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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    The Journal entry for cash withdrawn from the bank is a contra entry.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 I am assuming that cash is withdrawn from the bank for business use.

    Journal Entry for Cash Withdrawn from Bank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

    Particulars L.F. Amount Nature of Account Accounting Rule
    Cash a/c   XXX Real Debit- What comes into the business.
     To Bank a/c    XXX Personal Credit- The Giver.

    (Being cash withdrawn from the bank).

    2. Modern Accounting Perspective

    Particulars L.F. Amount Nature of Account Accounting Rule
    Cash a/c   XXX Asset Debit- The Increase in Asset.
     To Bank a/c    XXX Asset Credit- 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    (Being cash withdrawn from the bank).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.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    15th May Cash a/c   5,00,000 Asset Debit- The Increase in Asset.
       To Bank a/c    5,00,000 Asset Credit– The Decrease in Asset.

    (Being cash withdrawn from the bank).

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  2. 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/c Debit Nominal account Debit all expenses and losses
     To Outstanding Salary A/c Credit Personal account (Representative) Credit the giver

    (Being salary due)

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

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

    (Being salary paid)

    2. According to the “Modern rules” of accounting

    a. Entry for salary due

    Salary A/c Debit Expense Debit the increase in expense
     To Outstanding Salary A/c Credit Liability Credit the increase in liability

    (Being salary due)

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

    Outstanding Salary A/c Debit Liability Debit the decrease in liability
     To Cash/Bank A/c Credit Asset Credit 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/c Debit 100,000 Debit the increase in expense
     To Outstanding Salary A/c Credit  100,000 Credit 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/c Debit 100,000 Debit the decrease in liability
     To Cash/Bank A/c Credit  100,000 Credit the decrease in asset

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

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  3. 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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  4. 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/c Debit Debit  the increase in expense
    To Vendor a/c Credit Credit the increase in liability

    (being goods purchased from the vendor on credit)

    2.

    Vendor a/c Debit Debit  the decrease in liability
    To Cash a/c Credit Credit 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:

    May Purchase a/c Debit 60,000
    To  Vendor a/c Credit 60,000

    (being goods purchased on credit from the vendor)

    July Vendor a/c Debit 60,000
    To  Cash a/c Credit 60,000

    (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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  5. 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:

    Particulars Debit/Credit Amount Amount
    Advance Rent Paid
    Prepaid Rent A/c Debit 30,000
        To Cash A/c Credit 30,000
    (Being rent paid in advance)

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

    Particulars Debit/Credit Amount Amount
    Rent Expense When Actually Incurred
    Rental Expenses A/c Debit 10,000
        To Prepaid Rent A/c Credit 10,000
    (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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  6. 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/c Debit Nominal account Debit all expenses and losses
     To Cash/Bank A/c Credit Real account/Personal account Credit what goes out/Credit the giver

    (Being salary paid by cash/cheque)

    2. According to the “Modern rules” of accounting

    Salary A/c Debit Expense Debit the increase in expense
     To Cash/Bank A/c Credit Asset Credit 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/c Debit 500,000 Debit the increase in expense
     To Bank A/c Credit  500,000 Credit 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/c Debit 75,000 Debit the increase in expense
     To Cash A/c Credit  75,000 Credit the decrease in asset

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

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  7. 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

    Particulars Debit/Credit Amount Amount
    Interest received from a bank
    Bank A/c Dr Debit 1,500
        To Interest Income A/c Credit 1,500
    (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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  8. This answer was edited.

    Meaning of Days Payable Outstanding Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annRead more

    Meaning of Days Payable Outstanding

    Days Payable Outstanding (DPO) refers to the average number of days taken by an organization (or) company to pay to its outstanding suppliers/vendors. It is calculated on the credit purchases made by an organization. It is computed on a monthly, quarterly (or) annual basis. This portraits how well can a company manage its cash outflows.

    If the company takes less time to make payment to its outstanding suppliers then it states that an organization has a strong financial position. but if the company takes a more (or) longer time to pay its outstanding supplier then it could either be an action plan or else the company’s financial position is weak.

    Formula

    The following formula is used for calculating Days Payable Outstanding (DPO) of an organization.

    Formula of Days Payable Outstanding

    Where Cost of Goods Sold (COGS) = Opening Inventory + Purchases – Closing Inventory.

    Example

    ABC Ltd has furnished you with the following information. Compute Days Payable Outstanding.

    S.No. Particulars Amount
    1. Average Accounts Payable 45,000
    2. Cost of Goods Sold 2,25,000
    3. Number of Days 30

    Calculation Part-

    Days Payable Outstanding = Average Accounts Payable * No. of days/Cost of Goods Sold

    = 45,000 * 30/2,25,000

    = 6 Days

    In my perspective, 6 days is a low average period for an organization for making the payments to all the outstanding suppliers. Therefore it represents a fairly good DPO. Although it depends on the organization about their understandability on high or low DPO.

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  9. Commission Received refers to a percentage amount received by the company (or) an individual on the total sales incurred. It is an indirect income/revenue recorded on the credit side of profit and loss account. The term "commission" is more likely used in the stock market which is paid to a broker oRead more

    Commission Received refers to a percentage amount received by the company (or) an individual on the total sales incurred. It is an indirect income/revenue recorded on the credit side of profit and loss account. The term “commission” is more likely used in the stock market which is paid to a broker on the sale of shares (or) securities.

    Journal Entry for Commission Received

    Nowadays many organization uses a bank account for every business transaction i.e., either to make or receive payment. The journal entry on the commission received can be recorded in two different approaches of accounting. They are

    1. Traditional Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Bank a/c   XXX Personal Debit- The Receiver
     To Commission Received a/c    XXX Nominal Credit- All Incomes and Gains

    (Being commission received)

    2. Modern Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Bank a/c   XXX Asset Debit- The Increase in Asset.
     To Commission Received a/c    XXX Income Credit- The Increase in Income.

    (Being Commission received)

    Example

    On 1st March, Anna Ltd. received a commission amounting to 70,000 through cheque. Journalise the following transaction.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st March Bank a/c   70,000 Asset Debit- The Increase in Asset
       To Commission Received a/c    70,000 Income Credit- The Increase in Income.

    (Being commission received through cheque)

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  10. 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/c Debit Debit the increase in asset
    To Debtor a/c Credit Credit the decrease in asset

    (being cash received from the debtor)

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

    Cash a/c Debit Debit the increase in asset
    To Sales a/c Credit Credit the increase in revenue

    (being goods sold)

    3. Journal entry for cash received from withdrawal

    Cash a/c Debit Debit the increase in asset
    To Bank a/c Credit Credit the decrease in asset

    (being cash received from withdrawal)

    4. Journal entry for cash received from other income

    Cash a/c Debit Debit the increase in asset
    To Other income a/c Credit Credit 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/c Debit Debit the increase in asset
      To Capital a/c Credit Credit the increase in revenue

    (being additional capital introduced)

    Hope this helps.

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