Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business. Capital Accounts in a partnership firm can be ofRead more
Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business.
Capital Accounts in a partnership firm can be of two types:
Fixed Capital Account
Fluctuating Capital Account
A fixed Capital Account is one where only non-recurring transactions related to capital accounts are recorded. For example:
Capital introduced
Capital withdrawn/ Drawings
For transactions that are recurring in nature like interest on capital, the interest of drawings a separate account called Partner’s Current Account is created.
Fluctuating Capital Accounts are the ones where there is a single account to record all types of transactions related to the partner’s capital account, whether recurring or nonrecurring.
Fixed Capital Accounts are usually created in cases where there are numerous recurring transactions and partners want to keep a record of the fixed amount invested in the business by all the partners at any point in time.
Fluctuating Capital Account is usually created in cases where the number of recurring transactions is not high or partners want to keep a record of the amount due to all the partners in business at any point in time.
However, the decision to choose what kind of capital account should be implemented in the firm is complete with the partners. They may choose whatever they think is a more suitable fit.
To summarise the difference between the two following table can be used:
Fixed Capital Account
Fluctuating Capital Account
Non-recurring transactions are recorded.
Recurring transactions are recorded.
Created where the number of recurring transactions is high to maintain a separate record.
Created where the number of recurring transactions is low.
A Profit and Loss (P&L) statement is a financial statement that records a summary of all expenses and incomes of a business during a period of time. It helps in determining the financial performance of the business. After recording all transactions in an account, if the debit side is greater thaRead more
A Profit and Loss (P&L) statement is a financial statement that records a summary of all expenses and incomes of a business during a period of time. It helps in determining the financial performance of the business.
After recording all transactions in an account, if the debit side is greater than the credit side, then the account is said to have a debit balance. Similarly, if the credit side is greater than the debit side, then the account has a credit balance.
In a P&L account, when the expenses (debit) are greater than the incomes (credit), the business is said to be in a net loss. This loss is what we call the debit balance of a Profit and Loss account. A P&L account with a debit balance can be subtracted from Capital or be shown on the asset side of the Balance Sheet.
As you can see above, the net loss is shown on the right side of the P&L account. This represents the debit balance of P&L. Once it is transferred to the balance sheet, it is either subtracted from capital or shown on the asset side as shown in the second image. However, they cannot be shown on both sides of the balance sheet at the same time.
However, if the credit side is greater, that is if income is greater than expenses, then the P&L account shows a credit balance which is also known as net profit. This profit is added with Capital to show the final balance in the Balance Sheet.
Debit balance of Profit & Loss account is not preferable for a business. Hence they should put in efforts to either reduce costs or increase their income to gain profits.
When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the nRead more
When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the new partner. The partners can choose to forego their shares equally or in an agreed proportion.
Before admission of the new partner, the existing partners would be sharing their profits in the old ratio. Upon admission, the profit-sharing ratio would change to accommodate the new partner. This would give rise to the new ratio. Hence Sacrificing ratio can be calculated as:
Sacrificing Ratio = Old Ratio – New Ratio
For example, Tony and Steve are partners in a firm, sharing profits in the ratio of 3:2. They decide to admit Bruce into the partnership such that the new profit-sharing ratio is 2:1:2. Now, to calculate the sacrificing ratio of Tony and Steve, we subtract their new share from their old share.
Tony’s Sacrifice = 3/5 – 2/5 = 1/5
Steve’s Sacrifice = 2/5 – 1/5 = 1/5
Therefore, the Sacrificing ratio of Tony and Steve is 1:1. This shows that Tony gave up 1/5th of his share while Steve also sacrificed 1/5th of his share.
Calculation of sacrificing ratio is important in a partnership as it helps in measuring that portion of the share of existing partners that have to be sacrificed. This ensures a smooth reconstitution of the partnership. Since the old partners are foregoing a part of their share in profits, the new partner has to bring in some amount as goodwill to compensate for their loss.
Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be: Admission of a partner Death of a partner Retirement of a partner Dissolution of firm In the event of the above cases, the existing partnership is dRead more
Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be:
Admission of a partner
Death of a partner
Retirement of a partner
Dissolution of firm
In the event of the above cases, the existing partnership is dissolved and a new partnership is created with the new partners without affecting the firm.
A new partnership deed is created, in case there is a partnership deed agreed among partners and new profit-sharing ratios among the partners are decided, while the assets and liabilities of the firm remain the same.
