Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares. Now let’s understand the reason behRead more
Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares.
Now let’s understand the reason behind it.
We know preference shares are those shares that carry some preferential rights:
Dividend at a fixed rate
Right to get repaid before equity shareholders in event of winding up of the company
Other rights as specified in the Articles of Associations.
Also, unlike equity shares, preference shares are redeemable i.e. repaid after a period of time (which cannot be more than 20 years).
Generally, the creditors of a company have the right to be repaid first. So, in event of redemption of preference shares, the preference shareholders are repaid before creditors and the total capital of the company will but the total debt of the company is unaffected.
The gap between the debt and equity of the company will further widen and this will also increase the debt-equity ratio of the company. It will be perceived to be a risky scenario by the creditors and lenders of the company because the
So to protect the creditor and lender, Section 55 of the Companies Act comes to rescue.
Section 55 of the Companies Act ensure that the creditors and lenders of a company do not find themselves in a riskier situation when the company decides to redeem its preference shares by making it mandatory for a company to either
issue new shares to fund the redemption of preference shares
OR
create a capital redemption reserve if it uses profits for redemption
OR
a combination of both
This will fill up the void created by the redemption of preference shares and the debt-equity ratio will remain unaffected. Keeping an amount aside in Capital Redemption Reserve ensures that such amount will not be used for dividend distribution and capital will be restored because it can be only used to issue bonus shares.
In this way the debt-equity ratio remains the same, the interest of the creditors and lenders secured.
Bonus shares are fully paid shares that are issued to existing shareholders at no cost.
Let’s take a numerical example for further understanding:
ABC Ltd wants to redeem its 1,000 9% Preference shares at a face value of Rs 100 per share. It has decided to issue 8,000 equity shares @Rs 10 per share and use the profit and reserves to fund the deficit.
The journal entries will be as follows:
Working note: Rs
9% preference shares due for redemption (1,000 x 10) – 1,00,000
Less: Amount of new shares issued (8,000 x 10) – 80,000
Amount to be transferred to CRR 20,000
Hence, the reduction of total capital by Rs 1,00,000 due to the redemption of preference shares is reversed by issuing equity shares of Rs 80,000 and creating a Capital Redemption Reserve of Rs 20,000.
The correct option is (d) None of these. AS-3(Revised) deals with the preparation and presentation of cash flow statements. A cash flow statement is a statement that summarises the movement of cash and cash equivalents of an enterprise in an accounting year. It helps the stakeholder to know: the amoRead more
The correct option is (d) None of these.
AS-3(Revised) deals with the preparation and presentation of cash flow statements. A cash flow statement is a statement that summarises the movement of cash and cash equivalents of an enterprise in an accounting year. It helps the stakeholder to know:
the amount of cash generated by operating activities,
amount of cash invested in various assets or sale of assets,
the types of finance source utilised by an enterprise and
the net cash flow of the business.
Provision for depreciation is actually a charge on profit, i.e. it will be deducted even if there is loss. Also, there is nothing mentioned in the AS-3(revised) from which we can consider the provision for tax as an appropriation of profit.
Generally, the cash flow statement is prepared as per the ‘indirect method’ by most enterprises.
As per the indirect method, the computation starts from Net Profit before tax and extraordinary items. To calculate this, we have to take the current year’s profit and add the current year’s provision for tax to it.
The reason behind it is that we need to obtain the cash flow from operations and the provision for tax is a non-cash item that has reduced the net profit. So, we have to add it back to the current year’s profit.
Option (A) Current Liabilities is wrong.
Though the provision for tax is classified as a current liabilities in the balance sheet, it is not considered as a current liability when making adjustments for changes in working capital while preparing cash flow statement.
Option (B) as appropriation of profit is wrong.
An appropriation of profit is an item for which an amount is put aside when there is profit. For example, transfer to reserves. But the provision for tax is a charge on profit.
Option (C) either (A) or (B) is also wrong because both the options are incorrect as discussed above.
The correct option is option A. Journal is the book of original entry. It is from the journal, the postings in the ledgers are made. As it is the journal first to record the transactions, it is called the book of original entry. It is from the journal, the postings in the ledgers are made. Ledgers aRead more
The correct option is option A.
Journal is the book of original entry. It is from the journal, the postings in the ledgers are made. As it is the journal first to record the transactions, it is called the book of original entry.
It is from the journal, the postings in the ledgers are made. Ledgers are called the books of principal book of entry.
Option B Duplicate is wrong as there is no such thing as the book of duplicate entry in financial accounting. Journal entries are the first-hand record of business transactions. Hence, it cannot be the book of duplicate entries.
Option C Personal is wrong. This classification of ‘personal’ is a type of account as per traditional rules of accounting, not books of accounts
Option D Nominal is wrong. It is also a type of account as per the traditional rules of accounting.
The correct option is D) Fewer entries in the general ledger To understand why option D is correct, we need to understand the concept. Petty cashbook is a special cashbook prepared for recording petty or small cash expenses. The benefit is that the chief cashier can focus on large cash and bank tranRead more
The correct option is D) Fewer entries in the general ledger
To understand why option D is correct, we need to understand the concept.
Petty cashbook is a special cashbook prepared for recording petty or small cash expenses.
The benefit is that the chief cashier can focus on large cash and bank transactions and there are fewer transactions in the main cashbook.
The petty cashier is provided with a fixed amount for a month or week and is reimbursed the amount spent at the end of the period after he sends the details of expenses to the chief cashier.
There are entries for the transfer of cash to the petty cashier in the main cashbook only.
Option A ‘No entries made at all in the general ledger for items paid by petty cash ‘ is wrong. It is not possible to omit entries of petty expense just because there is a petty cashbook. There will be entries related to:
The cash is given to the petty cashier in a fixed amount or the amount spent as petty expenses during the month or week.
Petty cash A/c Dr. Amt
To Cash A/c Amt
Option (B) ‘The same number of entries in the general ledger is wrong because there can never be the same number of entries as all the petty expenses are recorded in the petty cashbook and only the entries for transfer of cash to the petty cashier is recorded in the main cash book.
Option D ‘More entries made in the general ledger’ is wrong because the number of entries actually reduce as only petty cash transfer entries are recorded in the main cashbook instead of numerous entries of petty cash transactions.
TDS stands for Tax Deducted at Source It is the tax deducted on certain incomes as specified under sections 192 to 194N of the Income Tax Act,1961 by the person who is responsible to pay such income. For example, an employer is liable to deduct the TDS on the salary paid to the employee subject to tRead more
TDS stands for Tax Deducted at Source
It is the tax deducted on certain incomes as specified under sections 192 to 194N of the Income Tax Act,1961 by the person who is responsible to pay such income.
For example, an employer is liable to deduct the TDS on the salary paid to the employee subject to the provisions of the Income Tax Act, 1961.
TDS is deducted either,
at the time of payment
OR
At time of credit to the account of the payee or at the time of payment; whichever is earlier
We know that Income tax liability is calculated after the income for a year is earned. In the next year, which is called the Assessment Year, income tax payable is calculated on the income earned in the Previous Year
For example:
Year 2021-2022 – This year (Previous Year) – Income is earned here.
Year 2021-2022 – Next Year (Assessment Year) – Income tax is assessed here.
But, the government collects the income tax from the income of the assessee in the Previous Year itself by the following ways:
TDS – Tax Deducted at Source
TCS – Tax Collected at Source
Advance Tax
Some of the most common sections are given below:
Section 192 – Salary
Section 194A – Interest other on securities deposits with the bank, post office etc) – @10%
Section 194B and 194BB – Winning from lotteries, crossword puzzle – @30%
Section 194 – DA – Payment in respect of Life Insurance Policy – @5%.
So, according to sections 192 to 194N, some amount of income tax is deducted from the income of the assessee in the Previous Year itself.
In the Assessment Year, the assessee also gets a tax credit for the TDS i.e. the Income Tax liability gets reduced by the amount of Tax Deducted at Source in the Previous Year.
As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts. Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future,Read more
As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts.
Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future, its creditors and lenders report to the firm about their dues.
At that time, a firm may get to know that it had failed to record some liabilities in its books and it has settled them now.
We know that when a partnership firm is dissolved, a realisation account is created to which all the assets and liabilities of the firm are transferred. Entries are as given below:
Realisation A/c Dr. ₹ Amt
To Assets A/c ₹ Amt
( Asset transferred to realisation account)
Liabilities A/c Dr. ₹ Amt
To Realisation A/c ₹ Amt
(Liabilities transferred to realisation account)
Hence, for transferring unrecorded liabilities, the procedure is the same for the recorded liabilities:
Unrecorded Liabilities A/c Dr. ₹ Amt
To Realisation A/c ₹ Amt
( Unrecorded liabilities transferred to realisation account)
Then to pay off the unrecorded liability the entry is:
Realisation A/c Dr. ₹ Amt
To Cash / Bank A/c ₹ Amt
(Unrecorded liabilities paid off)
That’s it, I hope I was able to make you understand.
The term "principal book of accounts'' refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account. So to put it simply, the principal book of accounts mean ledgers. Ledgers are prepared by posting the debits and credits of a joRead more
The term “principal book of accounts” refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account.
So to put it simply, the principal book of accounts mean ledgers.
Ledgers are prepared by posting the debits and credits of a journal entry to the respective accounts.
A ledger groups the transactions concerning the same account. For example, Mr B is a debtor of X Ltd. Hence all the transactions entered into with Mr. will be grouped into the ledger Mr B A/c in the books of X Ltd.
Ledgers are of utmost importance because all the information to any account can be known by its ledger.
Preparation of ledger is very important because all the information to any account can be known by its ledger. Ledgers also display the balance of each and every account which may be debit or credit. This helps in the preparation of the trial balance and subsequently the financial statements of an entity.
Hence, it is the most important book of accounts and calling it the ‘books of final entry’ is also justified.
The correct option is Option C: Journal Entries. Journal entries are the primary entries in the books of accounts and they are passed when any transaction or event takes place. Every journal entry has a dual effect i.e. two or more accounts are affected. For example, When cash is introduced in the bRead more
The correct option is Option C: Journal Entries.
Journal entries are the primary entries in the books of accounts and they are passed when any transaction or event takes place. Every journal entry has a dual effect i.e. two or more accounts are affected.
For example, When cash is introduced in the business, the journal entry passed is:
Cash A/c Dr. ₹10,000
To Capital A/c ₹10,000
The accounts affected here are Cash A/c and Capital A/c.
Cash A/c gets debited by ₹10,000,
and Capital A/c get credited by ₹10,000.
All the processes of accounting are conducted in an ordered manner known as the accounting cycle.
The first step in an accounting cycle is to identify the transactions and events which are monetary in nature.
The second step is to record the identified transactions in form of journal entries.
And the third step is to make postings in the general ledger accounts as per the journal entries.
Hence, the preparation of the ledger is the third step in the accounting cycle and is prepared from the journal entries.
No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use. Drawings are actually shown in the balance sheet as a deduction from the capital account. Let’s take an example, Mr X runs a tradingRead more
No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use.
Drawings are actually shown in the balance sheet as a deduction from the capital account.
Let’s take an example, Mr X runs a trading business. For meeting his personal expense we withdrew cash from his business cash of amount Rs. 15,000. It shall be reported like this:
Journal Entries:
Balance sheet:
Profit and loss account reports only the nominal accounts i.e. incomes and expenses. That’s why drawings are not shown in the statement of profit or loss because it is neither an expense nor an income.
It represents the owner’s withdrawal of capital from business for personal use. Hence, the drawings account is a personal account. Drawings lead to a simultaneous reduction in capital and cash or stock of a business which has nothing to do with Profit and loss A/c.
Therefore it is reported in the balance sheet only.
You must have knowledge of what depreciation is. Depreciation is the process of allocating the value of an asset over its useful life. It reduces the carrying value of the asset year by year till it is scraped. It is an expense (expense of using the asset for business purposes) and it is charged toRead more
You must have knowledge of what depreciation is. Depreciation is the process of allocating the value of an asset over its useful life. It reduces the carrying value of the asset year by year till it is scraped.
It is an expense (expense of using the asset for business purposes) and it is charged to profit and loss account.
Depreciation can be reported in the financial statement in two ways:
Deduct depreciation from the asset account and show the asset at “depreciation less” value. See the journal entries below:
Maintain a provision for depreciation account and show the asset account at original cost. In this method, no entry is passed through the asset account. See the journal entries below:
Provision for depreciation account represents the collection of total depreciation till date on an asset. That’s why it is also called accumulated depreciation account. When an asset is sold, its accumulated depreciation is credited to the asset account. See the journal entry below:
It is shown on the liabilities side of the balance sheet. It is a nominal account because it is shown as an expense in the statement of profit or loss.
