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Discy Latest Questions

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    No, Goodwill is not a fictitious asset. What is Good Will? Goodwill of an entity is an intangible asset. It can be said that it's the excess amount an entity is liable to pay when it purchases all the assets at a price higher than its fair market value of another entity. The purchasing entity is wilRead more

    No, Goodwill is not a fictitious asset.

    What is Good Will?

    Goodwill of an entity is an intangible asset. It can be said that it’s the excess amount an entity is liable to pay when it purchases all the assets at a price higher than its fair market value of another entity. The purchasing entity is willing to pay the higher amount reasons such as brand image, modernised technology, high-grade employee relationships etc.

    The goodwill is valued at the time of the merger of two or more entities or acquisition of one by another entity.

    It is generally noticed that better the organisation’s reputation higher is the value of goodwill.

    What is a Fictitious Asset?

    Fictitious means “Bogus” or “Untrue” and asset means anything beneficial for the organisation.
    Thus fictitious assets are not an asset but just the expenses or losses which can not be accounted for in the current reporting period rather are to be written off in the future reporting period.

    For Example,

    • Preliminary Expenses
    • Miscellaneous Expenses
    • Loss on Issue of Debentures
    • Discount on Share Issue.

     

    Why is goodwill not a fictitious asset?

    Goodwill is an intangible asset and not a fictitious asset. A fictitious asset does not have a realizable value as it is merely an expenditure incurred by the company. It does not have a tangible existence either. Whereas goodwill has a monetary value i.e it has a realizable value even though it has no tangible existence.  Hence, it’s an intangible asset.

    Goodwill is presented in a balance sheet as –

    Goodwill as an Intangible Asset


    Aastha.

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    Before I answer this question of your's it would be beneficial for you to have clarity over the concept of Deferred Revenue. Meaning of a Deferred Revenue Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before renderingRead more

    Before I answer this question of your’s it would be beneficial for you to have clarity over the concept of Deferred Revenue.

    Meaning of a Deferred Revenue

    Deferred revenue is an amount received by an entity in advance before delivering the goods or transferring the title to goods or before rendering the services.

    The concept of deferred revenue applies only if an entity follows the Accrual System of Accounting. If the entity follows the cash system of accounting it’s of no relevance as the entire amount received becomes income in the year of receipt.

    Whether the Deferred Revenue is a Liability?

    The answer to this question is  “Yes” it is a liability. Even though you got the answer that it is a liability but I believe a part of the question remains unanswered i.e why is it a liability?

    The logic for the same is- Since the entity has already received the amount even before rendering services or delivering goods the entity or a company has a sort of an obligation to deliver the goods or render such services at the predetermined future date. Failing which it may be liable to face legal proceedings or legal actions. Hence, it becomes a liability on a part of the entity to honour such a transaction.

    When the entity receives the amount before delivering goods or rendering services that amount is recorded as a “Liability” and once the goods are delivered or services are rendered the liability is reduced and the entity records it as a “Revenue”.

    For Example,

    In the case of an Educational Institutes like the Universities, Coaching Institutes etc. it charges fees even before the term commences. In such a case the entity has not yet rendered service of imparting education hence, the tuition fees so received shall become a deferred revenue and shall be recorded as a liability at the time of the receipt and at as and when it’s accrued it shall be recorded as revenue.

    Journal Entry for the same shall be:

    At the time of receipt of Tuition Fees-

    Cash  A/cDebitDebit the Increase in an Asset.
    Deferred Revenue A/cCreditCredit the Increase in a Liability.

    And at the time of recording revenue on monthly basis every month-

    Deferred Revenue A/cDebitDebit the Decrease in a Liability.
    Tuition Fees Earned A/cCreditCredit the Increase in an Income.

    Deferred Revenue is Presented in the Balance Sheet as –

    Deferred Revenue in Balance Sheet

    Conclusion

    Deferred revenue at the time of early receipt of the amount is recorded as a liability and at the time of actual income recorded as revenue in the income statement.


    Aastha Mehta.

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    First, let me help you interpret the difference between Receipts & Income along with the help of an example. Difference between Income & Receipts  Income Receipts Income refers to the amount received by an entity from its core business operations and day to day functioning. Any cash inflow rRead more

    First, let me help you interpret the difference between Receipts & Income along with the help of an example.

