AccountingQA Latest Questions

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  2. GautamSaxena Curious .
    This answer was edited.

    Goods purchased for cash The purchasing of goods for cash is a business transaction and a vital business operation that is supposed to be recorded in the journal in order to keep a track of the business stock. A journal is a detailed account that records all the financial transactions in a businessRead more

    Goods purchased for cash

    The purchasing of goods for cash is a business transaction and a vital business operation that is supposed to be recorded in the journal in order to keep a track of the business stock.

    A journal is a detailed account that records all the financial transactions in a business chronologically. It is used to keep a record of all the financial transactions occurring in a business and one of its primary motives is that it helps in the preparation of the ledger and trial balance statement.

    Journal entry for goods purchased for cash

    In the entry, goods purchased for cash, the cash a/c is credited and the purchases a/c is debited. It’s because of that golden rule in accounting, Dr. what comes in and Cr. what goes out.

    Imagine, goods were purchased for cash on 1-Jan-2021. Then we’ll be passing the entry below:

     

     

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Aadil
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  2. GautamSaxena Curious .
    This answer was edited.

    Business commencement with cash The term 'started the business with cash' is basically the commencement of business. In order to start any business, a certain sum of money has to be invested by the owner, which is known as the business's capital in accounting. Commencement of business refers to theRead more

    Business commencement with cash

    The term ‘started the business with cash’ is basically the commencement of business. In order to start any business, a certain sum of money has to be invested by the owner, which is known as the business’s capital in accounting.

    Commencement of business refers to the starting or beginning of the business. In companies, it’s a declaration issued by the company’s directors with the registrar stating that the subscribers of the company have paid the amount agreed. In a sole proprietorship, the business can be commenced with the introduction of any asset such as cash, stock, furniture, etc.

    Therefore, we may also call it the first journal entry of business because generally, people tend to start the business with cash rather than something else.

    Journal entry

    Explanation via rules

    As per the golden rules of accounting, the cash a/c is debited as the rule says “debit what comes in, credit what goes out.” Whereas the capital a/c is credited because “debit all expenses and losses, credit all incomes and gains”

    As per modern rules of accounting, cash is a current asset, and assets are debited when they increase. Whereas, on the increment on liabilities, they are credited, therefore, capital a/c is credited.

     

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Aadil
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Introduction Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings. The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation aRead more

    Introduction

    Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings.

    The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation as shown in the example below:

    It is shown as a negative figure under both assets and capital heading. I will be explaining why it is so.

    Accounting Equation

    The accounting equation represents the relationship between assets, liabilities, and capital of an entity whether profit oriented or not, according to which, the total assets of a business equals to the sum of its total capital and total liabilities.

    Assets = Liabilities + Capital

    This equation holds good in every monetary transaction or event like the event given in the question.

    Cash withdrawn for personal use

    We know every transaction affects two accounts. In this case, too, the ‘cash withdrawn for personal use’ affects two accounts. Cash withdrawn for personal use is known as drawings.

    Let’s see the journal entry for drawings of cash from business:


    Here the drawing account is debited because it is a contra-equity account i.e. it is a mirror image of the capital account or opposite of the capital account. Here the cash account is an asset account; hence it is credited as it is reduced.

    As drawings represent the outflow of capital from the business, it is written off from the Capital account in the balance sheet.

    Hence, in the accounting equation, the drawing amount is deducted from the Asset side and from the capital side, indicating a balance.

    It does not appear in the statement of profit or loss despite having a debit balance because it is not an expense account.

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Aadil
AadilCurious
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  2. Ayushi Curious Pursuing CA

    The accounting equation for a non-profit organisation is almost the same as in the case of the profit-oriented organisation. Let's first briefly understand what accounting equation and non-profit organisation are: Accounting Equation Accounting equation is an equation that depicts the relationship bRead more

    The accounting equation for a non-profit organisation is almost the same as in the case of the profit-oriented organisation. Let’s first briefly understand what accounting equation and non-profit organisation are:

    Accounting Equation

    Accounting equation is an equation that depicts the relationship between assets, liabilities and capital of an entity.

    Assets = Liabilities + Capital

    As per this equation, the total assets of an entity are equal to the sum of its total liabilities and total capital. This equation holds good in every situation.

    Non-Profit Organisation

    A Non-Profit Organisation is an entity which exists for purposes other than for profit. Such organizations exist and operate for charitable purposes, promotion of culture and sports and welfare of society. The accounting for Non-profit organisation is slightly different from For-profit organisations. In the case of a non-profit organisation, the capital account is known as the capital fund.

    Accounting Equation for non-profit organisations

    The Accounting equation for a non-profit organisation is as follows:

    Assets = Liabilities + Capital fund.

    The difference is only in name. In the case of non-profit organizations, the capital is known as a capital fund. Rest everything is the same. The accounting equation will be prepared as normally prepared for business concerns.

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Simerpreet
SimerpreetHelpful
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  2. GautamSaxena Curious .
    This answer was edited.

    Interest on capital Interest on capital is interest payable to the owner/partners for providing a firm with the required capital to commence the business. Normally, it is charged for a full year on the balance of capital at the beginning of the year unless some fresh capital is introduced during theRead more

    Interest on capital

    Interest on capital is interest payable to the owner/partners for providing a firm with the required capital to commence the business. Normally, it is charged for a full year on the balance of capital at the beginning of the year unless some fresh capital is introduced during the year.

