Adjustment of Proprietor’s Salary in Final Accounts (Financial Statements)

If the proprietor works in the firm, the firm is liable to pay salary to the proprietor. The proprietor’s salary is an expense to the firm, and adjustments have to be made in respect of that at the time of preparing final accounts.

Adjustment:

A. If Proprietor’s Salary is given outside the trial balance:

In such case, two effects will take place:

• Proprietor’s salary will be shown in the Dr. side of the Profit & Loss A/c, being an expense for the business.
• It will be added to the Capital A/c in the Liabilities side of the Balance Sheet.

B. If Proprietor’s Salary is given Inside the trial balance:

In such a case, Proprietor’s salary will only be shown in the Dr. side of the Profit & Loss A/c, being an item of expense.

Illustration:

The following adjustments were noted:

• Salary to be provided to proprietor i.e., ₹5000.
• 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.
• Interest on loan to be provided at 6% p.a.
• Interest on Bank Deposits is to be provided @ 4%.

Solution: