Fluctuating Capital Fluctuating capital is a capital that is unstable and keeps changing frequently. In the fluctuating capital, the capital of each partner changes from time to time. In partnership firms, each partner will have a separate capital account. Any additional capital introduced during thRead more
Fluctuating Capital
Fluctuating capital is a capital that is unstable and keeps changing frequently. In the fluctuating capital, the capital of each partner changes from time to time. In partnership firms, each partner will have a separate capital account. Any additional capital introduced during the year will also be credited to their capital account. In the fluctuating capital method, only one capital a/c is maintained i.e no current accounts like in the fixed capital a/c method. Therefore, all the adjustments like interest on capital, drawings, etc. are completed in the capital a/c itself.
It is most commonly seen in partnership firms and it is not essential to mention the Fluctuating Account Method in the partnership deed.
All the adjustments resulting in a decrease in the capital will be debited to the partner’s capital, such as drawings made by each partner, interest on drawings, and share of loss.
Similarly, the activities or adjustments that lead to an increase in the capital are credited to the partner’s capital account, such as interest on capital, salary, the share of profit, and so on.
Sundry Debtors in Trial Balance The debtor is a company's asset, and assets are always debited in the trial balance. The trial balance is a statement maintained at the end of an accounting period, listing the ending balances in each general ledger account. There are two sides to this account, debit,Read more
Sundry Debtors in Trial Balance
The debtor is a company’s asset, and assets are always debited in the trial balance.
The trial balance is a statement maintained at the end of an accounting period, listing the ending balances in each general ledger account.
There are two sides to this account, debit, and credit and they include all the transactions done in the business over a particular accounting period.
As we know, assets, expenses, and drawings are always debited. That applies not only in journals but here as well, hence, all of your assets are to be debited.
Trial Balance Statement
As we can see here, the sundry debtors (on the 4th) are debited like all the other assets, expenses, and losses. In the end, if the basic accounting equation i.e. assets=capital+liability is violated, a mismatch arises which in the balancing figure is shown under the name of suspense account. Such errors must not be found and corrected to avoid any mismatch in the balance sheet of the company.
Total Assets = Capital + Other Liabilities.
Therefore, this is how the sundry debtors are treated in the Trial Balance.
Starting of the business The starting of the business, in accounting terms, is called the commencement of the business. There are three types of businesses that can be commenced, they are, sole proprietorship, partnership, and joint-stock company. In order to start the business, in companies, commenRead more
Starting of the business
The starting of the business, in accounting terms, is called the commencement of the business. There are three types of businesses that can be commenced, they are, sole proprietorship, partnership, and joint-stock company.
In order to start the business, in companies, commencement is 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.
Journal entry
In this entry, “Started business with cash $60,000”
As per the golden rules of accounting, the cash a/c is debited because we bring in cash to the business, and 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 a/c is debited as 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.
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.
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.
It’s an income for the business. Hence, credited to P&L Appropriation A/c.
It’s an expense for the owner/partner. Therefore, debited to owner’s/partner’s capital a/c
Interest on drawings is charged to the partners only when there is an agreement made among the partners in this regard or if it is mentioned in the Partnership Deed.
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/12
2. Product Method: This method is used when-
Drawings are made of unequal amounts at irregular intervals of time. Then this formula is used-
Interest on Drawings = Total of Products × Rate/100 × 1/12
When drawings are made of equal amounts at regular/equal intervals of time. Then interest on drawings can be calculated on the total of the amount drawn, for the average of the period applicable to the first and last installment.
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 months
Interest on Drawings = Total of drawings × Rate/100 × 5/12
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
There are three types of businesses that can be commenced, they are sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting. In companiRead more
There are three types of businesses that can be commenced, they are sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting.
In companies, commencement is 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.
Journal entry
In the journal entry, “Started business with Cash”
As per the golden rules of accounting, the cash a/c is debited because we bring in cash to the business, and 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 a/c is debited as 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.
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:
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:
Journal entry for commission earned but not received Commission earned but not received is called accrued income. As we know there are two types of accounting, cash basis of accounting, in which the transaction is recorded only when cash is received or paid, and accrual basis of accounting, in whichRead more
Journal entry for commission earned but not received
Commission earned but not received is called accrued income. As we know there are two types of accounting, cash basis of accounting, in which the transaction is recorded only when cash is received or paid, and accrual basis of accounting, in which even if money is yet to be accepted or paid, the transactions are still recorded.
E.g of accrual income- rent earned but not collected, interest on the investment earned but not received, etc.