    When the business firm faces a loss, the interest on capital will not be provided. It is permitted only when the business earns a profit. Such payment of interest is generally observed in partnership firms. It is provided before the division of profits among the partners in a partnership firm.

    If an owner or partner introduces additional capital to the business then, it is also taken into account for providing interest on capital.

    Interest on capital in the accounting equations

    Interest on capital is an expense from a business point of view, as it is payable to the owner and is not paid in cash. Being an income from the owner’s point of view, it is added to his capital account. And being a business expense from the business point of view, it is therefore deducted from the capital.

    Hence, it further doesn’t create any change in the accounting equation mathematically but it’s mandatory to be shown as it plays a vital role in the profit and loss a/c and even helps the business save tax.

    Example

    Z started a business with cash and stock of ₹45,000 and ₹5,000 respectively. Further, he received interest on capital of ₹1,000. The accounting equation for the following transactions will be as follows:

    Accounting Equation

     

     

     

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Simerpreet
SimerpreetHelpful
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  2. GautamSaxena Curious .
    This answer was edited.

    Interest on capital Interest on capital is interest payable to the owner/partners for providing a firm with the required capital to commence the business. It's a fixed return that a business owner is eligible to receive. When the business firm faces a loss, the interest on capital will not be providRead more

    Interest on capital

    Interest on capital is interest payable to the owner/partners for providing a firm with the required capital to commence the business. It’s a fixed return that a business owner is eligible to receive.

    When the business firm faces a loss, the interest on capital will not be provided. It is permitted only when the business earns a profit. Such payment of interest is generally observed in partnership firms. It is provided before the division of profits among the partners in a partnership firm.

    If an owner or partner introduces additional capital to the business, it is also taken into account for providing interest on capital.

    Sample journal entry

    Interest on capital is an expense for business, thus, debited as per the golden rules of accounting, debit the increase in expense, and the owner/partner’s capital a/c is credited as per the rule, credit all incomes and gain.

    As per the modern rules of accounting, we debit the increase in expenditure and credit the increase in capital.

    As we know, as per the business entity concept, business and owner are two different entities and a business is a separate living entity. Therefore, the capital introduced by the owner/partners is the amount on which they’re eligible to receive a return.

    Example:

    Tom is the business owner of the firm XYZ Ltd. He has contributed ₹ 10,00,000 to the business with 10% interest provided to Tom at the end of the year.

    Solution:

    Here interest on capital will be calculated as,

    Interest on capital = Amount invested × Rate of interest × Number of Months/12

    = 10,00,000 × 10% × 12/12

    = ₹ 1,00,000

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Simerpreet
SimerpreetHelpful
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Introduction   Furniture is treated as a fixed asset of an enterprise unless it deals in the manufacturing or the trade of furniture. As stock in trade, it will be treated as current assets. In both cases, they are real accounts. Hence, the golden rule of accounting will be the same. But, when it coRead more

    Introduction

     

    Furniture is treated as a fixed asset of an enterprise unless it deals in the manufacturing or the trade of furniture. As stock in trade, it will be treated as current assets.

    In both cases, they are real accounts. Hence, the golden rule of accounting will be the same.

    But, when it comes to journal entries, Furniture A/c will appear only when it is treated as a fixed asset.

    No journal entries are passed in the stock-in-trade account except for some balance transferring entries.

    Journal Entries on taking Furniture as a fixed asset

    Taking furniture as a fixed asset, we can pass various entries related to it. Since furniture is an asset, any increase is debited and the decrease is credited.

    Also, furniture is a real account which means the golden rule of accounting  applicable is, “Debit what comes in and credit what goes out”.

    Following are the basic entries related to furniture.

    Purchase of furniture

    The most common entry related to furniture is the purchase of furniture:

    Furniture A/c                                            Dr. Amt
    To Cash / Bank A/c Amt

    Here Furniture A/c is increased, hence debited.
    Cash or Bank being reduced is credited.

    Sale of furniture

     

    Cash / Bank A/c                                       Dr. Amt
    Profit and Loss A/c *                               Dr. Amt
    To Furniture A/c Amt
    To Profit and Loss A/c  ** Amt

     *In case of loss

    **In case of profit

     On the sale of furniture, its balance gets reduced, hence credited.
    Cash or Bank is debited as cash comes in hand or into the bank.

    Also, profit or loss may arise due to the difference in sale value and the carrying amount of the furniture A/c.

    The difference is debited to Profit and Loss A/c in case of loss and credited in case of profit.

     

    Depreciation on Furniture

    Depreciation A/c                                         Dr. Amt
    To Furniture A/c Amt

    Here, furniture is credited as it is decreased by the amount of depreciation.

    Depreciation being a non-cash expense, is debited.

    Journal Entries on taking Furniture as stock in trade

    When furniture is stock of trade of a business, the journal entries will be like normal purchase and sales entries as below:

     

    Purchase A/c                                               Dr. Amt
    To Cash / Bank A/c Amt

     

     

    Cash / Bank A/c                                          Dr. Amt
    To Sales A/c Amt

    There will be no furniture account.

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