In case provision for depreciation account is not maintained then the balance sheet looks like this:
What is a capital redemption reserve account?
Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares. Now let’s understand the reason behRead more
Capital Redemption Reserve is a statutory reserve, which means it is mandatory for a company to create such reserve when it decides to redeem its preference shares. Capital Redemption Reserve cannot be utilised for any purpose other than the issue of bonus shares.
Now let’s understand the reason behind it.
We know preference shares are those shares that carry some preferential rights:
Also, unlike equity shares, preference shares are redeemable i.e. repaid after a period of time (which cannot be more than 20 years).
Generally, the creditors of a company have the right to be repaid first. So, in event of redemption of preference shares, the preference shareholders are repaid before creditors and the total capital of the company will but the total debt of the company is unaffected.
The gap between the debt and equity of the company will further widen and this will also increase the debt-equity ratio of the company. It will be perceived to be a risky scenario by the creditors and lenders of the company because the
So to protect the creditor and lender, Section 55 of the Companies Act comes to rescue.
Section 55 of the Companies Act ensure that the creditors and lenders of a company do not find themselves in a riskier situation when the company decides to redeem its preference shares by making it mandatory for a company to either
OR
OR
This will fill up the void created by the redemption of preference shares and the debt-equity ratio will remain unaffected. Keeping an amount aside in Capital Redemption Reserve ensures that such amount will not be used for dividend distribution and capital will be restored because it can be only used to issue bonus shares.
In this way the debt-equity ratio remains the same, the interest of the creditors and lenders secured.
Bonus shares are fully paid shares that are issued to existing shareholders at no cost.
Let’s take a numerical example for further understanding:
ABC Ltd wants to redeem its 1,000 9% Preference shares at a face value of Rs 100 per share. It has decided to issue 8,000 equity shares @Rs 10 per share and use the profit and reserves to fund the deficit.
The journal entries will be as follows:
Working note: Rs
9% preference shares due for redemption (1,000 x 10) – 1,00,000
Less: Amount of new shares issued (8,000 x 10) – 80,000
Amount to be transferred to CRR 20,000
Hence, the reduction of total capital by Rs 1,00,000 due to the redemption of preference shares is reversed by issuing equity shares of Rs 80,000 and creating a Capital Redemption Reserve of Rs 20,000.
See lessAs per accounting standard AS3 provision for taxation should be treated as?
The correct option is (d) None of these. AS-3(Revised) deals with the preparation and presentation of cash flow statements. A cash flow statement is a statement that summarises the movement of cash and cash equivalents of an enterprise in an accounting year. It helps the stakeholder to know: the amoRead more
The correct option is (d) None of these.
AS-3(Revised) deals with the preparation and presentation of cash flow statements. A cash flow statement is a statement that summarises the movement of cash and cash equivalents of an enterprise in an accounting year. It helps the stakeholder to know:
Provision for depreciation is actually a charge on profit, i.e. it will be deducted even if there is loss. Also, there is nothing mentioned in the AS-3(revised) from which we can consider the provision for tax as an appropriation of profit.
Generally, the cash flow statement is prepared as per the ‘indirect method’ by most enterprises.
As per the indirect method, the computation starts from Net Profit before tax and extraordinary items. To calculate this, we have to take the current year’s profit and add the current year’s provision for tax to it.
The reason behind it is that we need to obtain the cash flow from operations and the provision for tax is a non-cash item that has reduced the net profit. So, we have to add it back to the current year’s profit.
Option (A) Current Liabilities is wrong.
Though the provision for tax is classified as a current liabilities in the balance sheet, it is not considered as a current liability when making adjustments for changes in working capital while preparing cash flow statement.
Option (B) as appropriation of profit is wrong.
An appropriation of profit is an item for which an amount is put aside when there is profit. For example, transfer to reserves. But the provision for tax is a charge on profit.
Option (C) either (A) or (B) is also wrong because both the options are incorrect as discussed above.
See lessCapital account is which type of account?
The correct option is option A. Journal is the book of original entry. It is from the journal, the postings in the ledgers are made. As it is the journal first to record the transactions, it is called the book of original entry. It is from the journal, the postings in the ledgers are made. Ledgers aRead more
The correct option is option A.
