Monthly Rent and Salary 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: 20A

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)           To Cash/Bank account           To Outstanding rent account [Being- rent paid and payable  (5,000 x 12 – 45,000)]	Dr		60,000	45,000 15,000

 

Profit and Loss Account

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

 

Balance Sheet

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

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

ADJUSTMENT: 20B

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)           To Cash/Bank account           To Outstanding salary account (eing- salary paid and payable)	Dr		60,000	100,000 20,000

 

Profit and Loss Account

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

 

Balance Sheet

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

 

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