Investment and Interest Hidden Adjustment in Final Accounts

  

Adjustments given below trial balance must be adjusted for final account.

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 in Final Accounts

Closing stock Outstanding expenses Prepaid expenses Accrued income or income receivable   Advance income or unearned income Depreciation on assets Appreciation on assets Written off or amortized Purchase or sale of fixed assets Bad debts, provision and discount Bad debts recovered

Goods loss by fire and insurance claim Goods distribute as free sample Manager’s commission Bonus to employees and retirement benefit Create reserve (general reserve and capital reserve) Goods sold on sale or return basis Hidden adjustment: (a) Interest on loan or debenture (b) Interest on investment (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: 19A

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           To Interest received account [Being- interest receivable on 200,000@5%]	Dr Dr		10,000	10,000

 

Profit and Loss Account

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

 

Balance Sheet

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

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

ADJUSTMENT: 19B

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 Interest received	200,000	− 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 Accrued interest account           To Interest received account [Being- interest paid and payable, 200,000@5%]	Dr Dr		3,000 7,000	10,000

 

Profit and Loss Account

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

 

Balance Sheet

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

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

ADJUSTMENT: 19C

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 Interest received	200,000	− 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           To Interest received account [Being- interest	Dr		Nil	Nil

 

Profit and Loss Account

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

 

Balance Sheet

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

 

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