    Difference between Income & Receipts 

    IncomeReceipts
    Income refers to the amount received by an entity from its core business operations and day to day functioning.Any cash inflow received by an entity can be termed as receipts.
    All incomes affect the statement of profit & loss.But all receipts do not affect profit & loss statement.
    Income includes only revenue receipts.

     

    Receipts include both capital receipts & revenue receipts.
    It can be cash or non-cash in nature. For eg. non-cash items such as an unrealized gain from investments, profit on revaluation of fixed assets are also considered as income.It is only cash in nature.

    Examples of Receipts & Income

    For instance, XYZ Inc. receives the following amount in the month of January 20×1. Let us differentiate the following transactions as receipts or income.

    1. Borrowed 50,000 from a bank for establishing a new unit.
    2. Amount of 10,000 received from the disposal of an old machine.
    3. Amount of 600,000 received from the issue of new shares & debentures of XYZ Inc.
    4. 500,000 received as consideration for the sale of goods or services.
    5. Rent received 60,000 from the tenant.
    6. Interest & Dividend received 15,000 from investments in Amazon Inc.

    All the above examples can be termed as receipts but all of them cannot be termed as income. Only examples 4, 5, & 6 can be referred to as income for XYZ Inc.

    Eg. 1, 2, & 3 are capital receipts and will not affect the statement of profit & loss of XYZ Inc. Therefore they are termed only as receipts & not income.

    Whereas eg. 4, 5, & 6 are revenue receipts and will affect the profit & loss statement. Therefore, they can be referred to as income for XYZ Inc.

    Now moving forward, let me help you understand the difference between payments & expenditure, with the help of an example.

    Difference between Payments & Expenditure

    ExpenditurePayments
    Expenditure refers to the amount incurred by an entity for operating the business and for earning income.Any cash outflow incurred by an entity can be termed as payments.
    All expenses affect the statement of profit & loss.But all payments do not affect profit & loss statement.
    Expenditure includes only revenue expenditure.

     

    Payments include both capital expenditure & revenue expenditure.
    It can be cash or non-cash in nature. For eg. non-cash items such as depreciation, amortization, bad debts are also considered expenses.It is only cash in nature.

    Examples of Payments & Expenditure

    For instance, ABC Inc. incurs the following payments in the month of January 20×1. Let us differentiate these transactions as payments or expenditures.

    1. Paid 40,000 for the acquisition of new machinery.
    2. Paid 200,000 for the redemption of shares and debentures issued by ABC Inc.
    3. Repaid 45,000 amount of loan taken from the financial institution.
    4. Salary & Wages paid 100,000.
    5. Purchase of Raw materials 30,000.
    6. Professional fees paid 15,000.

    All the above examples can be referred to as payments by ABC Inc. but all of them cannot be termed as expenditures. Only examples 4, 5, & 6 can be referred to as expenditures for ABC Inc.

    Eg. 1, 2, & 3 are capital expenditures and will not affect the statement of profit & loss of ABC Inc. Therefore they are termed only as payments and not expenditures.

    Whereas eg. 4, 5, & 6 are revenue expenditures and will affect the profit & loss statement. Therefore, they can be referred to as expenditure for ABC Inc.

    Conclusion

    1. All cash incomes are receipts. But all cash receipts are not income.
    2. All cash expenditures are payments. But all cash payments are not expenditure.

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    In the business world, the terms "Debt" and "Liability" are used interchangeably and are understood to be the same. But in reality, they differ. Debt Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date. For Example, Term loans acceptedRead more

    In the business world, the terms “Debt” and “Liability” are used interchangeably and are understood to be the same. But in reality, they differ.

    Debt

    Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date.

    For Example,

    • Term loans accepted from a bank or financial institutions for business expansion
    • Car loan, Home loan, Education loan

    Liability

    Liability is an obligation to render goods or services or an economic obligation to be discharged off at a future date.

    For Example,

    • Outstanding payment to suppliers of raw materials
    • Outstanding Expenses – accrued rent, outstanding professional fees, outstanding electricity expenses, unpaid salary, etc
    • Income received in advance – rent received in advance, commission received in advance, etc
    • Bills payable
    • Debts accepted by an entity

    Key differences between Debt and Liability

    Now, let me help you understand the differences between the two terms discussed above, debt and liability.

