Adjustments in Final Accounts: Hidden Adjustment Investment and Interest

 

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

 

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.

 

There are four options for interest:

(a) Interest is not paid

(a) Partial interest paid (50%, 3 months, 6 months, 9 months etc)

(b) Full (100%) interest paid

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

ADJUSTMENT: 22A

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

Extracted Trial Balance

As on 31^st December 2019

Particulars	Debit	Credit
5% Investment	200,000	−

Required: Effect in final account

SOLUTION:

Given and working note:

Interest receivable on investment for one year = 200,000 @ 5% = 10,000

Interest is not received

Interest receivable = 10,000

Journal Entries

Date	Particulars		LF	Amount	Amount
	Accrued interest account	Dr		10,000
	To Interest received account				10,000
	[Being- interest receivable on 200,000@5%]

 

Profit and Loss Account

Particulars		Amount	Particulars		Amount
			By Interest	Nil
			Add: Accrued interest	+10,000	10,000

 

Balance Sheet

Liabilities	Amount	Assets		Amount
		Investment:
		5% Invest  in debentures	200,000
		Add: Accrued interest	+10,000	210,000

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

ADJUSTMENT: 22B

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

Extracted Trial Balance

As on 31^st December 2019

Particulars	Debit	Credit
5% Investment	200,000	−
Interest received		3,000

Required: Effect in final account

SOLUTION:

Given and working note:

Interest receivable on investment for one year = 200,000 @ 5% = 10,000

Interest already received on investment = 3,000

Interest receivable = 10,000 – 3,000 = 7,000

Journal Entries

Date	Particulars		LF	Amount	Amount
	Bank account	Dr		3,000
	Accrued interest account	Dr		7,000
	To Interest received account				10,000
	[Being- interest paid and payable, 200,000@5%]

 

Profit and Loss Account

Particulars		Amount	Particulars		Amount
			By Interest	3,000
			Add: Accrued interest	7,000	10,000

 

Extracted Balance Sheet

Liabilities	Amount	Assets		Amount
		Investment:
		5% Invest  in debentures	200,000
		Add: Accrued interest	7,000	207,000

###########

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

ADJUSTMENT: 22C

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

Extracted Trial Balance

As on 31^st December 2019

Particulars	Debit	Credit
5% Investment	200,000
Interest received		10,000

Required: Effect in final account

SOLUTION:

Given and working note:

Interest receivable on investment for one year = 200,000 @ 5% = 10,000

Interest already received on investment = 10,000

Interest receivable = 10,000 – 10,000 = nil

Journal Entries

Date	Particulars		LF	Amount	Amount
	Accrued interest account	Dr		Nil
	To Interest received account				Nil
	[Being- interest

 

Profit and Loss Account

Particulars		Amount	Particulars		Amount
			By Interest	10,000
			Add: Accrued interest	Nil	10,000

 

Extracted Balance Sheet

Liabilities	Amount	Assets		Amount
		Investment:
		5% Invest  in debentures	200,000
		Add: Accrued interest	10,000	210,000

 

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