Dissolution of a firm means the firm no longer exists. Various reasons for the dissolution of a partnership firm could be:
Mutual decision of partners
By the court of law
A partnership firm is dissolved by a court of law when there has been a non-compliance of law, the firm is engaged in illegal practices, or that the court’s opinion is that it is in the public interest for the firm to be dissolved.
The partnership is also dissolved with the dissolution of the firm but the converse need not be true.
When a firm is dissolved, there is a sequence that is followed to pay creditors and partners.
First, outside creditors like banks, third party creditors are paid firstly with the cash available with the firm and then by selling the assets.
Second, partners who have lent moneyin the form of a loan to the firm are paid.
Lastly, if there is any surplus, partners are paid with the amount of their capital. In case of loss, partners are required to pay from their personal assets.
Dissolution of the firm can be done by the partners themselves and they could also appoint a third person to do so on the payment of fees, charges, the proportion of surplus, or any contract that has been agreed to.
To summarize, we can a draw a difference table as follows:
Dissolution of Partnership
Dissolution of Partnership Firm
The partnership ends but the firm still stands.
A partnership firm no longer exists.
A new partnership deed is created by the mutual agreement of partners.
A new partnership firm is created if the partners decide.
Interest on Investment is to be shown on the Credit side of a Trial Balance. Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return onRead more
Interest on Investment is to be shown on the Credit side of a Trial Balance.
Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return on investment (ROI).
Since interest on investment is an income, it is shown on the creditside of the Trial Balance. This is based on the accounting rule that all increase in incomes are credited and all increase in expenses are debited. A Trial Balance is a worksheet where the balances of all assets, expenses and drawings are shown on the debit side while the balances of all liabilities, incomes and capital are shown on the credit side.
For example, if Jack bought Corporate Bonds of Amazon, worth $50,000 with a 10% interest on investment, then the accounting treatment for interest on investment would be
Cash/Bank A/C Dr 5,000
To Interest on Investment in Corporate Bonds (Amazon) 5,000
As per the above entry, since interest on investment is credited, it will show a credit balance and hence be shown on the credit side of the Trial Balance. Interest on investment account is not to be confused with an Investment account. Investment is an asset whereas interest on investment is an income.
A capital account is a personal account as per the traditional rules of accounting. The real, nominal and personal account classification comes from the traditional rules of accounting. Let’s discuss each type of account and understand why the capital account is a personal account: Real account geneRead more
A capital account is a personal account as per the traditional rules of accounting.
The real, nominal and personal account classification comes from the traditional rules of accounting. Let’s discuss each type of account and understand why the capital account is a personal account:
Real account generally represents assets or possessions of a business other than those which are related to any person (debtors account).
Such accounts don’t close by the year-end and are carried forward.
Examples are cash account, bank account, fixed accounts etc. The golden rule of accounting for real accounts is: “Debit what comes in, credit what goes out.”
Nominal accounts are the accounts that represent the income, expense, gain or loss of an entity.
Examples are salaries account, purchase account, sales account etc. Such accounts are closed at the year-end to the profit and loss account.
The golden rule of accounting for the nominal account is: “Debit all expenses and losses and credit all incomes and gains”
Personal accounts are the accounts that represent a person. For example, a debtors’ account represents the persons to whom a business owes money. Likewise, the creditor’s account, any personal loan account etc
The golden rule of accounting for personal accounts is: “Debit the receiver and credit the giver”
A capital account is therefore a personal account as it represents the money invested by the owner of a business. It is shown in the liabilities side of the balance sheet because it is an internal liability of a business; the money is to be paid back to the owner on liquidation.
Let’s a journal entry related to capital account to understand the golden rules of accounting for personal accounts:
Example,
Cash A/c Dr Amt
To Capital A/c Amt
( Being cash introduced into the business)
As cash comes into the business as capital and is given by the owner (who is a person), the Capital A/c is credited (credit the giver).
Now, there are modern rules of accounting too. As per the modern rules of accounting, there are five types of accounts. One of which is the capital account.
Capital when increased, it is credited and when decreased it is debited.
Here are a few entries related to capital account:
Cash A/c Dr Amt
To Capital A/c Amt (Credited as capital is increased)
(Being cash introduced into the business)
Capital A/c Dr Amt (Debited as capital is reduced)
To Cash A/c Amt
(Being cash withdrawn from business)
Profit and loss A/c Dr Amt
To Capital A/c Amt (Capital is increased, so credited)
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.
