I am assuming that you are asking the question with reference to the sole proprietorship business. In the case of a company, the rates as per the Companies Act, 2013 will apply. A sole proprietor can charge the depreciation in its books of accounts at whatever rate it wants but it should not be moreRead more
I am assuming that you are asking the question with reference to the sole proprietorship business. In the case of a company, the rates as per the Companies Act, 2013 will apply. A sole proprietor can charge the depreciation in its books of accounts at whatever rate it wants but it should not be more than the rates prescribed in the Income Tax Act, 1961.
It is a general practice to take depreciation rate lower than the Income Tax Act, 1961, so that the financial statements look good because of slightly higher profit. There is no harm in it as it is a sole proprietor.
The Income Tax Act, 1961 has prescribed rates at which depreciation is to be given on different blocks of assets. For motor vehicles, the rates are as follows:
Particulars | Rates (WDV) | |
1 | Motor buses, motor Lorries and motor taxis used in a business of running them on hire. | 30% |
2 | Motor buses, motor lorries and motor taxis used in a business of running them on hire, acquired on or after the 23rd day of August 2019 but before the 1st day of April 2020 and is put to use before the 1st day of April 2020. | 45% |
3 | Commercial vehicles to use in business other than running them on hire. | 40% |
Let’s take an example to understand the accounting treatment:-So a business can choose to charge depreciation at rates slightly lower than the above rates.
Mr A purchased a lorry for ₹1,00,000 on 1st April 2021 for his business, to be used for transportation of the finished goods. Now, Mr A decided to charge depreciation on the WDV method @30% (prescribed rate is 40%).
Following will be the journal entries.
I hope I was able to answer your question.
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Journal Entry for Interest on Drawings is- Particulars Amount Amount Drawings A/c                                                     Dr $$$     To Interest on Drawings A/c $$$ So as per the modern approach: From the point of view of business, Interest on Drawings is an Income. When there is an inRead more
Journal Entry for Interest on Drawings is-
So as per the modern approach: From the point of view of business, Interest on Drawings is an Income.
From the point of view of the proprietor, Interest on Drawings is a Liability.
So as per the modern approach:
So as per the modern approach, Interest on Drawings is credited because with Interest the income increases for the business. Whereas, the amount of such interest is a loss from the point of view of the owner/ Proprietor, as such the amount of drawings is increased by the amount of interest and hence the Drawings account is debited.
For Example, Harry charged interest on drawings on Rs 10,000 @ 12% for one year.
Explanation:
Step 1: To identify the account heads.
In this transaction, two accounts are involved, i.e. Drawings A/c and Interest on Drawings A/c.
Step 2: To Classify the account heads.
According to the modern approach: From the point of view of business, Â Interest on Drawings is a Revenue A/c and Drawings A/c is an Expense A/c.
Step 3: Application of Rules for Debit and Credit:
According to the modern approach: As Revenue increases because of interest on drawings received by the business, Interest on Drawings A/c will be Credited. (Rule – increase in Revenue is credited).
Drawings A/c is an expense account for the business and as expense increases, Drawings A/c will be debited. (Rule – increase in the expenses is debited).
So from the above explanation, the Journal Entry will be-