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.
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When in a single transaction two or more accounts are involved, such kinds of transactions are termed as Compound entries. Example 1, Johnson Co. purchased goods worth 5,000, and half of the amount was paid in cash and the other half by cheque. So here three accounts are involved: Purchase account-Read more
When in a single transaction two or more accounts are involved, such kinds of transactions are termed as Compound entries.
Example 1, Johnson Co. purchased goods worth 5,000, and half of the amount was paid in cash and the other half by cheque.
So here three accounts are involved:
Purchase account- That is to be debited.
Cash account- That is to be credited.
Bank account- That is to be credited.
Journal entry:
Now posting the above journal entry in a ledger account.
In the Journal, the Purchase account has been debited. So in the ledger, the purchase account will also be debited. Since the purchase account is debited in the ledger, the corresponding two credit accounts of this entry i.e. the cash and the bank will be written on the debit side in the particulars column. So while posting, the amount to be considered would be the amount individually paid in cash and bank as shown in the journal entry.
Cash a/c is credited with the purchase account. In the ledger, purchase a/c will be posted on the credit side. So while posting, the amount to be considered would be the amount individually paid in cash.
Bank a/c is credited with the purchase account. In the ledger, purchase a/c will be posted on the credit side. So while posting, the amount to be considered would be the amount individually paid in Bank a/c.
Example 2, Johnson Co purchased goods and made payment in cash 2,000. Along with it, it also paid commission and interest of 1,000 and 500 respectively.
So here four accounts are involved:
Purchase account- That is to be debited.
The commission allowed account- That is to be debited.
Interest allowed account- That is to be debited.
Cash account- That is to be credited.
Journal Entry:
Now posting the above journal entry in a ledger account.
In the journal entry, the cash account has been credited. So in the ledger, the cash account will also be credited. Since the cash account is credited in the ledger, the corresponding three accounts will also be credited in the particulars column. As in the journal entry the three debit accounts viz. Purchase, the commission allowed, and interest allowed, the amounts written against them shall be entered in the respective accounts in the amount column on the credit side of the cash account.
Purchase a/c is debited with a cash account. In the ledger, Cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in the Purchase account.
The commission allowed a/c is debited with a cash account. In the ledger, cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in Commission allowed a/c.
Interest allowed a/c is debited with a cash account. In the ledger, cash a/c will be posted on the debit side. So while posting, the amount to be considered would be the amount individually paid in Interest allowed a/c.
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