    Particulars

    Debt

    Liability

    1. Narrow/Broad aspectDebt is an integral part of liability. It is a type of liability.Liability is a broader term and it includes debt and other payables.
    2. Repayment modeDebt can be repaid back only in cash.Liabilities other than debt can be settled by rendering goods or services or by paying cash.
    3. OccurrenceDebt does not arise on a daily basis. It results only when an entity borrows money from another party.Other liabilities arise during the course of the day to day operations of the business.
    4. Formal agreementDebt involves a formal agreement between the borrower and the lender.Liabilities apart from debt may not involve such a formal agreement between the parties.
    5. UtilizationDebt helps entities for business expansion and diversification.Liabilities help entities conduct their daily business functions and processes.
    6. Interest paymentThe repayment of debt involves payment of interest along with the principal amount.Discharge of other liabilities may not involve payment of interest along with the actual amount of liability.
    7. Option of installmentsDebt repayment usually provides an option of payment in installments.Liabilities settlement may not provide such an option to the borrower.

    Conclusion

    All debts are liabilities, but not all liabilities are debts.

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    Yes, Nancy, there are few assets which show the credit balance. Those assets generally hold zero or unfavourable balance. Assets which have a credit balance In accounting perspective assets and expenses generally have a debit balance whereas liabilities, revenue and capital have a credit balance. YeRead more

    Yes, Nancy, there are few assets which show the credit balance. Those assets generally hold zero or unfavourable balance.

    Assets which have a credit balance

    In accounting perspective assets and expenses generally have a debit balance whereas liabilities, revenue and capital have a credit balance. Yet there exist a couple of assets which do have a credit balance those assets are known as contra assets.

    Contra Asset

    A contra asset is referred to an asset which generally has a zero or negative balance. Such an asset is used to offset or reduce the balance of the respective asset account with which it is paired to. Hence reducing or offsetting the amount of the respective asset account with the contra asset account gives us the net value of the respective asset.

    It acts as an asset holding credit balance. Contra assets are useful for the organization because it allows them to follow the matching principle by initially recording an expense in the contra asset account.

    Assets with a negative balance

     

    For Example- Max purchased an air conditioner from eBay for 4,00,000. The salvage value of air- conditioner is 30,000 and has an expected useful life of 10 years. On 31-12-yyyy, how much balance will be shown in the Accumulated Depreciation account.

    Calculation Part

    Annual Depreciation = (Value of Asset – Salvage value)/Estimated life of the asset.

    = (4,00,000 – 30,000)/10  => 37,000

     Dr                                       Accumulated Depreciation a/c                                     Cr

    DateParticularsAmountDateParticularsAmount
    31-12-yyyyBy Dep. a/c37,000
    31-12-yyyyBy Dep. a/c37,000
    31-12-yyyyBy Dep. a/c37,000
    31-12-yyyyBy Dep. a/c37,000
    Total1,48,000

    Net Asset value = Total asset value – Accumulated Depreciation

    = 4,00,000 – 1,48,000  => 2,52,000

    Placement in the Balance Sheet

    Assets with Negative Balance

    Here in the balance sheet “Accumulated Depreciation” shows a negative balance which is a contra asset and it is deducted from the respective asset account. Hence providing us with the Net value of the asset.

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  1. This answer was edited.

    As we all know, a payment is made when we purchase a good or service on a credit or cash basis. In terms of a business, a vendor (supplier/creditor) is a person who sells goods to the company on a cash or credit basis with an agreement to receive the payment within a specified period. This in turn aRead more

    As we all know, a payment is made when we purchase a good or service on a credit or cash basis. In terms of a business, a vendor (supplier/creditor) is a person who sells goods to the company on a cash or credit basis with an agreement to receive the payment within a specified period.

    This in turn affects the accounts payables as the vendors are the creditors of the company as well as considered a short-term liability and are recorded under the head of current liabilities in the balance sheet.

    Journal entry for payment to vendor

    1.

    Purchase a/cDebitDebit  the increase in expense
    To Vendor a/cCreditCredit the increase in liability

    (being goods purchased from the vendor on credit)

    2.

