The sole proprietorship is a business that is unincorporated and owned by a single person. The owner of the business invests capital in the business in the form of cash, any asset or stock, or in any other form. In, sole proprietorship owner and business are inseparable. Interest on capital is the aRead more
The sole proprietorship is a business that is unincorporated and owned by a single person. The owner of the business invests capital in the business in the form of cash, any asset or stock, or in any other form. In, sole proprietorship owner and business are inseparable.
Interest on capital is the amount paid by the entity/business to the owners. It is an expense to the business and income for the proprietor, and interest is adjusted in the owner’s capital account. It is calculated on an agreed percentage and for a certain period. It is paid before calculating net profit.
If there is a loss, no interest will be paid on capital.
Journal Entry for Interest on Capital in Sole Proprietorship:
Interest on capital entry
Interest on Capital A/c
Debit
Debit the increase in expense.
To Owner’s Capital A/c
Credit
Credit the increase in income.
2. Closing interest on capital account
Profit and Loss A/c
Debit
Debit the increase in expense.
To Interest on Capital A/c
Credit
Credit the increase in income.
In sole proprietor’s Profit and Loss A/c interest will be recorded as an expense on the debit side and will be added to the owner’s capital in the Balance Sheet is considered as an adjustment to the capital account.
For example, A invested Rs 1,00,000 in a business. He wants to adjust 5% interest on his capital, then the entry will be:
Interest on capital entry
Interest on Capital A/c
5,000
To Owner’s Capital A/c
5,000
2. Closing interest on capital account
Profit and Loss A/c
5,000
To Interest on Capital A/c
5,000
In the case of a partnership, the treatment is the same as done in a sole proprietorship. The interest rate is agreed upon by the partners and is mentioned in the partnership deed. No interest is provided on the capitals of the partners if not mentioned in the deed.
If in a particular period, the partnership firm incurs a loss, then no interest will be provided to the partners.
The principal book of accounting is “Ledger”. It records all types of transactions relating to a real, personal or nominal account. It records transactions relating to an income, expense, asset or a liability. A ledger classifies a transaction which is recorded in journal to their respective accountRead more
The principal book of accounting is “Ledger”. It records all types of transactions relating to a real, personal or nominal account. It records transactions relating to an income, expense, asset or a liability.
A ledger classifies a transaction which is recorded in journal to their respective accounts, and in the end calculates a closing balance for the same account. The closing balance is further transferred to the financial statements, and hence ledger is called the books of final entry as it gives true and fair picture of an account.
Template of Ledger:
For example, ABC Ltd purchased machinery for cash amounting to Rs 1,00,000 on 1st January. This transaction will include a machinery account and a cash account. The amount will be recorded in the respective accounts for that period.
The reason being ledger is called a principal book of accounting is, it helps a business in preparation of trial balance and financial statements.
In the books of Krish Fitness and Wellness Club Income & Expenditure A/c for the year ended 31 March 2020 Expenditure Amt Income Amt To Doctors and Coaches Honorarium 25,000 By Subscription (600*100) 60,000 To Medicines 15,500 By Entrance Fees 25,000 To General Expenses 8,000 By Miscellaneous ReRead more
In the books of Krish Fitness and Wellness Club
Income & Expenditure A/c for the year ended 31 March 2020
Expenditure
Amt
Income
Amt
To Doctors and Coaches Honorarium
25,000
By Subscription (600*100)
60,000
To Medicines
15,500
By Entrance Fees
25,000
To General Expenses
8,000
By Miscellaneous Receipts
15,000
To Newspaper
8,000
By Deficit (excess of expenditure over income)
21,500
To Rent, Rates and Taxes
5,000
To Tournament Expenses (W.N.1)
25,000
To Loss on Sale of Medical Equipment (W.N.2)
10,000
To Depreciation on Medical Equipment
25,000
1,21,500
1,21,500
Working Notes:
1.Calculation of Tournament Fund
Tournament Fund as of 1 April 2019
15,000
Add: Donations to Tournament Fund
20,000
Less: Tournament Expenses
-60,000
Tournament Expenses
-25,000
2. Calculation of Loss on Sale of Medical Equipment
The accounting equation represents the relationship between assets, capital, and liabilities of a business. It follows the concept of the double-entry bookkeeping system where every debit has an equal credit. The rules state that at any time a business’ assets should equal liabilities. This is alsoRead more
The accounting equation represents the relationship between assets, capital, and liabilities of a business. It follows the concept of the double-entry bookkeeping system where every debit has an equal credit. The rules state that at any time a business’ assets should equal liabilities. This is also known as the statement of financial position equation.
