Manager's commission and interest on capital

A manager's commission is an incentive linked to profit, on top of salary. It is a business expense in the profit and loss account and, until paid, a liability (manager's commission payable). Entry: Manager's Commission A/c Dr, To Manager's Commission Payable A/c. Work it out last, after every other adjustment, because it depends on the final profit.

Read carefully which profit the percentage is on.

• On profit before charging the commission: commission = profit × rate ÷ 100. On a profit of ₹22,000 at 10%: ₹2,200.
• On profit after charging the commission (the commission is part of what reduces the profit it is based on): commission = profit before commission × rate ÷ (100 + rate). On ₹22,000 at 10%: 22,000 × 10 ÷ 110 = ₹2,000. Check: 22,000 − 2,000 = 20,000, and 10% of 20,000 is 2,000.

If a question does not say which, take it on profit before charging the commission. In the book, Ankit's manager gets 10%: ₹2,062 before charging, or ₹1,875 after charging it.

Interest on capital is allowed to the owner on the money he has invested. It is an expense of the business (debited to profit and loss) and is added to the owner's capital in the balance sheet. Entry: Interest on Capital A/c Dr, To Capital A/c. Ankit: 5% of ₹12,000 = ₹600. If extra capital came in during the year, charge interest on it only for the months it was in the business.

Interest on drawings is the reverse: charged to the owner on money he took out. It is an income of the business (credited to profit and loss) and is deducted from capital.

The book's Figure 9.2 lists all eleven adjustments, each with its entry and its two places. Use it as a checklist.