    Vendor a/cDebitDebit  the decrease in liability
    To Cash a/cCreditCredit the decrease in asset

    (being payment made to the vendor)

    Example

    XYZ Ltd. purchased goods from a vendor amounting to 60,000 on a credit basis in May and agreed to make the due payment in July. The journal entries in the books of XYZ Ltd. are as follows:

    MayPurchase a/cDebit60,000
    To  Vendor a/cCredit60,000

    (being goods purchased on credit from the vendor)

    JulyVendor a/cDebit60,000
    To  Cash a/cCredit60,000

    (being payment made to the vendor in cash)

    Note: In case the company purchases the goods from the vendor directly for cash then only the following entry shall be passed in the books of accounts:

     

    Purchase a/c

     

    Debit

    Debit the increase in expense
     

    To Cash a/c

     

    Credit

    Credit the decrease in asset

    (being goods purchased from the vendor for cash)

    Hope this helps.

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  1. This answer was edited.

    Salary due is the amount of salary payable for a particular period but the related services corresponding to the amount of salary payable have already been availed by the business entity. It is also known as salary outstanding. It is a liability for the business entity. Journal Entry for Salary DueRead more

    Salary due is the amount of salary payable for a particular period but the related services corresponding to the amount of salary payable have already been availed by the business entity. It is also known as salary outstanding. It is a liability for the business entity.

    Journal Entry for Salary Due

    Journal entry for salary due/payable can be recorded in the books of accounts using both the golden rule and the modern rule of accounting.

    1. According to the “Golden rules” of accounting

    a. Entry for salary due

    Salary A/cDebitNominal accountDebit all expenses and losses
     To Outstanding Salary A/cCreditPersonal account (Representative)Credit the giver

    (Being salary due)

    b. Entry at the time of actual payment of the salary due

    Outstanding Salary A/cDebitPersonal account (Representative)Debit the receiver
     To Cash/Bank A/cCreditReal account/Personal accountCredit what goes out/Credit the giver

    (Being salary paid)

    2. According to the “Modern rules” of accounting

    a. Entry for salary due

    Salary A/cDebitExpenseDebit the increase in expense
     To Outstanding Salary A/cCreditLiabilityCredit the increase in liability

    (Being salary due)

    b. Entry at the time of actual payment of the salary due

    Outstanding Salary A/cDebitLiabilityDebit the decrease in liability
     To Cash/Bank A/cCreditAssetCredit the decrease in asset

    Example

    ABC Ltd did not pay salary 100,000 for the month of March 20xx due on 31st March 20xx because of lack of funds. However, they paid the due salary on 25/04/20xx.

    1. Journal entry for salary due on 31/03/20xx

    Salary A/cDebit100,000Debit the increase in expense
     To Outstanding Salary A/cCredit 100,000Credit the increase in liability

    (Being salary due for the month of March 20xx)

    2. Journal entry at the time of payment on 25/04/20xx

    Outstanding Salary A/cDebit100,000Debit the decrease in liability
     To Cash/Bank A/cCredit 100,000Credit the decrease in asset

    (Being salary paid for the month of March 20xx)

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  1. In this modern business world, Banks performs various functions to an organization such as it accepts various deposits from the debtors, makes payment to the creditors on the standing instructions of the company. Banks provide various agency and miscellaneous services to an organization. The JournalRead more

    In this modern business world, Banks performs various functions to an organization such as it accepts various deposits from the debtors, makes payment to the creditors on the standing instructions of the company. Banks provide various agency and miscellaneous services to an organization.

    The Journal entry for cash withdrawn from the bank is a contra entry. Cash can be taken from the bank for two uses either for personal use (or) business use. I am assuming that cash is withdrawn from the bank for business use.

    Journal Entry for Cash Withdrawn from Bank

    This journal entry can be recorded in two different accounting perspectives they are-

    1. Traditional Accounting Perspective

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Cash a/c XXXRealDebit- What comes into the business.
     To Bank a/c  XXXPersonalCredit- The Giver.

    (Being cash withdrawn from the bank).

    2. Modern Accounting Perspective

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Cash a/c XXXAssetDebit- The Increase in Asset.
     To Bank a/c  XXXAssetCredit- The Decrease in Asset.

    (Being cash withdrawn from the bank).

    Example

    On 15th May, Anna Ltd withdraws 5,00,000 from their Bank account for business purpose. Journalise the following transaction.

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    15th MayCash a/c 5,00,000AssetDebit- The Increase in Asset.
      To Bank a/c  5,00,000AssetCredit– The Decrease in Asset.

    (Being cash withdrawn from the bank).

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  1. This answer was edited.

    Cash Withdrawn from Bank for Office Use the cash withdrawn from bank for office use shall be recorded in the books as: Journal Entry: (Using modern rules of accounting) Why is cash account debited? When we withdraw an amount from the bank we receive cash i.e the entity's cash in hand balance increasRead more

    Cash Withdrawn from Bank for Office Use

    the cash withdrawn from bank for office use shall be recorded in the books as:

    Journal Entry: (Using modern rules of accounting)

    cash withdrawn from bank for office use

    Why is cash account debited?

    When we withdraw an amount from the bank we receive cash i.e the entity’s cash in hand balance increases. As per the modern rules of accounting, we debit the increase in an asset. And so in the above entry cash account is debited.

    Why is bank account credited?

    When an amount is withdrawn from the bank the entity receives cash while the balance in his bank account reduces. Thus as per the modern rules of accounting, we credit the decrease in an asset. The bank account of an entity is shown under the head of current assets and so it’s credited since the withdrawals lead to a reduction in the balance with the bank. Hence, in the above entry bank account is credited.

    Journal Entry: (Using golden rules of accounting)

    Cash withdrawn for office use

    Why is the cash account debited?

    As per the golden rule of accounting, cash account is classified as a real account. As per the rule for a real account, we debit what comes in and credit what goes out. Hence, when the cash is withdrawn for the office use we receive cash hence, cash account is debited.

    Why is the bank account credited?

    As per the golden rule of accounting, the bank account is classified as a personal account. As per the rule for a personal account, we debit the receiver and credit the giver. Here, Bank balance reduces i.e bank is the giver hence, its credited.


    Aastha Mehta.

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  1. This answer was edited.

    Rent Paid in Advance A rent paid in advance is nothing but the prepaid rent. When an entity rents a factory it is liable to pay a pre-decided sum of money for using the premise or property of another person. Thus, when this pre-decided amount is paid for such factory even before availing the benefitRead more

    Rent Paid in Advance

    A rent paid in advance is nothing but the prepaid rent. When an entity rents a factory it is liable to pay a pre-decided sum of money for using the premise or property of another person.

    Thus, when this pre-decided amount is paid for such factory even before availing the benefits. It can be said that the rent is paid in advance.

    Journal Entry for Advance Rent Paid

    Accounting treatment of advance paid for rent by using the “Modern Rules of Accounting” –

    At the time of making an actual payment –

    Prepaid Rent using modern rules of accounting

    Why do we debit prepaid rent?

    Rental payment is basically an expense for an organization or any person for that matter hence we debit the increase in expenses. When such rent is paid in advance it can be called as an asset since it will generate some economic value to an organization or an entity in future.

    Since prepaid rent is an asset as per the modern rules of accounting we debit the increase in an asset.

    Why do we credit cash a/c?

    Cash is an asset, to be precise it’s a current asset. And when an entity makes an advance payment of rent the cash in hand balance with an entity reduces.

    Hence, as per the “Modern Rules of Accounting,” we credit the decrease in an asset hence cash being an asset is credited as such payment reduces the organization’s cash balance.

    At the time when the prepaid rent actually applies-

    Journal entry when actual rent is incurred

    For Example,

    Mr Max pays rent of 10,000 every month. Thus, the landlord and Mr Max entered into an agreement that Mr Max will pay rent at the beginning of each quarter for the entire quarter. So, Mr Max pays at the beginning of every quarter the amount of 30,000.

    The journal entries for above shall be:

    ParticularsDebit/CreditAmountAmount
    Advance Rent Paid
    Prepaid Rent A/cDebit30,000
        To Cash A/cCredit30,000
    (Being rent paid in advance)

    And at the end of every month, the journal entry to be passed shall be –

    ParticularsDebit/CreditAmountAmount
    Rent Expense When Actually Incurred
    Rental Expenses A/cDebit10,000
        To Prepaid Rent A/cCredit10,000
    (Being rental expense incurred at every month end)

    I have tried to explain the journal entry for prepaid rent as simply as I can. I hope it helped.


    Aastha Mehta.

     

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  1. In this growing competitive world, every organization needs to retain its loyal and trustworthy staff members and make a timely payment towards wages and salaries to its workers and employees. Timely payment not only motivates and built the confidence of the workers and employees but also encouragesRead more

    In this growing competitive world, every organization needs to retain its loyal and trustworthy staff members and make a timely payment towards wages and salaries to its workers and employees. Timely payment not only motivates and built the confidence of the workers and employees but also encourages them to achieve organizations short term and long term goals.

    Journal Entry for wages paid in cash

    This entry can be recorded in the books of accounts by using two different approaches of accounting. They are-

    1. Traditional Accounting Approach

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Wages a/c XXXNominalDebit- All expenses and Losses
     To Cash a/c  XXXRealCredit- What goes out of the business.

    (Being paid wages in cash)

    2. Modern Accounting Approach

    ParticularsL.F.AmountNature of AccountAccounting Rule
    Wages a/c XXXExpenseDebit- The Increase in Expense
     To Cash a/c  XXXAssetCredit- The Decrease in Asset.

    (Being wages paid in cash)

    Example

    On 4th March, Anna Ltd. makes a payment towards wages amounting to 40,000 in cash. Journalise the following transaction in the books of Anna Ltd.

    In the Books of Anna Ltd.

    DateParticularsL.F.AmountNature of AccountAccounting Rule
    4th MarchWages a/c 40,000ExpenseDebit- The Increase in Expense
      To Cash a/c  40,000AssetCredit- The Decrease in Asset.

    (Being wages paid in cash)

    Hope this helps.

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  1. This answer was edited.

    Cash is commonly received by the business under the following situations: 1. Receipt of payment by a debtor in cash. 2. Sale of goods by the business on a cash basis. 3. Withdrawal of cash from the bank. 4. Cash received from other income. 5. Additional capital introduced by the partner, etc. It isRead more

    Cash is commonly received by the business under the following situations:

    1. Receipt of payment by a debtor in cash.

    2. Sale of goods by the business on a cash basis.

    3. Withdrawal of cash from the bank.

    4. Cash received from other income.

    5. Additional capital introduced by the partner, etc.

    It is important to note that the receipt of cash in any of the above-mentioned scenarios is always debited in the books of accounts because it is an asset for the business.

    1. Journal entry for cash received by the debtor

    Cash a/cDebitDebit the increase in asset
    To Debtor a/cCreditCredit the decrease in asset

    (being cash received from the debtor)

    2. Journal entry for cash received from the sale of goods

    Cash a/cDebitDebit the increase in asset
    To Sales a/cCreditCredit the increase in revenue

    (being goods sold)

    3. Journal entry for cash received from withdrawal

    Cash a/cDebitDebit the increase in asset
    To Bank a/cCreditCredit the decrease in asset

    (being cash received from withdrawal)

    4. Journal entry for cash received from other income

    Cash a/cDebitDebit the increase in asset
    To Other income a/cCreditCredit the increase in revenue

    (being cash received from other incomes such as commission, rent, interests, etc)

    5. Journal entry for additional capital introduced by the partner

    Cash a/cDebitDebit the increase in asset
      To Capital a/cCreditCredit the increase in revenue

    (being additional capital introduced)

    Hope this helps.

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  1. This answer was edited.

    Individuals employed in an organization receive salary but salaried individuals do not maintain books of accounts. They are not required to pass any journal entry and prepare financial statements. So, it is assumed that the question asked is “journal entry for salary paid” and not for salary receiveRead more

    Individuals employed in an organization receive salary but salaried individuals do not maintain books of accounts. They are not required to pass any journal entry and prepare financial statements.

    So, it is assumed that the question asked is “journal entry for salary paid” and not for salary received. An employer paying salary to his employees will be required to pass the journal entry in his books of accounts for salary paid.

