Adjustment of Interest on Deposits in Final Accounts (Financial Statements)

When an investment is made and deposited into the bank, the bank pays interest on that deposit. This is known as interest on deposits. For example, Opening of Fixed Deposit into the bank. The bank pays a fixed rate of interest on these deposits. While preparing final accounts of the firm, adjustments have to be made in respect of that.

Adjustment:

A. If Interest on Deposits is given outside the trial balance:

In such case, two effects will take place:

• Interest on deposits will be shown in the Cr. side of the Profit & Loss A/c.
• Amount of Interest on Deposits is added to the Bank Deposits in the Assets side of the Balance Sheet.

B. If Interest on Deposits is given Inside the trial balance:

In such a case, Interest on Deposits will be shown only once in the Cr. side of the Profit & Loss A/c.

Illustration:

The following adjustments were noted:

• Interest on Bank Deposits is to be provided @ 4%.
• Interest on capital @ 5% to be provided.
• Interest on Drawings is to be charged at 10% p.a. These Drawings have been made at the beginning of the year.
• Salary to be provided to proprietor i.e. 5000.
• Interest on loan to be provided at 6% p.a.

Solution: