Interest on Loan
A business usually takes loans from banks in order to make expenditures in their business. They also need to pay certain interest on this loan amount. If a business is unable to pay the interest on the loan in the same financial year, then this interest is called Outstanding Interest. The adjustments, in this case, are shown below:
Adjustment:
A. If Interest on Loan is given outside the trial balance:
In such case, two effects will take place:
- Firstly, Interest on the loan will be shown in the Dr. side of the Profit & Loss A/c, being an item of expense.
- It will be added to the Loan A/c in the Liabilities side of the Balance Sheet.
B. If Interest on Loan is given Inside the trial balance:
In such a case, Interest on the loan will only be shown in the Dr. side of the Profit & Loss A/c, being an expense of the business.
Financial Statement with Adjustment with Examples-II
Through adjustments in the financial statement, we consider all the accounting items which are relevant to the current financial year, but not recorded in the books due to any reason or wrongly recorded. This helps us in getting the actual profit or loss for the year and the accurate financial position of the company. Five adjustments such as Interest on Capital, Interest on Drawings, Interest on Deposits, Interest on Loans, and Proprietor’s Salary are discussed below: