Adjustments in Final Accounts: Hidden Adjustment Monthly Expenses

 

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.

 

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: 23A

The following extracted information of NG Traders is given below:

                                             Extracted Trial Balance

                                             As on 31^st December 2019

Particulars	Debit	Credit
Rent paid  (Rs 5,000 per month)	45,000	−

Required: Effect in final account

SOLUTION:

Given and working note:

Final account is prepared for 12 months or one year.

Here, Rent for one year = 5,000 x 12 months = 60,000

Rent paid already 45,000

Outstanding rent for the year = 60,000 –45,000     = 15,000

 

Journal Entries

Date	Particulars		LF	Amount	Amount
	Rent account (P&L)	Dr		60,000
	To Cash/Bank account				45,000
	To Outstanding rent account				15,000
	[Being- rent paid and payable  (5,000 x 12 – 45,000)]

 

Profit and Loss Account

Particulars		Amount	Particulars	Amount
To Rent paid	45,000
Add: Outstanding	+15,000	60,000

 

Extracted Balance Sheet

Liabilities	Amount	Assets		Amount
Current liabilities:
Outstanding rent	15,000

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

ADJUSTMENT: 23B

The following extracted information of NG Traders is given below:

                                             Extracted Trial Balance

                                             As on 31^st December 2019

Particulars	Debit	Credit
Salary paid	100,000	−

Additional information:

Salary payable for 2 months.

Required: Effect in final account

SOLUTION:

Given and working note:

Final account is prepared for 12 months or one year.

Salary paid for 10 months; salary payable for 2 months

Salary per month = 100,000 ÷ 10 = 10,000

Outstanding salary for 2 months = 10,000 x 2 = 20,000

 

Journal Entries

Date	Particulars		LF	Amount	Amount
	Salary (P&L)	Dr		60,000
	To Cash/Bank account				100,000
	To Outstanding salary account				20,000
	(Being- salary paid and payable)

 

Profit and Loss Account

Particulars		Amount	Particulars	Amount
To Salary paid	100,000
Add: Outstanding	20,000	120,000

 

Balance Sheet

Liabilities	Amount	Assets		Amount
Current liabilities:
Outstanding salary	20,000

 

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