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 or pension to employees Create reserve or fund Goods sold on sale or return basis Hidden adjustment: (a) Interest on loan or debenture (b) Interest on investment (c) Monthly rent and salary |
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: 14A
The following information of EP Company Ltd is provided to you for year ended 31st 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 To Outstanding commission account (Being- commission payable to manager Rs 800,000 @ 3%) |
Dr |
|
24,000
|
24,000
|
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: 14B
The following information of PL Company is provided to you for year ended 31st 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 To Outstanding commission account (Being- commission payable to manager Rs 525,000 x 5/105 |
Dr |
|
25,000
|
25,000
|
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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