INTEREST ON CAPITAL

Interest on capital means the cost of using the capital invested in an enterprise by the proprietor
or partners. Its accounting treatment is summarized below.

I. Adjusting entry to be passed Interest on capital a/c Dr.

To capital a/c
II. Treatment in P/L Account Shown on the debit side as a separate item

III. Treatment in Balance Sheet Shown on the liability side by way of addition
to the capital

INTEREST ON Drawings

Interest on drawings means the cost of using the money or other assets withdrawn by properitor
or partners. It accounting treatment is summarized below.

I. Adjusting entry to be passed Capital a/c Dr.

To interest on drawings a/c
II. Treatment in P/L Account Shown on the credit side as a separate item

III. Treatment in Balance Sheet Shown on the liability side by way of

deduction to the capital

NOTE: - on the absence of exact date of drawings, the interest on drawings is to be calculated
for an average period of 6 months, assuming that drawings are made evenly throughout the year.

ABNORMAL LOSS

The abnormal loss is an avoidable loss and is usually caused by theft, fire, abnormal spoilage,
leakage, breakage etc. The accounting treatment for the following is as follows.

I. Adjusting entry to be passed Loss of stock a/c Dr.

To trading a/c
II. Treatment in trading account Total value of abnormal loss (whether
recovered or not) is shown on the credit side as
a separate item.
III. Treatment in P/L Account Total value of unrecovered loss of stock (i.e.
total loss less amount if any recovered from
insurance co. is shown on the debit side as a
separate item.)
IV. Treatment in Balance Sheet The amount due if any form the insurance
company is shown on the assets side as a
“current assets”
BAD DEBTS

A bad debt refers to a debt which is irrecoverable. In other words it represents amount due from
the customer which could not be recovered. It accounting treatment is as follows.

I. Adjusting entry to be passed Bad debts a/c Dr.

To debtors a/c
II. Treatment in P/L Account Shown on the debit side as a separate item

III. Treatment in Balance Sheet Shown on the assets side by way of deduction
from the debtors.

PROVISION FOR DOUBTFUL DEBTS

A provision for doubtful debts refers to a provision created to cover the loss of possible bad
debts by means of predetermined percentage of net debtors (i.e. debtors less bad debts ) with a
view to bring in a certain amount at which bad debts would be charged for each accounting year.
Its treatment is as follows.

I. Adjusting entry to be passed Profit and Loss a/c Dr.

To Provision for doubtful debts a/c
II. Treatment in P/L Account Shown on the debit side as a separate item

III. Treatment in Balance Sheet Shown on the assets side by way of deduction
from the debtors.

PROVISION FOR DISCOUNT ON DEBTORS

Provision for discount on debtors refers to the provision created to provide for discount likely to
be allowed on good debtors (sundry debtors less additional bad debts given outside the trial
balance and provision for doubtful debts). Its accounting treatment is summarized below.

I. Adjusting entry to be passed Profit and Loss a/c Dr.

To Provision for discount on debtors a/c
II. Treatment in P/L Account Shown on the debit side as a separate item

III. Treatment in Balance Sheet Shown on the asset side by way of deduction
from the debtors.

RESERVE FOR DISCOUNT ON CREDITORS

Reserve for discount on creditors refers to the reserve created for discount likely to be earned
from the creditors on their payments. It accounting treatment is as follows:-
 I. Adjusting entry to be passed Reserve for discount on creditors a/c Dr.
To Profit and loss a/c
II. Treatment in P/L Account Shown on the credit side as a separate item

III. Treatment in Balance Sheet Shown on the Liability side by way of

deduction from the creditors.

COMMISSION ON PROFIT

Commission on profit is the remuneration on the basis of certain percentage of profits. Such
profit may be calculated before or after charging such commission. In the absence of any
information, commission is allowed as a percentage of net profit before charging such
commission. Its accounting treatment is as follows.

I. Adjusting entry to be passed Manager’s Commission a/c Dr.

To Outstanding Commission a/c
II. Treatment in P/L Account Shown on the debit side as a separate item

III. Treatment in Balance Sheet Shown on the Liability side as a current

liability
GOODS SENT ON APPROVAL

Goods sent on “approval” or “sale or return” basis means the delivery of the goods to customer
with the option to retain or return them within a specified period. When such transactions are
few, these transactions are accounted as an ordinary sale. If at the year end, goods are still lying
with customers and specified period has not yet expired, the original entry made for sale is
cancelled. Like an ordinary entry of closing stock, such goods are considered as stock lying with
the customer on behalf of seller and are valued at cost. Its accounting treatment is:-

I. Adjusting entry to be passed 1. Sales a/c Dr.

To debtors a/c
2. Stock with customer a/c Dr.
To trading a/c
I. Treatment in P/L Account 1. Sales value of such goods is shown on
credit side by way of deduction from
sales.
2. Cost of such goods is shown on the
credit side by way of addition to
closing stock in hand.
II. Treatment in Balance Sheet 1. Sales value of such goods is shown on
the assets side by way of deduction
from the debtors.
2. Cost of such goods is shown on the
assets side by way of addition to the
closing stock in hand.