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.
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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