The accounting equation can be shown as follows:
Assets = Capital + Liabilities
For example, Liza starts a business by investing $3,000 as cash. In accounting terms, business and owner are separate and so business owes money to Liza as capital.
In this example,
Capital invested = $3,000
Cash (Asset) = $3,000
If Liza puts this into the accounting equation, it will be shown as:
Assets =
Capital + Liabilities
$3,000 (Cash) =
$3,000 + Liabilities
Further, Liza purchases a market stall from Ben and the cost of the stall was $1,800. She purchases flowers from the wholesale market at a cost of $700. Now she is left with $500 cash out of the original $3,000.
The state of her business has now changed and can be shown as follows:
The correct answer is 4. To ascertain the collective effect of all transactions pertaining to a particular account. The reason being is that in the ledger account all the effects are recorded for example, how much money is spent on a particular type of expense or how much money is receivable from aRead more
The correct answer is 4. To ascertain the collective effect of all transactions pertaining to a particular account. The reason being is that in the ledger account all the effects are recorded for example, how much money is spent on a particular type of expense or how much money is receivable from a debtor. In ledger accounts, information can be obtained about a particular account.
Ledger is the Principal book of accounts and also called the book of final entry. It summarises all types of accounts whether it is an Asset A/c, Liability A/c, Income A/c, or Expense A/c. The transactions recorded in the Journal/Subsidiary books are transferred to the respective ledger accounts opened.
Importance of preparing ledger accounts:
Ledger accounts get the ready results i.e. helps in identifying the amount payable or receivable.
It is necessary for the preparation of the Trial Balance.
The financial position of the business is easily available with the help of Assets A/c and Liabilities A/c.
It helps in preparing various types of income statements on the basis of balances shown in ledger accounts.
It can be used as a control tool as it shows balances of various accounts.
It is useful for the management to forecast or plan for the future.
An asset is an item of property owned by a company/business. It may be for a longer or shorter period of time. Assets are classified into two broad heads: Non-Current Assets Current Assets The asset may be sold for several reasons such as: An asset is fully depreciated. It should be sold becaRead more
An asset is an item of property owned by a company/business. It may be for a longer or shorter period of time. Assets are classified into two broad heads:
Non-Current Assets
Current Assets
The asset may be sold for several reasons such as:
An asset is fully depreciated.
It should be sold because it is no longer needed.
It is removed from the books due to unforeseen circumstances.
The journal entry for profit on the sale of assets will be:
Cash / Bank A/c
Debit
To Asset A/c
Credit
To Profit on Sale of Asset A/c
Credit
(Being sale of an asset made with a gain)
According to the golden rules of accounting, in the above entry “Cash/Bank A/c” it is a Real Account and the rule says “Debit what comes in” and so is debited.
“Asset A/c” is a real account and the rule says “Credit what goes out” and so is credited. Any Gain on sale of an asset goes to the Nominal account and according to the rule “Credit, all incomes and gains” and so is credited.
The journal entry for loss on sale of the asset will be:
Cash / Bank A/c
Debit
Loss on Sale of Asset A/c
Debit
To Asset A/c
Credit
(Being sale of an asset made and loss incurred)
In the above entry, “Loss on Sale of Asset” is debited because according to Nominal account rules “Debit all losses and expenses” and so is debited.
According to modern rules of accounting, “Debit entry” increases assets and expenses, and decreases liability and revenue, a “Credit entry” increases liability and revenue, and decreases assets and expenses.
Cash / Bank A/c
Debit
Increases Asset
Loss on Sale of Asset A/c
Debit
Increases Expenses
To Asset A/c
Credit
Decreases Asset
To Profit on Sale of Asset A/c
Credit
Increases Expenses
For example, Mr. A sold furniture for $2,500 and incurred a loss on the sale which amounted to $2,500.
According to modern rules, the journal entry will be:
In the books of Youth Ltd. Income & Expenditure A/c for the year ended 31 March 2018 Expenditure Amt (₹) Income Amt (₹) To Salaries 31,500 By Subscription (W.N.1) 75,000 To Postage 1,250 By Entrance fees 1,100 To Rent 9,000 By Sale of old magazines 450 To Printing and Stationery 14,000 By IntereRead more
In the books of Youth Ltd.
Income & Expenditure A/c for the year ended 31 March 2018
Expenditure
Amt (₹)
Income
Amt (₹)
To Salaries
31,500
By Subscription (W.N.1)
75,000
To Postage
1,250
By Entrance fees
1,100
To Rent
9,000
By Sale of old magazines
450
To Printing and Stationery
14,000
By Interest on investment (W.N.3)
3,500
To Sports material consumed (W.N.2)
10,000
To Miscellaneous expenses
3,100
To Depreciation on furniture (W.N.4)
1,000
To Surplus
10,200
80,050
80,050
Working Notes:
1. Calculation of Subscription:
Subscription for the year
60,000
Add: Outstanding subscription
16,200
Less: Subscription in arrears
(1,200)
75,000
2. Calculation of sports material consumed:
Opening stock of Sports Material
3,000
Add: Purchased during the year
11,500
Less: Closing stock of Sports material
(4,500)
10,000
3. Calculation of Interest on investment:
Investment as on 1.10.2017 = 70,000
The investment will be calculated for 6 months i.e starting from 1.10.2017 to 31.3.2018
For 6 months
= 70,000 * 10% * 6/12
= 3,500
4. Calculation of Depreciation on furniture:
Furniture as on 1.10.2017 = 20,000
Depreciation on the furniture will be calculated for 6 months i.e starting from 1.10.2017 to 31.3.2018
International Financial Reporting Standards (IFRS) is a not-for-profit, public interest organization. The main objective of the IFRS Foundation is to raise the standard of financial reporting and bring about global harmonization of accounting standards. IFRS was established to develop high-quality,Read more
International Financial Reporting Standards (IFRS) is a not-for-profit, public interest organization. The main objective of the IFRS Foundation is to raise the standard of financial reporting and bring about global harmonization of accounting standards.
IFRS was established to develop high-quality, understandable, enforceable, and generally accepted accounting standards. International Accounting Standards Board (IASB) develops IFRS. There are currently 16 IFRSs in issue.
Benefits of IFRS Standards:
It brings transparency by international comparability and quality of financial information.
It strengthens accountability by reducing the information gap between providers and users of the capital.
It contributes to economic efficiency by improving capital allocation and, helps investors in identifying opportunities and risks across the world.
Following are the uses of IFRS:
As national requirements.
As the basis for all or some national requirements.
As an international benchmark for those countries which develop their own requirements.
By regulatory authorities for domestic and foreign companies.
By companies themselves.
Challenges faced by companies if IFRS is not implemented:
The financial statements will differ for the companies who have offices worldwide and use only national accounting standards.
Increased complexity while preparing financial statements.
Difficulty in comparing and verifying financial statements.
Accounting of transactions will differ from country to country if IFRS is not implemented.
Return inwards are the goods returned by the customer to the seller. The goods are returned for reasons like defects, excess delivery, and low quality. Return inwards are also known as Sales Returns. Sales returns are a contra account to sales revenue. The amount of sales returns is deducted from thRead more
Return inwards are the goods returned by the customer to the seller. The goods are returned for reasons like defects, excess delivery, and low quality. Return inwards are also known as Sales Returns.
Sales returns are a contra account to sales revenue. The amount of sales returns is deducted from the total sales in the Trading section of the Trading and Profit & Loss Account.
In subsidiary books, return inwards are recorded only for those goods which are sold on credit to the customer.
For example, On 1 August E Electronics sold 50 units of television to Hill Hotels on credit for Rs.25,000 each. Out of which 5 units were found to be defective and were returned back to E Electronics. In that accounting period, E Electronics made a total sales of Rs.20,00,000 (including the item sold to Hill Hotels).
E Electronics in its Trading section of Trading and P&L A/c will account for a sales return of Rs.1,25,000 (Rs.25,000*5) and this amount will be deducted from the total sales. The same will be recorded in the subsidiary books as it accounts for sales made on credit.
Extract of Profit & Loss Account:
For a business, sales returns will either have a decrease in the sales revenue or it will increase the sales returns and allowances which is a contra account to sales revenue. An increase in sales returns will decrease gross profit.
The correct answer is 4. Not shown in Branch Account. The value of depreciation of fixed assets will be not shown in the branch accounting because the opening value of the asset is recorded at the start of the period on the debit side and the closing value of the asset is shown on the credit side atRead more
The correct answer is 4. Not shown in Branch Account.
The value of depreciation of fixed assets will be not shown in the branch accounting because the opening value of the asset is recorded at the start of the period on the debit side and the closing value of the asset is shown on the credit side at the end of the period.
The difference between the opening and closing values of the asset is the value of depreciation which is automatically charged. In this case, if depreciation is also shown it will be counted twice.
Example:
XYZ Ltd purchased furniture for one of its branches on 1st January. Following are the details of the purchase:
Furniture as on 1st January
$30,000
Furniture purchased on 1st June
$5,000
Depreciation is provided on furniture at @10% per annum on the straight-line method.
Woking Notes:
Amt
i. Depreciation on furniture:
On $30,000 @10% p.a for full year
3,000
On $5,000 @10% p.a for 6 months
250
3,250
ii. Branch Furniture as of 31 Dec:
Furniture as of 1 January
30,000
Add: Addition made during the year
5,000
35,000
Less: Depreciation
(3,250)
31,750
As additional furniture was purchased after 6 months, depreciation will be charged on that and the total depreciation of 3,250 will be charged on the furniture of $35,000 ($30,000+$5,000) and the difference will be the closing balance which will be shown in the branch account on the credit side.
The depreciation amount will not be shown in the Branch Account as the difference between the opening and closing values of the furniture reflects the value of depreciation. If depreciation is shown in the account it will be counted twice.
Is there interest on capital in sole proprietorship?
The sole proprietorship is a business that is unincorporated and owned by a single person. The owner of the business invests capital in the business in the form of cash, any asset or stock, or in any other form. In, sole proprietorship owner and business are inseparable. Interest on capital is the aRead more
The sole proprietorship is a business that is unincorporated and owned by a single person. The owner of the business invests capital in the business in the form of cash, any asset or stock, or in any other form. In, sole proprietorship owner and business are inseparable.
Interest on capital is the amount paid by the entity/business to the owners. It is an expense to the business and income for the proprietor, and interest is adjusted in the owner’s capital account. It is calculated on an agreed percentage and for a certain period. It is paid before calculating net profit.
If there is a loss, no interest will be paid on capital.
Journal Entry for Interest on Capital in Sole Proprietorship:
2. Closing interest on capital account
In sole proprietor’s Profit and Loss A/c interest will be recorded as an expense on the debit side and will be added to the owner’s capital in the Balance Sheet is considered as an adjustment to the capital account.
For example, A invested Rs 1,00,000 in a business. He wants to adjust 5% interest on his capital, then the entry will be:
2. Closing interest on capital account
In the case of a partnership, the treatment is the same as done in a sole proprietorship. The interest rate is agreed upon by the partners and is mentioned in the partnership deed. No interest is provided on the capitals of the partners if not mentioned in the deed.
If in a particular period, the partnership firm incurs a loss, then no interest will be provided to the partners.
See lessPrincipal books of accounting is known as?
The principal book of accounting is “Ledger”. It records all types of transactions relating to a real, personal or nominal account. It records transactions relating to an income, expense, asset or a liability. A ledger classifies a transaction which is recorded in journal to their respective accountRead more
The principal book of accounting is “Ledger”. It records all types of transactions relating to a real, personal or nominal account. It records transactions relating to an income, expense, asset or a liability.
A ledger classifies a transaction which is recorded in journal to their respective accounts, and in the end calculates a closing balance for the same account. The closing balance is further transferred to the financial statements, and hence ledger is called the books of final entry as it gives true and fair picture of an account.
Template of Ledger:
For example, ABC Ltd purchased machinery for cash amounting to Rs 1,00,000 on 1st January. This transaction will include a machinery account and a cash account. The amount will be recorded in the respective accounts for that period.
The reason being ledger is called a principal book of accounting is, it helps a business in preparation of trial balance and financial statements.