Journal is the book of original entry. It is from the journal, the postings in the ledgers are made. As it is the journal first to record the transactions, it is called the book of original entry.
It is from the journal, the postings in the ledgers are made. Ledgers are called the books of principal book of entry.
Option B Duplicate is wrong as there is no such thing as the book of duplicate entry in financial accounting. Journal entries are the first-hand record of business transactions. Hence, it cannot be the book of duplicate entries.
Option C Personal is wrong. This classification of ‘personal’ is a type of account as per traditional rules of accounting, not books of accounts
Option D Nominal is wrong. It is also a type of account as per the traditional rules of accounting.
See lessWhen a petty cash book is kept there will be
The correct option is D) Fewer entries in the general ledger To understand why option D is correct, we need to understand the concept. Petty cashbook is a special cashbook prepared for recording petty or small cash expenses. The benefit is that the chief cashier can focus on large cash and bank tranRead more
The correct option is D) Fewer entries in the general ledger
To understand why option D is correct, we need to understand the concept.
Option A ‘No entries made at all in the general ledger for items paid by petty cash ‘ is wrong. It is not possible to omit entries of petty expense just because there is a petty cashbook. There will be entries related to:
Petty cash A/c Dr. Amt
To Cash A/c Amt
Option (B) ‘The same number of entries in the general ledger is wrong because there can never be the same number of entries as all the petty expenses are recorded in the petty cashbook and only the entries for transfer of cash to the petty cashier is recorded in the main cash book.
Option D ‘More entries made in the general ledger’ is wrong because the number of entries actually reduce as only petty cash transfer entries are recorded in the main cashbook instead of numerous entries of petty cash transactions.
See lessWhat is TDS?
TDS stands for Tax Deducted at Source It is the tax deducted on certain incomes as specified under sections 192 to 194N of the Income Tax Act,1961 by the person who is responsible to pay such income. For example, an employer is liable to deduct the TDS on the salary paid to the employee subject to tRead more
TDS stands for Tax Deducted at Source
It is the tax deducted on certain incomes as specified under sections 192 to 194N of the Income Tax Act,1961 by the person who is responsible to pay such income.
For example, an employer is liable to deduct the TDS on the salary paid to the employee subject to the provisions of the Income Tax Act, 1961.
TDS is deducted either,
OR
We know that Income tax liability is calculated after the income for a year is earned. In the next year, which is called the Assessment Year, income tax payable is calculated on the income earned in the Previous Year
For example:
Year 2021-2022 – This year (Previous Year) – Income is earned here.
Year 2021-2022 – Next Year (Assessment Year) – Income tax is assessed here.
But, the government collects the income tax from the income of the assessee in the Previous Year itself by the following ways:
Some of the most common sections are given below:
So, according to sections 192 to 194N, some amount of income tax is deducted from the income of the assessee in the Previous Year itself.
In the Assessment Year, the assessee also gets a tax credit for the TDS i.e. the Income Tax liability gets reduced by the amount of Tax Deducted at Source in the Previous Year.
See lessWhat are unrecorded liabilities?
As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts. Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future,Read more
As the name suggests, unrecorded liabilities means the liabilities that a firm fails to record in its book of accounts.
Usually, a firm gets to know about its unrecorded liabilities when it is about to get dissolved. What happens is that upon hearing that a firm is going to dissolve in near future, its creditors and lenders report to the firm about their dues.
At that time, a firm may get to know that it had failed to record some liabilities in its books and it has settled them now.
We know that when a partnership firm is dissolved, a realisation account is created to which all the assets and liabilities of the firm are transferred. Entries are as given below:
Realisation A/c Dr. ₹ Amt
To Assets A/c ₹ Amt
( Asset transferred to realisation account)
Liabilities A/c Dr. ₹ Amt
To Realisation A/c ₹ Amt
(Liabilities transferred to realisation account)
Hence, for transferring unrecorded liabilities, the procedure is the same for the recorded liabilities:
Unrecorded Liabilities A/c Dr. ₹ Amt
To Realisation A/c ₹ Amt
( Unrecorded liabilities transferred to realisation account)
Then to pay off the unrecorded liability the entry is:
Realisation A/c Dr. ₹ Amt
To Cash / Bank A/c ₹ Amt
(Unrecorded liabilities paid off)
That’s it, I hope I was able to make you understand.
