Financial Statements with Adjustments 3
11. INTEREST ON CAPITAL
Meaning: To see whether the business is really earning profit or not, interest on capital at a certain rate is provided. However, some experts are against the recording of interest on capital.
Treatment:
Interest on capital A/c Dr.
To Capital A/c
Two-fold effect:
1. Shown on debit side of Profit and Loss A/c.
2. Shown on liabilities side of Balance Sheet by way of addition to the capital.
(Interest on loan has the similar treatment with the only difference that the amount paid appearing in the trial balance will be deducted to be shown in the balance sheet.)
12. INTEREST ON DRAWINGS
Meaning: Interest on drawings is charged from proprietor, as drawings reduce capital. However some experts are against the recording of interest on drawings.
Treatment:
Drawings A/c Dr.
To Interest on Drawings A/c
Two-fold effect:
1. Shown on credit side of Profit and Loss Account.
2. On liabilities side of Balance Sheet by way of addition to the drawings which are ultimately deducted from the capital.
13. DEFERRED REVENUE EXPENDITURE
The expenditure done in initial stage but the benefit of which will also be available in subsequent years is called deferred revenue expenditure.
Treatment:
Profit &loss A/c Dr.
To advertisement A/c
Two-fold effect:
1. Shown on the debit side of Profit &loss A/c
2. Shown on assets side by way of deduction from capitalised expenditure.
Financial Statements with Adjustments 3
14. LOSS OF STOCK BY FIRE
There can be three cases:
1. All the stock is fully insured.
2. The stock is partly insured.
3. The stock is not insured at all.
1. If the stock is fully insured:
The whole loss will be claimed from the insurance company.
Treatment:
Insurance Co. A/c Dr.
To Trading A/c
Two fold effect:-
1. Shown on credit side of Trading A/c.
2. Shown on Assets Side of Balance Sheet.
2. If the stock is partially insured:
The loss of stock covered by insurance policy will be claimed from the insurance company and the rest of amount will be loss for the business.
Treatment:
Insurance Co. A/c Dr.
Profit & Loss A/c Dr.
To Trading A/c
Two fold effect:-
1. Shown on credit side of Trading A/c with the value of stock & shown on debit side of P& L A/c for that part of the stock which is not insured.
2. Loss of stock Fire is shown on asset side of the Balance sheet which amount is to be realized from the insurance company.
3. If the stock is not insured:
Whole loss will be borne by the firm.
Treatment:
Profit & Loss A/c Dr.
To Trading A/c
Two fold effect:-
1. Shown on the credit side of Trading A/c.
2. Shown on the debit side of P&L A/c.