Adjustments in Final Accounts: Manager Commission

 

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

 

Managerial Remuneration and Commission

The managing director or directors who involves in day to day functioning of the company can get remuneration for their service.

The amount of remuneration should be specified in articles of association. 

According to Company Act, the general meeting of company may grant a reward (commission) in a sum not exceeding 3% of net profit after tax.

It is paid the directors who work full time for the company to encourage them.

 

Applied in Final Accounts

If managers’ commission is paid before preparation of trial balance, it should be debited to profit and loss account.

But, if such commission is outstanding to pay, it debited in profit and loss account and is shown in liability side of balance sheet.

There are two ways to calculation of commission.

First is net profit before charging such commission and secondly on the basis of net profit after charging such commission.

Commission before charged          = Difference of Dr and Cr x (% ÷ 100)  

Commission after charged             = Difference of Dr and Cr x [% ÷ (100+ %)]  

 

Keep in Mind (KIM)

According to Company Act, the general meeting of shareholders may grant a commission In a sum not exceeding 3% of net profit after tax to the directors who work full time for the company. Commission and incentive helps to increase work efficiency to the employees.

 

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

ADJUSTMENT: 17A

The following information of EP Company Ltd is provided to you for year ended 31^st December:

Net profit before manager’s commission $/₹/Rs 800,000

Additional information:

Manager’s commission for the year is decided 3% of net profit before charging

Required: Adjustment entries and effect in final account

 

Journal Entries

Date	Particulars		LF	Amount	Amount
	Manager’s commission account	Dr		24,000
	To Outstanding commission account				24,000
	(Being- commission payable to manager Rs 800,000 @ 3%)

 

Profit and Loss Account

Particulars		Amount	Particulars	Amount
To Outstanding manager’s comm.		24,000

 

Balance Sheet

Liabilities	Amount	Assets		Amount
Current liabilities:
Outstanding manager’s comm.	24,000

 

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

ADJUSTMENT: 17B

The following information of PL Company is provided to you for year ended 31^st December:

Net profit before manager’s commission Rs 525,000.

Additional information:

Manager’s commission for the year is decided 5% of net profit after charging

Required: Adjustment entries and effect in final account

 

Journal Entries

Date	Particulars		LF	Amount	Amount
	Manager’s commission account    Dr	Dr		25,000
	To Outstanding commission account				25,000
	(Being- commission payable to manager Rs 525,000 x 5/105

 

Profit and Loss Account

Particulars		Amount	Particulars	Amount
To Outstanding manager’s comm.		25,000

 

Balance Sheet

Liabilities	Amount	Assets		Amount
Current liabilities:
Outstanding manager’s comm.	25,000

 

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