See lessWhat is the principal book of accounts?
The term "principal book of accounts'' refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account. So to put it simply, the principal book of accounts mean ledgers. Ledgers are prepared by posting the debits and credits of a joRead more
The term “principal book of accounts” refers to the set of ledgers that an entity prepares to group the similar transactions recorded as journal entries under an account.
So to put it simply, the principal book of accounts mean ledgers.
Ledgers are prepared by posting the debits and credits of a journal entry to the respective accounts.
A ledger groups the transactions concerning the same account. For example, Mr B is a debtor of X Ltd. Hence all the transactions entered into with Mr. will be grouped into the ledger Mr B A/c in the books of X Ltd.
Ledgers are of utmost importance because all the information to any account can be known by its ledger.
Preparation of ledger is very important because all the information to any account can be known by its ledger. Ledgers also display the balance of each and every account which may be debit or credit. This helps in the preparation of the trial balance and subsequently the financial statements of an entity.
Hence, it is the most important book of accounts and calling it the ‘books of final entry’ is also justified.
See lessA ledger account is prepared from?
The correct option is Option C: Journal Entries. Journal entries are the primary entries in the books of accounts and they are passed when any transaction or event takes place. Every journal entry has a dual effect i.e. two or more accounts are affected. For example, When cash is introduced in the bRead more
The correct option is Option C: Journal Entries.
Journal entries are the primary entries in the books of accounts and they are passed when any transaction or event takes place. Every journal entry has a dual effect i.e. two or more accounts are affected.
For example, When cash is introduced in the business, the journal entry passed is:
Cash A/c Dr. ₹10,000
To Capital A/c ₹10,000
The accounts affected here are Cash A/c and Capital A/c.
Cash A/c gets debited by ₹10,000,
and Capital A/c get credited by ₹10,000.
All the processes of accounting are conducted in an ordered manner known as the accounting cycle.
The first step in an accounting cycle is to identify the transactions and events which are monetary in nature.
The second step is to record the identified transactions in form of journal entries.
And the third step is to make postings in the general ledger accounts as per the journal entries.
Hence, the preparation of the ledger is the third step in the accounting cycle and is prepared from the journal entries.
See lessAre drawings recorded in profit and loss account?
No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use. Drawings are actually shown in the balance sheet as a deduction from the capital account. Let’s take an example, Mr X runs a tradingRead more
No, drawings are not shown in the statement of profit or loss. By drawings, we mean the withdrawal of cash or goods by the owner of the business for his personal use.
Drawings are actually shown in the balance sheet as a deduction from the capital account.
Let’s take an example, Mr X runs a trading business. For meeting his personal expense we withdrew cash from his business cash of amount Rs. 15,000. It shall be reported like this:
Journal Entries:
Balance sheet:
Profit and loss account reports only the nominal accounts i.e. incomes and expenses. That’s why drawings are not shown in the statement of profit or loss because it is neither an expense nor an income.
It represents the owner’s withdrawal of capital from business for personal use. Hence, the drawings account is a personal account. Drawings lead to a simultaneous reduction in capital and cash or stock of a business which has nothing to do with Profit and loss A/c.
Therefore it is reported in the balance sheet only.
See lessWhat is a provision for depreciation account?
You must have knowledge of what depreciation is. Depreciation is the process of allocating the value of an asset over its useful life. It reduces the carrying value of the asset year by year till it is scraped. It is an expense (expense of using the asset for business purposes) and it is charged toRead more
You must have knowledge of what depreciation is. Depreciation is the process of allocating the value of an asset over its useful life. It reduces the carrying value of the asset year by year till it is scraped.
It is an expense (expense of using the asset for business purposes) and it is charged to profit and loss account.
Depreciation can be reported in the financial statement in two ways:
Provision for depreciation account represents the collection of total depreciation till date on an asset. That’s why it is also called accumulated depreciation account. When an asset is sold, its accumulated depreciation is credited to the asset account. See the journal entry below:
It is shown on the liabilities side of the balance sheet. It is a nominal account because it is shown as an expense in the statement of profit or loss.
In case provision for depreciation account is not maintained then the balance sheet looks like this:
See less