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):
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 |
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
ADJUSTMENT: 18A
The following extracted information of NG Company Ltd is given below:
Extracted Trial Balance
As on 31st December 2019
Particulars |
Debit |
Credit |
|
10% loan
|
−
|
500,000 − |
|
Required: Effect in final account
SOLUTION:
Given and working note:
Interest on loan for one year = 500,000 @ 10% = 50,000
There is not interest paid
Now, interest payable = 50,000
Journal Entries
Date |
Particulars |
|
LF |
Amount |
Amount |
|
Interest on loan account To Outstanding interest account [Being- interest paid and payable, 500,000@10%] |
Dr |
|
50,000
|
50,000
|
Profit and Loss Account
Particulars |
|
Amount |
Particulars |
Amount |
To Interest on debenture Add: Outstanding
|
Nil +50,000 |
50,000
|
|
|
Balance Sheet
Liabilities |
Amount |
Assets |
|
Amount |
Secured & Unsecured loan: 10% Loan
Current liabilities: Outstanding interest on debenture
|
500,000
50,000 |
|
|
|
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###########
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
ADJUSTMENT: 18B
The following extracted information of NG Company Ltd is given below:
Extracted Trial Balance
As on 31st December 2019
Particulars |
Debit |
Credit |
|
10% Loan Interest paid |
− 20,000 |
500,000 − |
|
Required: Effect in final account
SOLUTION:
Given and working note:
Interest on debentures for one year = 500,000 @ 10% = Rs 50,000
Interest Rs 20,000 has already paid.
Now, interest payable = 50,000 –20,000 = 30,000
Journal Entries
Date |
Particulars |
|
LF |
Amount |
Amount |
|
Interest on debenture account To Bank account To Outstanding interest account [Being- interest paid and payable, 500,000@10%] |
Dr |
|
50,000
|
20,000 30,000
|
Profit and Loss Account
Particulars |
|
Amount |
Particulars |
Amount |
To Interest on debenture Add: Outstanding
|
20,000 +30,000 |
50,000
|
|
|
Balance Sheet
Liabilities |
Amount |
Assets |
|
Amount |
Secured & Unsecured loan: 10% Loan
Current liabilities: Outstanding interest on debenture
|
500,000
30,000 |
|
|
|
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
ADJUSTMENT: 18C
The following extracted information of NG Company Ltd is given below:
Extracted Trial Balance
As on 31st December 2019
Particulars |
Debit |
Credit |
|
10% Debenture Interest paid |
− 25,000 |
500,000 − |
|
Additional information:
Interest is to be paid for 6 months
Required: Effect in final account
SOLUTION:
Given and working note:
Interest on loan for one year = 500,000 @ 10% = 50,000
Interest Rs 25,000 has already paid.
Now, interest payable = 50,000 – Rs 25,000 = 25,000
Here, 6 months means 50% interest paid, and 50% is to be paid.
Journal Entries
Date |
Particulars |
|
LF |
Amount |
Amount |
|
Interest on debenture account To Bank account To Outstanding interest account [Being- interest paid and payable, 500,000@10%] |
Dr |
|
50,000
|
25,000 25,000
|
Profit and Loss Account
Particulars |
|
Amount |
Particulars |
Amount |
To Interest on debenture Add: Outstanding
|
25,000 +25,000 |
50,000
|
|
|
Balance Sheet
Liabilities |
Amount |
Assets |
|
Amount |
Secured & Unsecured loan: 10% Debentures
Current liabilities: Outstanding interest on debenture
|
500,000
25,000 |
|
|
|
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
ADJUSTMENT: 18D
The following extracted information of NG Company Ltd is given below:
Extracted Trial Balance
As on 31st December 2019
Particulars |
Debit |
Credit |
|
10% Debentures Interest paid |
− 50,000 |
500,000 − |
|
Required: Effect in final account
SOLUTION:
Given and working note:
Interest on debenture for one year = 500,000 @ 10% = 50,000
Interest Rs 50,000 has already paid.
Now, interest payable = 50,000 – 50,000 = Nil
Journal Entries
Date |
Particulars |
|
LF |
Amount |
Amount |
|
Interest on debenture account To Bank account To Outstanding interest account [Being- interest paid and payable, 500,000@10%] |
Dr |
|
50,000
|
50,000 Nil
|
Profit and Loss Account
Particulars |
|
Amount |
Particulars |
Amount |
To Interest on debenture Add: Outstanding
|
50,000 + NIL |
50,000
|
|
|
Balance Sheet
Liabilities |
Amount |
Assets |
|
Amount |
Secured & Unsecured loan: 10% Debentures
Current liabilities: Outstanding interest on debenture
|
500,000
NIL |
|
|
|
***********
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