What is the difference between fixed and fluctuating capital account?
Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business. Capital Accounts in a partnership firm can be ofRead more
Capital Accounts record transactions of owners of a business and typically includes amount invested, retained, and withdrawn from the business. In the case of a partnership firm, there are multiple capital accounts as multiple people own the business.
Capital Accounts in a partnership firm can be of two types:
A fixed Capital Account is one where only non-recurring transactions related to capital accounts are recorded. For example:
For transactions that are recurring in nature like interest on capital, the interest of drawings a separate account called Partner’s Current Account is created.
Fluctuating Capital Accounts are the ones where there is a single account to record all types of transactions related to the partner’s capital account, whether recurring or nonrecurring.
Fixed Capital Accounts are usually created in cases where there are numerous recurring transactions and partners want to keep a record of the fixed amount invested in the business by all the partners at any point in time.
Fluctuating Capital Account is usually created in cases where the number of recurring transactions is not high or partners want to keep a record of the amount due to all the partners in business at any point in time.
However, the decision to choose what kind of capital account should be implemented in the firm is complete with the partners. They may choose whatever they think is a more suitable fit.
To summarise the difference between the two following table can be used:
· Capital introduced
· Capital withdrawn
· Interest on capital
· Interest in drawings
See lessWhat is debit balance of profit and loss account?
A Profit and Loss (P&L) statement is a financial statement that records a summary of all expenses and incomes of a business during a period of time. It helps in determining the financial performance of the business. After recording all transactions in an account, if the debit side is greater thaRead more
A Profit and Loss (P&L) statement is a financial statement that records a summary of all expenses and incomes of a business during a period of time. It helps in determining the financial performance of the business.
After recording all transactions in an account, if the debit side is greater than the credit side, then the account is said to have a debit balance. Similarly, if the credit side is greater than the debit side, then the account has a credit balance.
In a P&L account, when the expenses (debit) are greater than the incomes (credit), the business is said to be in a net loss. This loss is what we call the debit balance of a Profit and Loss account. A P&L account with a debit balance can be subtracted from Capital or be shown on the asset side of the Balance Sheet.
As you can see above, the net loss is shown on the right side of the P&L account. This represents the debit balance of P&L. Once it is transferred to the balance sheet, it is either subtracted from capital or shown on the asset side as shown in the second image. However, they cannot be shown on both sides of the balance sheet at the same time.
However, if the credit side is greater, that is if income is greater than expenses, then the P&L account shows a credit balance which is also known as net profit. This profit is added with Capital to show the final balance in the Balance Sheet.
Debit balance of Profit & Loss account is not preferable for a business. Hence they should put in efforts to either reduce costs or increase their income to gain profits.
See lessWhat is sacrificing ratio?
When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the nRead more
When a partnership firm consisting of some partners, decide to admit a new partner into their firm, they have to forego a part of their share for the new partner. Therefore, sacrificing Ratio is the proportion in which the existing partners of a company give up a part of their share to give to the new partner. The partners can choose to forego their shares equally or in an agreed proportion.
Before admission of the new partner, the existing partners would be sharing their profits in the old ratio. Upon admission, the profit-sharing ratio would change to accommodate the new partner. This would give rise to the new ratio. Hence Sacrificing ratio can be calculated as:
Sacrificing Ratio = Old Ratio – New Ratio
For example, Tony and Steve are partners in a firm, sharing profits in the ratio of 3:2. They decide to admit Bruce into the partnership such that the new profit-sharing ratio is 2:1:2. Now, to calculate the sacrificing ratio of Tony and Steve, we subtract their new share from their old share.
Tony’s Sacrifice = 3/5 – 2/5 = 1/5
Steve’s Sacrifice = 2/5 – 1/5 = 1/5
Therefore, the Sacrificing ratio of Tony and Steve is 1:1. This shows that Tony gave up 1/5th of his share while Steve also sacrificed 1/5th of his share.
Calculation of sacrificing ratio is important in a partnership as it helps in measuring that portion of the share of existing partners that have to be sacrificed. This ensures a smooth reconstitution of the partnership. Since the old partners are foregoing a part of their share in profits, the new partner has to bring in some amount as goodwill to compensate for their loss.
See lessWhat is the difference between dissolution of partnership and dissolution of firm?
Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be: Admission of a partner Death of a partner Retirement of a partner Dissolution of firm In the event of the above cases, the existing partnership is dRead more
Dissolution of partnership means partnership coming to an end while the firm still stands. Various reasons for the dissolution of partnership could be:
In the event of the above cases, the existing partnership is dissolved and a new partnership is created with the new partners without affecting the firm.
A new partnership deed is created, in case there is a partnership deed agreed among partners and new profit-sharing ratios among the partners are decided, while the assets and liabilities of the firm remain the same.
Dissolution of a firm means the firm no longer exists. Various reasons for the dissolution of a partnership firm could be:
A partnership firm is dissolved by a court of law when there has been a non-compliance of law, the firm is engaged in illegal practices, or that the court’s opinion is that it is in the public interest for the firm to be dissolved.
The partnership is also dissolved with the dissolution of the firm but the converse need not be true.
When a firm is dissolved, there is a sequence that is followed to pay creditors and partners.
Dissolution of the firm can be done by the partners themselves and they could also appoint a third person to do so on the payment of fees, charges, the proportion of surplus, or any contract that has been agreed to.
To summarize, we can a draw a difference table as follows:
· Admission
· Retirement
· Death
· By court
· Mutual decision of partners
How to show interest on investment in trial balance?
Interest on Investment is to be shown on the Credit side of a Trial Balance. Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return onRead more
Interest on Investment is to be shown on the Credit side of a Trial Balance.
Interest on investment refers to the income received on investment in securities. These securities can be shares, debentures etc. of another company. When one invests in securities, they are expected to receive a return on investment (ROI).
Since interest on investment is an income, it is shown on the credit side of the Trial Balance. This is based on the accounting rule that all increase in incomes are credited and all increase in expenses are debited. A Trial Balance is a worksheet where the balances of all assets, expenses and drawings are shown on the debit side while the balances of all liabilities, incomes and capital are shown on the credit side.
For example, if Jack bought Corporate Bonds of Amazon, worth $50,000 with a 10% interest on investment, then the accounting treatment for interest on investment would be
Cash/Bank A/C Dr 5,000
To Interest on Investment in Corporate Bonds (Amazon) 5,000
As per the above entry, since interest on investment is credited, it will show a credit balance and hence be shown on the credit side of the Trial Balance. Interest on investment account is not to be confused with an Investment account. Investment is an asset whereas interest on investment is an income.
See lessCapital account is which type of account?
A capital account is a personal account as per the traditional rules of accounting. The real, nominal and personal account classification comes from the traditional rules of accounting. Let’s discuss each type of account and understand why the capital account is a personal account: Real account geneRead more
A capital account is a personal account as per the traditional rules of accounting.
The real, nominal and personal account classification comes from the traditional rules of accounting. Let’s discuss each type of account and understand why the capital account is a personal account:
Such accounts don’t close by the year-end and are carried forward.
Examples are cash account, bank account, fixed accounts etc. The golden rule of accounting for real accounts is: “Debit what comes in, credit what goes out.”
Examples are salaries account, purchase account, sales account etc. Such accounts are closed at the year-end to the profit and loss account.
The golden rule of accounting for the nominal account is: “Debit all expenses and losses and credit all incomes and gains”
The golden rule of accounting for personal accounts is: “Debit the receiver and credit the giver”
A capital account is therefore a personal account as it represents the money invested by the owner of a business. It is shown in the liabilities side of the balance sheet because it is an internal liability of a business; the money is to be paid back to the owner on liquidation.
Let’s a journal entry related to capital account to understand the golden rules of accounting for personal accounts:
Example,
Cash A/c Dr Amt
To Capital A/c Amt
( Being cash introduced into the business)
As cash comes into the business as capital and is given by the owner (who is a person), the Capital A/c is credited (credit the giver).
Now, there are modern rules of accounting too. As per the modern rules of accounting, there are five types of accounts. One of which is the capital account.
Capital when increased, it is credited and when decreased it is debited.
Here are a few entries related to capital account:
Cash A/c Dr Amt
To Capital A/c Amt (Credited as capital is increased)
(Being cash introduced into the business)
Capital A/c Dr Amt (Debited as capital is reduced)
To Cash A/c Amt
(Being cash withdrawn from business)
Profit and loss A/c Dr Amt
To Capital A/c Amt (Capital is increased, so credited)
(Being profit transferred to capital account)
That’s it! I would conclude my answer.
There is another answer available to this question. You can refer to that answer by clicking this URL. https://www.accountingqa.com/topic-financial-accounting/accounting-terms-and-basics/is-capital-a-real-account/
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 less