs. 30,000 which was the listed price. You have to pass negative adjustment entry.
Trading Account Dr. 15,000
Closing Inventory Account Cr. 15,000
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