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CA Foundation · Accounting · Final Accounts of Sole Proprietors

On 1 January, Nair & Co. took a loan of Rs 4,00,000 at 9% per annum. The accounting year ends on 31 March, and no interest has been paid so far. How will the adjustment for outstanding interest appear in the final accounts?

Interest for three months is Rs 9,000 (4,00,000 x 9% x 3/12). It is charged to Profit and Loss Account as an expense and, since unpaid, appears as outstanding interest under current liabilities in the Balance Sheet. A full-year figure would be wrong.

  1. ARs 9,000 debited to Profit and Loss Account and shown as a current liability in the Balance SheetCorrect
  2. BRs 36,000 debited to Profit and Loss Account and shown as a current liability in the Balance Sheet
  3. CRs 9,000 debited to Profit and Loss Account and shown as a current asset in the Balance Sheet
  4. DRs 9,000 debited to Trading Account and shown as a current liability in the Balance Sheet

Explanation

Interest for 3 months = 4,00,000 x 9% x 3/12 = Rs 9,000. It is an expense of the year, so it is debited to Profit and Loss Account. Being unpaid, it is a liability. Option B takes a full year's interest, which is wrong because the loan ran only 3 months.

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