Adjustments in Final Accounts: Hidden Adjustment Loan and Investment

Arjun EP

Published on: September 26, 2020

Adjustments in Final Accounts

Adjustment entry means not adjusted while preparing trial balance.

It is also known additional information.

Almost all the adjustment entry effects dual aspect.

One is debit and other is credit.

There are a number of adjustments to be made while finalizing the financial statements.

But our discussion will be limited to the following adjustments (limited by the curriculum):

MAJOR ADJUSTMENTS OF FINAL ACCOUNTS:

1	Dividend	13	Bad debts, provision and discount
2	Transfer to reserve and fund	14	Recovery of bad debts
3	Adjustment of tax	15	Goods loss by fire and insurance claim
4	Closing stock	16	Goods distribute as free sample
5	Outstanding expenses	17	Manager’s commission
6	Prepaid expenses	18	Bonus or pension to employees
7	Accrued revenue or income	19	Create reserve or fund
8	Unearned or prepaid revenue	20	Goods sold on sale or return basis
9	Depreciation on assets	21	Hidden adjustment:
10	Appreciation on assets		(a) Interest on loan or debenture
11	Written off or amortized		(b) Interest on investment
12	Purchase or sale of fixed assets		(c) Monthly rent and salary
			(d) Loan and Investment

Hidden Adjustments in Final Accounts

Some information is not clarified in additional adjustment.

These transactions should be adjusted on the basis of indication or hints.

Such adjustment is known as hidden adjustment.

The examples of such hidden information are:

10% Debentures or loan

5% Investment

Rent @ Rs 5,000 per month

7% Preference shares capital

According to above examples

10% interest should be payable on debenture or loan,

5% interest should be receivable on investment,

Total rent for the year would be Rs 60,000 viz (12 months x Rs 5,000),

7% preference dividend should be payable if dividend paid on equity shares capital.

Keep in Mind (KIM)

When account balance is given in percentage (%) in trial balance like

8% debentures, 7% investment, 5% government bond etc there may be hidden adjustment.

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ADJUSTMENT: 24A

The following extracted information of NG Company Ltd is given below:

Extracted Trial Balance

As on 31^st December 2019

Particulars	Debit	Credit
10% Debentures (1 April)	–	500,000
5% Government bond (face value Rs 100,000)	98,000

Required: Effect in final account

SOLUTION:

Given and working note:

Interest on debentures = 500,000 @ 10% x 9/12 = Rs 37,500

Note: Interest should be paid for 9 month (1 April to 31 December = 9 months)

Interest on bond = 100,000 @ 5% = Rs 5,000

Interest receivable on investment for one year

Note: here face value Rs 100,000 but market value is Rs 98,000 but interest is calculated on Rs 100,000.

Journal Entries

Date	Particulars		LF	Amount	Amount
	Interest on debenture	Dr		37,500
	To Outstanding interest				37,500
	[Being- interest payable 500,000@10%]
	Accrued interest account	Dr		5,000
	To Interest received account				5,000
	[Being- interest receivable 100,000@5%]

Profit and Loss Account

Particulars		Amount	Particulars		Amount
To Interest on debenture	Nil		By Interest on investment	Nil
Add: Outstanding	37,500	37,500	Add: Accrued interest	+ 5,000	5,000

Balance Sheet

Liabilities	Amount	Assets		Amount
Secured & Unsecured loan:		Investment:
10% Debentures	500,000	5% Government bond	98,000
Current liabilities:		Add: Accrued interest	+ 5,000	103,000
Outstanding interest	37,500	(face value Rs 100,000)