See lessFrom the following Receipts and Payments Account of Krish Fitness and wellness Club for the year ended 31st March 2020 prepare Income and Expenditure Account?
In the books of Krish Fitness and Wellness Club Income & Expenditure A/c for the year ended 31 March 2020 Expenditure Amt Income Amt To Doctors and Coaches Honorarium 25,000 By Subscription (600*100) 60,000 To Medicines 15,500 By Entrance Fees 25,000 To General Expenses 8,000 By Miscellaneous ReRead more
In the books of Krish Fitness and Wellness Club
Income & Expenditure A/c for the year ended 31 March 2020
Working Notes:
1.Calculation of Tournament Fund
2. Calculation of Loss on Sale of Medical Equipment
What is accounting equation with examples?
The accounting equation represents the relationship between assets, capital, and liabilities of a business. It follows the concept of the double-entry bookkeeping system where every debit has an equal credit. The rules state that at any time a business’ assets should equal liabilities. This is alsoRead more
The accounting equation represents the relationship between assets, capital, and liabilities of a business. It follows the concept of the double-entry bookkeeping system where every debit has an equal credit. The rules state that at any time a business’ assets should equal liabilities. This is also known as the statement of financial position equation.
The accounting equation can be shown as follows:
Assets = Capital + Liabilities
For example, Liza starts a business by investing $3,000 as cash. In accounting terms, business and owner are separate and so business owes money to Liza as capital.
In this example,
Capital invested = $3,000
Cash (Asset) = $3,000
If Liza puts this into the accounting equation, it will be shown as:
Further, Liza purchases a market stall from Ben and the cost of the stall was $1,800. She purchases flowers from the wholesale market at a cost of $700. Now she is left with $500 cash out of the original $3,000.
The state of her business has now changed and can be shown as follows:
Main objective of preparing ledger account is to?
The correct answer is 4. To ascertain the collective effect of all transactions pertaining to a particular account. The reason being is that in the ledger account all the effects are recorded for example, how much money is spent on a particular type of expense or how much money is receivable from aRead more
The correct answer is 4. To ascertain the collective effect of all transactions pertaining to a particular account. The reason being is that in the ledger account all the effects are recorded for example, how much money is spent on a particular type of expense or how much money is receivable from a debtor. In ledger accounts, information can be obtained about a particular account.
Ledger is the Principal book of accounts and also called the book of final entry. It summarises all types of accounts whether it is an Asset A/c, Liability A/c, Income A/c, or Expense A/c. The transactions recorded in the Journal/Subsidiary books are transferred to the respective ledger accounts opened.
Importance of preparing ledger accounts:
- Ledger accounts get the ready results i.e. helps in identifying the amount payable or receivable.
- It is necessary for the preparation of the Trial Balance.
- The financial position of the business is easily available with the help of Assets A/c and Liabilities A/c.
- It helps in preparing various types of income statements on the basis of balances shown in ledger accounts.
- It can be used as a control tool as it shows balances of various accounts.
- It is useful for the management to forecast or plan for the future.
See lessWhat is the journal entry for sale of asset?
An asset is an item of property owned by a company/business. It may be for a longer or shorter period of time. Assets are classified into two broad heads: Non-Current Assets Current Assets The asset may be sold for several reasons such as: An asset is fully depreciated. It should be sold becaRead more
An asset is an item of property owned by a company/business. It may be for a longer or shorter period of time. Assets are classified into two broad heads:
The asset may be sold for several reasons such as:
The journal entry for profit on the sale of assets will be:
According to the golden rules of accounting, in the above entry “Cash/Bank A/c” it is a Real Account and the rule says “Debit what comes in” and so is debited.
“Asset A/c” is a real account and the rule says “Credit what goes out” and so is credited. Any Gain on sale of an asset goes to the Nominal account and according to the rule “Credit, all incomes and gains” and so is credited.
The journal entry for loss on sale of the asset will be:
In the above entry, “Loss on Sale of Asset” is debited because according to Nominal account rules “Debit all losses and expenses” and so is debited.
According to modern rules of accounting, “Debit entry” increases assets and expenses, and decreases liability and revenue, a “Credit entry” increases liability and revenue, and decreases assets and expenses.
For example, Mr. A sold furniture for $2,500 and incurred a loss on the sale which amounted to $2,500.
