Adjustment of Manager’s Commission in Final Accounts (Financial Statements)

The manager may be paid a commission due to an increase in sales of the business. This commission is paid on the net profit of the company. There can be two instances i.e. it can be paid before or after charging a commission.                           

Adjustment:

A. If Manager’s Commission is given outside the trial balance

In such case, two effects will take place:

• Shown on the Dr. side of the Profit & Loss A/c.
• Shown as an Outstanding Liability on the Liabilities side of the Balance Sheet.

B. If Manager’s Commission is given inside the trial balance

It will only be shown on the Dr. side of the Profit & Loss A/c.

Illustration:

Following is the trial balance of Mr. Rajan.

The following adjustments were noted:

1. The manager is entitled to commission @10% on net profit before charging such commission.
2. Goods to be used in business amounting to ₹10,000.
3. Out of the total Advertisement expenditure incurred, only ₹4,000 belongs to the current year.
4. Goods are sent to customers on a sale or return basis at cost plus 25% profit, the cost is ₹10,000.
5. Goods in transit costs ₹2,000.
6. Closing stock ₹4,500 to be taken into account.

Prepare Trading A/c, P & L A/c, and Balance sheet.

Solution:

Note: Contingent Liability will not be taken into account in the Balance sheet. It will be shown in Notes to Account.

Working Notes:

1. Calculation of Manager’s Commission