No, the building is not a current asset. Explanation Current assets are those in a business that is reasonably expected to be sold, consumed, cashed, or exhausted within one year of accounting through normal day-to-day business operations. Examples: Cash and cash equivalent, stock, liquid assets, etRead more
No, the building is not a current asset.
Explanation
Current assets are those in a business that is reasonably expected to be sold, consumed, cashed, or exhausted within one year of accounting through normal day-to-day business operations.
Examples: Cash and cash equivalent, stock, liquid assets, etc.
The building is expected to have a valuable life for more than a year and is bought for a longer term by a company. The building is a fixed asset/non-current asset, those assets which are bought by the company for a long term and aren’t supposed to be consumed within just one accounting year.
In order to understand it more clearly, let’s see the two types of assets in the classification of the assets on the basis of convertibility:
In the classification of the assets on the basis of their convertibility, they are classified either as current assets or fixed assets. Also referred to as current assets/ non-current assets or short-term/ long-term assets.
- Current Assets – As explained above, those assets in a business that is reasonably expected to be sold, consumed, cashed, or exhausted within one year of accounting.
- Fixed Assets –Â Those assets which are not likely to be converted into cash quickly and are bought by the business for a long term.
Building in the balance sheet
Let us take a look at the balance sheet’s asset side and see where building and current assets are shown
Balance Sheet (for the year ending…)
As we can see, the building is shown on the long-term assets side and not in the current assets.
Therefore, the building is not a current asset.
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Interest on drawings Drawings refer to the money withdrawn by owners/partners for personal use from the business. The drawings, in accounting terms, can be of any type. It can be cash withdrawn from business or furniture or car etc. Drawings are money or assets that are withdrawn from a company by iRead more
Interest on drawings
Drawings refer to the money withdrawn by owners/partners for personal use from the business. The drawings, in accounting terms, can be of any type. It can be cash withdrawn from business or furniture or car etc. Drawings are money or assets that are withdrawn from a company by its owners for personal use and must be recorded as a reduction of assets. It’s paid back to the business with some interest.
Interest on drawings is an income for the business and reduces the capital of the owner. Interest on drawings is the amount of interest paid by the partners, calculated concerning the period for which the money was withdrawn.
Formulae for Interest on drawings
There are three formulae used for calculating the interest on drawings. They are:
1. Simple Method: In this method, as the name suggests, the amount of interest on drawings is calculated simply for the time the amount has been utilized.
Interest on Drawings = Amount of drawings × Rate/100 × No. of Months/12Â
2. Product Method: This method is used when-
Interest on Drawings = Total of Products × Rate/100 × 1/12
Interest on Drawings= Total amount of drawings × Rate/ 100 × Average Period/12
Also, note-
Average Period = (No. of months left after first drawings+ No. of months left after last drawings)/2
Example:
Harish withdrew equal amounts at the beginning of every month for 9 months. Total drawings amounted to ₹6,000. Calculate the interest on drawings charged if the rate was 6% p.a.
Solution:
Average period = (No. of months left after first drawings+ No. of months left after last drawings)/2 = (9+1)/2 = 5 monthsÂ
Interest on Drawings = Total of drawings × Rate/100 × 5/12
Journal entry for interest on drawings:Â
Interest transferred to Profit & Loss A/c: