Journal entry for goods purchased by cheque The journal entry for goods purchased by cheque is as follows: In this journal entry, purchase account and bank account are involved. The explanation is given below. Explanation Purchase Whenever there is a purchase of goods, the purchase account is debiteRead more
Journal entry for goods purchased by cheque
The journal entry for goods purchased by cheque is as follows:
In this journal entry, purchase account and bank account are involved. The explanation is given below.
Explanation
Purchase
Whenever there is a purchase of goods, the purchase account is debited.
Goods refer to the items which an enterprise manufactures or purchases and sells to generate its business revenue.
If there is a purchase of any other item which does not satisfy the above definition of goods, then the purchase account is not involved.
For example, if stationery is purchased and the enterprise does not trade in stationery items, then the purchase account will not appear in the journal entry.
Payment by cheque
Payment by cheque means the payment amount will be deducted from the bank account balance. Hence, in the given journal entry, the bank account is involved.
The logic behind the debit and credit
The golden rules of accounting
Purchase is an expense hence it is a nominal account. The golden rule for nominal accounts is “Debit all expense and loss and credit all incomes and gains”
Hence, the purchase account is debited.
Bank is a real account and the golden rule of accounting for real accounts is, “Debit what comes in, credit what goes out”.
Hence, the bank account is credited as money is going out of the bank.
Modern rules of accounting
Purchase is an expense account, and expenses are debited when increased and credited when decreased.
Hence, the purchase account is debited here.
A bank account is an asset account. Asset accounts are debited in case of an increase and credited in case of a decrease. Hence, the bank account is credited here.
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Introduction A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account. TyRead more
Introduction
A capital reduction account is an account used to pass entries related to the internal reconstruction of a company. During reconstruction, paid-up capital reduced is credited to this account; hence its name is capital reduction account. It is also known as the reconstruction account.
Type of account
A capital reduction account is a temporary account open just to carry out internal reconstruction. It represents the sacrifices made by the shareholders, debenture holders and creditors. Also, any appreciation in the value of assets is credited to this account. It is closed to capital reduction when internal reconstruction is completed.
Entries passed through capital reduction account
When paid-up capital is cancelled.
When paid-up capital is cancelled, the share capital account is debited and the capital reduction account is debited as share capital is getting reduced.
When assets and liabilities are revalued
At the time of internal reconstruction, the gain or loss on revaluation is transferred to the capital reduction account instead of the revaluation reserve.
Writing off of accumulated losses and intangible assets
The credit balance of the capital reduction account is used to write off the accumulated losses and intangible assets like goodwill, patents etc which are unrepresented by capital. The capital reduction account is debited and profit and loss account and intangible assets accounts are credited.
Treatment in books of account
The balance in the capital reduction account, whether debit or credit, it is transferred to the capital reduction account. Hence, it doesn’t appear on the balance sheet.
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