    Journal Entry for Salary Paid

    I will present the journal entry in the books of the employer for salary paid using both the golden rule and the modern rule of accounting.

    1. According to the “Golden rules” of accounting

    Salary A/cDebitNominal accountDebit all expenses and losses
     To Cash/Bank A/cCreditReal account/Personal accountCredit what goes out/Credit the giver

    (Being salary paid by cash/cheque)

    2. According to the “Modern rules” of accounting

    Salary A/cDebitExpenseDebit the increase in expense
     To Cash/Bank A/cCreditAssetCredit the decrease in asset

    (Being salary paid by cash/cheque)

    Example

    1. Textile Inc. paid salary amounting to 500,000 to its employees by cheque or through online modes for the month of March 20xx on 31/03/20xx.

    Journal entry in the books of Textile Inc. on 31/03/20xx will be as follows-

    Salary A/cDebit500,000Debit the increase in expense
     To Bank A/cCredit 500,000Credit the decrease in asset

    (Being salary paid by cheque or through online modes for the month of March 20xx)

    2. Jute Inc. paid salary amounting to 75,000 to its employees in cash for the month of March 20xx on 31/03/20xx.

    Journal entry in the books of Jute Inc. on 31/03/20xx will be as follows-

    Salary A/cDebit75,000Debit the increase in expense
     To Cash A/cCredit 75,000Credit the decrease in asset

    (Being salary paid in cash for the month of March 20xx)

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  1. To begin with, three types of businesses can be commenced i.e. sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting. Journal entry fRead more

    To begin with, three types of businesses can be commenced i.e. sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting.

    Journal entry for started business with cash

    The cash a/c is debited as it is an asset for the business and the capital a/c is credited as it is a liability for the business according to the business entity concept.

    1. According to the golden rules of accounting:

    Cash a/cDebitDebit what comes in
    To Capital a/cCreditCredit the giver

    (being business commenced with cash)

    2. According to the modern rules of accounting:

    Cash a/cDebitDebit the increase in asset
    To Capital a/cCreditCredit the increase capital

    (being business commenced with cash)

    Example

    Mr. A commenced business with cash (capital) amounting to 1,00,000. The journal entry in the books of Mr. A is as follows

    Cash a/cDebit1,00,000
    To Capital a/cCredit1,00,000

    (being business commenced with cash)

    Hope this helps.

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  1. Journal entry for an interest received from a bank The interest received from the bank can be transacted in the journal book using the modern rules of accounting as -   Why Bank A/c is Debited? when the interest income is accrued it increases the bank balance and the bank balance is recorded asRead more

    Journal entry for an interest received from a bank

    The interest received from the bank can be transacted in the journal book using the modern rules of accounting as –

     

    Journal entries for interest income received from a bank

    Why Bank A/c is Debited?

    when the interest income is accrued it increases the bank balance and the bank balance is recorded as a current asset. Hence, its debited since interest income increases the entity’s bank balance.

    Why is Interest Received Credited?

    The interest received is an income for an entity and as per the modern rules of accounting, we credit the increase in income. Therefore, we credit interest income a/c.

    The interest received from the bank can be transacted in the journal book using the golden rules of accounting as –

    Journal entries for interest on income from bank using golden rules of accounting

    Why is Bank A/c Debited?

    Bank Account is classified as a “personal account” and as per the golden rule of accounting for personal account “we debit the receiver and credit the giver.”And hence, we debit the bank account.

    Why is income received from bank credited?

    Income received from a bank can be classified as “nominal account” and as per the golden rule of accounting for nominal account “we debit all expenses and losses and credit all incomes and gains.” so, interest received from the bank is credited.

    For Example,

    Mr Alex has a savings account with ABC Bank. The balance at the end of the first quarter with the bank is 1,00,000. The bank offers 6% p.a interest on such balance. Journalise the same.

    Solution :

    Journal of Mr Alex

    ParticularsDebit/CreditAmountAmount
    Interest received from a bank
    Bank A/c DrDebit1,500
        To Interest Income A/cCredit1,500
    (Being interest @ 6% p.a received from the bank for the first quarter)

     

    I have tried to logically explain the entry for interest income from the bank. I hope it helps.


    Aastha Mehta.

     

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