Journal entry
The commission that is to be received is debited, indicating the increase in assets whereas, the commission account (which will be giving you the commission) is credited.
Later on, upon receiving the cash an entry is passed crediting the commission receivable as shown below:
These are adjusted while making the final accounts for the business.
Simplifying with an example
If the rent earned was $1,000 and it’s yet to be received, we’ll be passing this entry-
What is fluctuating capital?
Fluctuating Capital Fluctuating capital is a capital that is unstable and keeps changing frequently. In the fluctuating capital, the capital of each partner changes from time to time. In partnership firms, each partner will have a separate capital account. Any additional capital introduced during thRead more
Fluctuating Capital
Fluctuating capital is a capital that is unstable and keeps changing frequently. In the fluctuating capital, the capital of each partner changes from time to time. In partnership firms, each partner will have a separate capital account. Any additional capital introduced during the year will also be credited to their capital account. In the fluctuating capital method, only one capital a/c is maintained i.e no current accounts like in the fixed capital a/c method. Therefore, all the adjustments like interest on capital, drawings, etc. are completed in the capital a/c itself.
It is most commonly seen in partnership firms and it is not essential to mention the Fluctuating Account Method in the partnership deed.
Fluctuating Capital Account Format
See lessHow to treat sundry debtors in trial balance?
Sundry Debtors in Trial Balance The debtor is a company's asset, and assets are always debited in the trial balance. The trial balance is a statement maintained at the end of an accounting period, listing the ending balances in each general ledger account. There are two sides to this account, debit,Read more
Sundry Debtors in Trial Balance
The debtor is a company’s asset, and assets are always debited in the trial balance.
As we know, assets, expenses, and drawings are always debited. That applies not only in journals but here as well, hence, all of your assets are to be debited.
Trial Balance Statement
As we can see here, the sundry debtors (on the 4th) are debited like all the other assets, expenses, and losses. In the end, if the basic accounting equation i.e. assets=capital+liability is violated, a mismatch arises which in the balancing figure is shown under the name of suspense account. Such errors must not be found and corrected to avoid any mismatch in the balance sheet of the company.
Total Assets = Capital + Other Liabilities.
Therefore, this is how the sundry debtors are treated in the Trial Balance.
See lessWhat is the journal entry for started business with cash 60000?
Starting of the business The starting of the business, in accounting terms, is called the commencement of the business. There are three types of businesses that can be commenced, they are, sole proprietorship, partnership, and joint-stock company. In order to start the business, in companies, commenRead more
Starting of the business
The starting of the business, in accounting terms, is called the commencement of the business. There are three types of businesses that can be commenced, they are, sole proprietorship, partnership, and joint-stock company.
In order to start the business, in companies, commencement is 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.
Journal entry
In this entry, “Started business with cash $60,000”
As per the golden rules of accounting, the cash a/c is debited because we bring in cash to the business, and 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 a/c is debited as 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.
See lessWhat is the journal entry for business started with cash?
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.
See lessCan you explain interest on drawings?
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/12
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 months
Interest on Drawings = Total of drawings × Rate/100 × 5/12
Journal entry for interest on drawings:
Interest transferred to Profit & Loss A/c:
See lessWhat is the journal entry for interest on capital?
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
See lessStarted business with cash 50000 entry?
There are three types of businesses that can be commenced, they are sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting. In companiRead more
There are three types of businesses that can be commenced, they are sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting.
In companies, commencement is 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.
Journal entry
In the journal entry, “Started business with Cash”
As per the golden rules of accounting, the cash a/c is debited because we bring in cash to the business, and 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 a/c is debited as 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.
Therefore, the entry we’ll be passing is-
See lessWhat is purchased goods for cash journal entry?
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:
See lessWhat is the accounting equation for interest on capital?
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
See lessWhat is commission earned but not received journal entry?
Journal entry for commission earned but not received Commission earned but not received is called accrued income. As we know there are two types of accounting, cash basis of accounting, in which the transaction is recorded only when cash is received or paid, and accrual basis of accounting, in whichRead more
Journal entry for commission earned but not received
Commission earned but not received is called accrued income. As we know there are two types of accounting, cash basis of accounting, in which the transaction is recorded only when cash is received or paid, and accrual basis of accounting, in which even if money is yet to be accepted or paid, the transactions are still recorded.
E.g of accrual income- rent earned but not collected, interest on the investment earned but not received, etc.
Journal entry
Simplifying with an example
If the rent earned was $1,000 and it’s yet to be received, we’ll be passing this entry-
When it’s received, this entry is passed
See less