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Nistha
Nistha
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Journal Entry
  2. Radhika
    This answer was edited.

    When a company earns profit, it distributes a proportion of its income to its shareholders, and such distribution is called the dividend. The dividend is allocated as a fixed amount per share and shareholders receive dividends proportional to their shareholdings. However, a company can only pay diviRead more

    When a company earns profit, it distributes a proportion of its income to its shareholders, and such distribution is called the dividend. The dividend is allocated as a fixed amount per share and shareholders receive dividends proportional to their shareholdings.

    However, a company can only pay dividends out of its current year profits or retained earnings (profits of the company that are not distributed as dividend and retained in the business is called retained earnings) of previous years but not out of capital.

    Dividends can be paid to shareholders in the form of

    • Cash
    • dividend re-investing plan of the company
    • future shares
    • share repurchase.

    For companies, payment of regular dividends boosts the morale of the shareholders, investors trust the companies more and it reflects positively on the share price of the company.

    For example, Nestle in India paid an interim dividend of 1100.00% to its shareholders in 2021.

    The journal entry for dividend paid is

    Particulars Debit Credit
    Retained Earnings A/c                                                          Dr. Amt  
    To Cash A/c   Amt

     

    According to the golden rules of accounting-

    • Retained earnings is a credit account by nature and since dividends are paid from retained earnings resulting in a deduction of the account, we debit
    • Cash is credited because the account is debit in nature and since dividends are paid in cash it’s credited to present the deduction in the account.

    According to modern rules of accounting-

    • Since cash is decreasing, we credit
    • Since retained earnings are decreasing and it is a part of capital it should be

    For example-

    A company paid a dividend of 25 crores to its shareholders in cash, the journal entry according to golden rules will be-

    Particulars Debit

    (in crores)

    		 Credit

    (in crores)
    Retained Earnings A/c  (Dr.) 25  
    To Cash A/c   25

     

     

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Simerpreet
SimerpreetHelpful
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  2. GautamSaxena Curious .
    This answer was edited.

    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

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Simerpreet
SimerpreetHelpful
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  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    Let me explain to you in short what is unrecorded assets in the partnership. Basically, these are the assets that are not recorded in the books of accounts but are still present in the business in physical form. These assets are directly credited to the realization account at the time of dissolutionRead more

    Let me explain to you in short what is unrecorded assets in the partnership. Basically, these are the assets that are not recorded in the books of accounts but are still present in the business in physical form. These assets are directly credited to the realization account at the time of dissolution of the partnership firm

    Unrecorded assets are treated in two ways:

    1. Either they can be sold for cash.
    2. Taken over by any of the partners.

    The journal entry for the unrecorded assets sold in cash is as follows:

    Bank A/c                                                                           ……..Dr xxx
                To Realization A/c xxx
    (Being unrecorded assets sold for cash)

    To make the entries more simple for you let me give you a small example

    A partnership firm has decided to dissolve its business. The firm had old furniture which was completely written off. They decide to sell the furniture for Rs 3,000. Here we can see that the firm has decided to realize its furniture by selling them in cash. Therefore the journal entry would be

    Bank A/c                                                                    ……..Dr 3,000
                To Realisation A/c 3,000
    (Being old furniture sold for cash)

    And the journal entry for unrecorded assets taken over by the partner is as follows:

    Partner’s capital A/c                                                      ……..Dr xxx
                To Realization A/c xxx
    (Being unrecorded taken over by the partner)

    For example:

    A partnership firm has decided to dissolve its business. The firm had old furniture which was completely written off. One of the pieces of furniture was taken over by one of the partners for Rs 3,000. Here we can see that the firm has decided to realize its furniture by taking over the partner. Therefore the journal entry would be

    Bank A/c                                                                    ……..Dr 3,000
                To Partnership A/c 3,000
    (Being old furniture taken by partner)

    As realization is a nominal account it debits all expenses and losses while credit all incomes and gains. Therefore when a business treats unrecorded assets either by selling them or is taken over by the partner’s, it brings a certain amount of cash into the business hence Bank A/c and Partner’s capital account is debited in the journal entry and appear on the credit side of the realization account.

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SidharthBadlani
SidharthBadlani
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  2. Ishika Pandey Curious ca aspirant
    This answer was edited.

    Definition Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle. Posting helps us to classify transactions in a better manner. A journal is used to record transactions in chronological order while ledgerRead more

    Definition

    Posting refers to moving the transaction entries from the journal to the ledger books of the company. It is an important part of the accounting cycle.

    Posting helps us to classify transactions in a better manner.

    A journal is used to record transactions in chronological order while ledger books are used to classify transactions into assets, liabilities, expenses, and incomes.

    Steps of Posting

    • Create and name ledger accounts for different items of trial balance

    • Identify those entries in the journal that relate to the relevant ledger book under consideration.

    • Post the entry on the debit or credit side of the ledger account.

    • For example, when salaries are paid a salary account is debited and a bank account is credited. When posting this transaction in the bank account we will debit the bank account and write “To salaries” under the head “particular”. This will indicate that salaries were paid from a bank account causing a reduction in the bank balance.

    • After all the journal entries relevant to a particular ledger account have been posted in it, we will tally the total of the debit and the credit side of the ledger account to ascertain any balance left.

    • Usually, asset accounts have the debit side exceeding the credit side. That is to say, they have a debit balance. Liability accounts usually have a credit balance.

    • It is not necessary that every ledger account may have a balance left at the end. The total of the amounts on the debit side may be equal to the total of the amounts on the credit side in some ledger accounts.

    • The last step is to recheck the ledger account to identify and correct any mistakes that may have occurred during the posting process.

    Importance of Posting

    • Posting helps us to classify transactions in a better and more efficient manner.

    • Posting makes the books of accounts more readable.

    • An accountant may choose to engage in posting once every month or even once every day as per the requirements of the business and the financial reporting norms.

    • Posting is necessary for the creation of financial statements. A trial balance cannot be drafted without determining the balance of each ledger account.

    • Posting helps us to know the balance of each account This helps to run the business smoothly by tracking balances timely and making up for any likely deficiency in advance.

    • Analysis of how balances of various ledger accounts have changed over time helps us to draw valuable conclusions for the business.

    Conclusion

    We can conclude by saying that the process of posting refers to transferring the entries from the journal to the ledger accounts.

    Posting is an essential step of the accounting cycle and without it, financial statements cannot be prepared. Any error while posting is bound to adversely affect the creation of the financial statements.

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Karan
Karan
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  2. PriyanshiGupta Graduated, B.Com
    This answer was edited.

    The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors. Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business. WriRead more

    The debts that have a higher chance of not being paid are called doubtful debts. They are a part of the regular dealing of the company and may arise due to disputes or treachery on the part of debtors.

    Bad debts refer to the doubtful debts that no longer seem to be recoverable from the business.

    Written off means an expense, income, asset, liability is no more recorded in the books of accounts because they no longer hold relevance for the business.

    When doubtful debts turn into bad debt, they are written off from the books after a stipulated time as they no longer seem recoverable.

    If any cash is received against such bad debts that were written off, it is known as cash received against bad debts written off. Cash is received against bad debts usually when the debtor is declared insolvent and money is recovered from its estate.

    Bad debts recovered are considered an income for the company as they were previously written off as a loss and any cash received against it is considered as income.

    Journal entry for such situation is:

    Cash or Bank A/c (Dr.)

    To Bad Debts Recovered A/c

    We debit the increase in assets, and since cash is coming into the business it is debited.

    We credit the income, and since bad debts recovered is an income to the business it is credited.

     

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Aadil
AadilCurious
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  2. GautamSaxena Curious .
    This answer was edited.

    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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Simerpreet
SimerpreetHelpful
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  2. Vijay Curious M.Com
    This answer was edited.

    Sometimes a business may earn an income by delivering the goods/services within the stipulated time. But the business may not have issued an invoice to the customer. Such a scenario is what is called unbilled revenue. Note that as per the accrual concept of accounting, sales are recognized on the daRead more

    Sometimes a business may earn an income by delivering the goods/services within the stipulated time. But the business may not have issued an invoice to the customer. Such a scenario is what is called unbilled revenue.

    Note that as per the accrual concept of accounting, sales are recognized on the day it was made, irrespective of whether the business receives cash or not.

    The business records unbilled revenue by passing the following journal entry:

    Unbilled Revenue is treated as an asset because it is yet to be fully recognized as an income. Therefore it is debited. Revenue A/c is credited as there is an increase in income.

    Once the bill/invoice has been issued to the customer, the following entry is passed to close the Unbilled Revenue A/c.

    Let me explain this concept with an example,

    Luca Traders, a business dealing in stationery and office supplies receives an order on August 5th for 1,000 pens worth 10 each. On August 8th they deliver the pens but they are yet to issue an invoice to the customer. They issue the invoice only on August 13th.

    So the sales revenue of 10,000 (1,000*10) will be treated as an unbilled revenue for the period of August 8th – August 12th. On August 8th the following entry is made to record unbilled revenue.

    Unbilled Revenue A/c  10,000
       To Revenue A/c  10,000
    (Being entry for recording unbilled revenue worth 10,000)

    When the invoice is sent to the customer on August 13th, the following journal entry is posted to close the unbilled revenue A/c.

    Bills Receivable A/c  10,000
       To Unbilled Revenue A/c  10,000
    (Being invoice issued against unbilled revenue)
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Radha
Radha
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)
    This answer was edited.

    Brief Introduction The stock of finished goods left unsold at the end of the year is known as closing stock. As closing stock represent an asset i.e. the unsold finished goods,  it has a debit balance. Closing stock appears on the credit side of the trading account and on the asset side of the balanRead more

    Brief Introduction

    The stock of finished goods left unsold at the end of the year is known as closing stock. As closing stock represent an asset i.e. the unsold finished goods,  it has a debit balance.

    Closing stock appears on the credit side of the trading account and on the asset side of the balance sheet. But, if closing stock is adjusted against purchase i.e. deducted from purchase account balance, then it doesn’t appear in the trading account.

    It is always shown on the asset of the balance irrespective of its treatment as discussed above because it is an asset.

    Though no ledger is maintained for closing stock in financial accounts of a business, the journal entry for the closing stock is passed and is as below:

    Closing stock A/c     Dr    Amt

      To Trading A/c                    Amt

    (When the closing stock appears in trading a/c)

    OR

    Closing stock A/c     Dr       Amt

      To Purchase A/c                   Amt

    (When closing stock is adjusted against purchase A/c and not shown in trading a/c)

    Generally, the closing stock is shown separately in the trial balance because it is already part of the purchase account balance.

    Closing stock is ascertained at the end of the financial year and it has great importance as it directly affects the gross profit or loss of a business. Closing stock at end of a year becomes the opening stock of the next financial year.

    Numerical Example

    ABC trading reported the following particulars at the end of the financial year 20X2-20X3:

    We will draw the trading and P/L account and balance sheet of ABC Trading using the above information.

    As the closing stock is not given, we will calculate the closing stock as a balancing figure.

    It can be also calculated using this formula:

    Closing stock = Opening stock + Purchase + Gross Profit – Sales

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A_Team
A_Team
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  2. GautamSaxena Curious .
    This answer was edited.

    Goods purchased for cash The purchasing of goods for cash is a business transaction and a vital business operation that is supposed to be recorded in the journal in order to keep a track of the business stock. A journal is a detailed account that records all the financial transactions in a businessRead more

    Goods purchased for cash

    The purchasing of goods for cash is a business transaction and a vital business operation that is supposed to be recorded in the journal in order to keep a track of the business stock.

    A journal is a detailed account that records all the financial transactions in a business chronologically. It is used to keep a record of all the financial transactions occurring in a business and one of its primary motives is that it helps in the preparation of the ledger and trial balance statement.

    Journal entry for goods purchased for cash

    In the entry, goods purchased for cash, the cash a/c is credited and the purchases a/c is debited. It’s because of that golden rule in accounting, Dr. what comes in and Cr. what goes out.

    Imagine, goods were purchased for cash on 1-Jan-2021. Then we’ll be passing the entry below:

     

     

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Astha
AsthaLeader
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  2. Simerpreet Helpful CMA Inter qualified
    This answer was edited.

    Journal Entry for Interest on Drawings is- Particulars Amount Amount Drawings A/c                                                      Dr $$$      To Interest on Drawings A/c $$$ So as per the modern approach: From the point of view of business, Interest on Drawings is an Income. When there is an inRead more

    Journal Entry for Interest on Drawings is-

    Particulars Amount Amount
    Drawings A/c                                                      Dr $$$
         To Interest on Drawings A/c $$$

    So as per the modern approach: From the point of view of business, Interest on Drawings is an Income.

    • When there is an increase in the Income, it is credited.
    • When there is a decrease in the Income, it is debited.

     

    From the point of view of the proprietor, Interest on Drawings is a Liability.

    So as per the modern approach:

    • When there is an increase in the Liability, it is credited.
    • When there is a decrease in the Liability, it is debited.

     

    So as per the modern approach,  Interest on Drawings is credited because with Interest the income increases for the business. Whereas,  the amount of such interest is a loss from the point of view of the owner/ Proprietor, as such the amount of drawings is increased by the amount of interest and hence the Drawings account is debited.

    For Example, Harry charged interest on drawings on Rs 10,000 @ 12% for one year.

    Explanation:

    Step 1: To identify the account heads.

    In this transaction, two accounts are involved, i.e. Drawings A/c and Interest on Drawings A/c.

    Step 2: To Classify the account heads.

    According to the modern approach: From the point of view of business,  Interest on Drawings is a Revenue A/c and Drawings A/c is an Expense A/c.

    Step 3: Application of Rules for Debit and Credit:

    According to the modern approach: As Revenue increases because of interest on drawings received by the business, Interest on Drawings A/c will be Credited. (Rule – increase in Revenue is credited).

    Drawings A/c is an expense account for the business and as expense increases, Drawings A/c will be debited. (Rule – increase in the expenses is debited).

    So from the above explanation, the Journal Entry will be-

    Particulars Amount Amount
    Drawings A/c                                                      Dr 1,200
         To Interest on Drawings A/c 1,200

     

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