According to modern rules, the journal entry will be:
Prepare Income and Expenditure Account of Youth Club from the following particulars for the year ended on 31st March 2018?
In the books of Youth Ltd. Income & Expenditure A/c for the year ended 31 March 2018 Expenditure Amt (₹) Income Amt (₹) To Salaries 31,500 By Subscription (W.N.1) 75,000 To Postage 1,250 By Entrance fees 1,100 To Rent 9,000 By Sale of old magazines 450 To Printing and Stationery 14,000 By IntereRead more
In the books of Youth Ltd.
Income & Expenditure A/c for the year ended 31 March 2018
Working Notes:
See lessWhat is the need for IFRS?
International Financial Reporting Standards (IFRS) is a not-for-profit, public interest organization. The main objective of the IFRS Foundation is to raise the standard of financial reporting and bring about global harmonization of accounting standards. IFRS was established to develop high-quality,Read more
International Financial Reporting Standards (IFRS) is a not-for-profit, public interest organization. The main objective of the IFRS Foundation is to raise the standard of financial reporting and bring about global harmonization of accounting standards.
IFRS was established to develop high-quality, understandable, enforceable, and generally accepted accounting standards. International Accounting Standards Board (IASB) develops IFRS. There are currently 16 IFRSs in issue.
Benefits of IFRS Standards:
Following are the uses of IFRS:
Challenges faced by companies if IFRS is not implemented:
- The financial statements will differ for the companies who have offices worldwide and use only national accounting standards.
- Increased complexity while preparing financial statements.
- Difficulty in comparing and verifying financial statements.
- Accounting of transactions will differ from country to country if IFRS is not implemented.
See lessHow to treat return inwards in profit and loss account?
Return inwards are the goods returned by the customer to the seller. The goods are returned for reasons like defects, excess delivery, and low quality. Return inwards are also known as Sales Returns. Sales returns are a contra account to sales revenue. The amount of sales returns is deducted from thRead more
Return inwards are the goods returned by the customer to the seller. The goods are returned for reasons like defects, excess delivery, and low quality. Return inwards are also known as Sales Returns.
Sales returns are a contra account to sales revenue. The amount of sales returns is deducted from the total sales in the Trading section of the Trading and Profit & Loss Account.
In subsidiary books, return inwards are recorded only for those goods which are sold on credit to the customer.
For example, On 1 August E Electronics sold 50 units of television to Hill Hotels on credit for Rs.25,000 each. Out of which 5 units were found to be defective and were returned back to E Electronics. In that accounting period, E Electronics made a total sales of Rs.20,00,000 (including the item sold to Hill Hotels).
E Electronics in its Trading section of Trading and P&L A/c will account for a sales return of Rs.1,25,000 (Rs.25,000*5) and this amount will be deducted from the total sales. The same will be recorded in the subsidiary books as it accounts for sales made on credit.
Extract of Profit & Loss Account:
For a business, sales returns will either have a decrease in the sales revenue or it will increase the sales returns and allowances which is a contra account to sales revenue. An increase in sales returns will decrease gross profit.
See lessIn branch accounting depreciation on branch fixed assets is?
The correct answer is 4. Not shown in Branch Account. The value of depreciation of fixed assets will be not shown in the branch accounting because the opening value of the asset is recorded at the start of the period on the debit side and the closing value of the asset is shown on the credit side atRead more
The correct answer is 4. Not shown in Branch Account.
The value of depreciation of fixed assets will be not shown in the branch accounting because the opening value of the asset is recorded at the start of the period on the debit side and the closing value of the asset is shown on the credit side at the end of the period.
The difference between the opening and closing values of the asset is the value of depreciation which is automatically charged. In this case, if depreciation is also shown it will be counted twice.
Example:
XYZ Ltd purchased furniture for one of its branches on 1st January. Following are the details of the purchase:
Depreciation is provided on furniture at @10% per annum on the straight-line method.
As additional furniture was purchased after 6 months, depreciation will be charged on that and the total depreciation of 3,250 will be charged on the furniture of $35,000 ($30,000+$5,000) and the difference will be the closing balance which will be shown in the branch account on the credit side.
The depreciation amount will not be shown in the Branch Account as the difference between the opening and closing values of the furniture reflects the value of depreciation. If depreciation is shown in the account it will be counted twice.
See less