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.
The journal entry for the dividend collected by the bank is as follows: Bank A/c Dr. Amt To Dividend Received A/c Amt Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below. The logRead more
The journal entry for the dividend collected by the bank is as follows:
Bank A/c Dr.
Amt
To Dividend Received A/c
Amt
Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below.
The logic behind the journal entry
This can be explained through the following rules of accounting:
Golden rules of accounting
Modern rules of accounting
Golden rules of accounting
A bank account is a real account and the golden rule of accounting for the real account is, “Debit what comes in and credit what goes out”
Hence, the bank account is debited as the money is coming into the bank.
Dividend is an income hence dividend received is a nominal account. The golden rule of accounting for a nominal account is “Debit all expenses and losses and credit all income and gains”
Hence, the dividend received account is credited as income.
Modern rules of accounting
As per modern rules of accounting, a bank account is an asset account.
The asset account is debited when increased and credited when decreased.
Hence, the Bank account is debited here as it is increased.
A dividend received account is an income account.
The income account is credited when increase and debited when decreased.
Hence, the dividend received account is credited here as it is increased.
Treatment in the financial statements
Since the dividend received is an income; it is shown on the credit side of the Statement of profit and loss.
The bank account is an asset so it will be shown on the balance sheet.
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.
Introduction Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings. The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation aRead more
Introduction
Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings.
The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation as shown in the example below:
It is shown as a negative figure under both assets and capital heading. I will be explaining why it is so.
Accounting Equation
The accounting equation represents the relationship between assets, liabilities, and capital of an entity whether profit oriented or not, according to which, the total assets of a business equals to the sum of its total capital and total liabilities.
Assets = Liabilities + Capital
This equation holds good in every monetary transaction or event like the event given in the question.
Cash withdrawn for personal use
We know every transaction affects two accounts. In this case, too, the ‘cash withdrawn for personal use’ affects two accounts. Cash withdrawn for personal use is known as drawings.
Let’s see the journal entry for drawings of cash from business:
Here the drawing account is debited because it is a contra-equity account i.e. it is a mirror image of the capital account or opposite of the capital account. Here the cash account is an asset account; hence it is credited as it is reduced.
As drawings represent the outflow of capital from the business, it is written off from the Capital account in the balance sheet.
Hence, in the accounting equation, the drawing amount is deducted from the Asset side and from the capital side, indicating a balance.
It does not appear in the statement of profit or loss despite having a debit balance because it is not an expense account.
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
What is the journal entry for goods purchased by cheque?
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.
See lessWhat is the journal entry for dividend collected by bank?
The journal entry for the dividend collected by the bank is as follows: Bank A/c Dr. Amt To Dividend Received A/c Amt Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below. The logRead more
The journal entry for the dividend collected by the bank is as follows:
Here, Bank Account is debited and the Dividend Received Account is credited. This treatment is explained below.
The logic behind the journal entry
This can be explained through the following rules of accounting:
Golden rules of accounting
A bank account is a real account and the golden rule of accounting for the real account is, “Debit what comes in and credit what goes out”
Hence, the bank account is debited as the money is coming into the bank.
Dividend is an income hence dividend received is a nominal account. The golden rule of accounting for a nominal account is “Debit all expenses and losses and credit all income and gains”
Hence, the dividend received account is credited as income.
Modern rules of accounting
As per modern rules of accounting, a bank account is an asset account.
The asset account is debited when increased and credited when decreased.
Hence, the Bank account is debited here as it is increased.
A dividend received account is an income account.
The income account is credited when increase and debited when decreased.
Hence, the dividend received account is credited here as it is increased.
Treatment in the financial statements
Since the dividend received is an income; it is shown on the credit side of the Statement of profit and loss.
The bank account is an asset so it will be shown on the balance sheet.
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 lessWhat is cash withdrawn for personal use accounting equation?
Introduction Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings. The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation aRead more
Introduction
Often cash is withdrawn by the owner or proprietor of a business for his or her personal use. Such withdrawal of cash is an outflow of capital from business and it is known as drawings.
The accounting treatment of cash withdrawn for personal use is expressed in the accounting equation as shown in the example below:
It is shown as a negative figure under both assets and capital heading. I will be explaining why it is so.
Accounting Equation
The accounting equation represents the relationship between assets, liabilities, and capital of an entity whether profit oriented or not, according to which, the total assets of a business equals to the sum of its total capital and total liabilities.
Assets = Liabilities + Capital
This equation holds good in every monetary transaction or event like the event given in the question.
Cash withdrawn for personal use
We know every transaction affects two accounts. In this case, too, the ‘cash withdrawn for personal use’ affects two accounts. Cash withdrawn for personal use is known as drawings.
Let’s see the journal entry for drawings of cash from business:
Here the drawing account is debited because it is a contra-equity account i.e. it is a mirror image of the capital account or opposite of the capital account. Here the cash account is an asset account; hence it is credited as it is reduced.
As drawings represent the outflow of capital from the business, it is written off from the Capital account in the balance sheet.
Hence, in the accounting equation, the drawing amount is deducted from the Asset side and from the capital side, indicating a balance.
It does not appear in the statement of profit or loss despite having a debit balance because it is not an expense account.
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 less