Withdrawals by the proprietor from the business for his personal use:

Withdrawals by the proprietor from the business for his personal use:

     Whenever the proprietor of a business withdraws cash, goods or any other asset from the business for his personal or domestic use, it should be treated as drawings, and so, it should be recorded in the Drawings Account opened in the name of the proprietor.

     Similarly, whenever the personal or household expenses of the proprietor, such as his club bill, life insurance premium, income-tax, school and college fees of his children, the wages and salaries of his domestic servants, the rent, electricity charges and water charges of his residence are paid by the business, they should be treated as drawings, and so, they should be recorded in the Drawings Account opened in the name of the proprietor.

      The two accounts that are required to be taken into consideration for recording the cash withdrawn by the proprietor from the business for his personal use are (1) Drawings Account and (2) Cash Account (if cash is withdrawn from the business) or Bank Account (if money is withdrawn from the bank).

     The two accounts that are required to be taken into account for recording the goods withdrawn by the proprietor from the business for his personal use are (1) Drawings Account and (2) Purchases Account (If the goods are withdrawn at cost price) or Sales Account (if the goods are withdrawn at selling price or if goods are withdrawn at cost price frequently).

     The two accounts that are required to be taken into consideration for recording any asset, say furniture, taken away by the proprietor from the business for his personal or household use are (1) Drawings Account and (2) Concerned Asset Account.

     The two accounts that are required to be taken into consideration for recording the private or domestic expenses of the proprietor paid by the business are   (1) Drawings Account and (2) Cash Account (i.e., if such expenses are paid out of business cash) or Bank Account (if such expenses are paid by the bank).

Journal Entries with illustrations:

https://docs.google.com/spreadsheets/d/10DwZUM1Ip1GQAs7PMQwi07pZgjwsxoZTob_ZiSRDEDg/edit?usp=drivesdk

Commencement of business with Creditors:

Commencement of business with Creditors:

Illustration 1.

     Arun commenced business with Creditors of Rs.1,000. Pass the journal entry.

Note: This transaction means that the proprietor has brought his private creditors (i.e., the amounts due from him to creditors on private account) into the business. (That is, the private creditors of the proprietor are treated as the creditors of the business).

     When the proprietor brings his private creditors into the business, the two accounts involved in the transaction are (a) capital account and (b) creditors account.

     Capital Account is a personal account. When the proprietor brings his private creditors into the business (i.e., when the private creditors of the proprietor are treated as the creditors of the business), the business discharges or frees the proprietor from his debts to the private creditors. This, in effect, means that the proprietor has received a benefit (i.e., discharge from his private liability or debt) from the business. As the proprietor is the receiver of benefit from the business, capital account has to be debited.

     Creditors account is a personal account. When the private creditors of the proprietor are brought into the business (i.e., treated as the creditors of the business), the creditors give up their claim against the proprietor in favour of the business. This, in effect, means that the creditors have given a benefit to the business. As the creditors are the givers of benefit to the business, creditors account has to be credited.

     The journal entry for this transaction will be: 

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                  Capital Account.    Dr.           1,000    

                   To Creditors Account.                        1,000

                 (Being the private

                    creditors of the 
                    proprietor brought
                    into  the business)

Commencement of business with debtors:

Commencement of business with debtors:

Illustration 1.

     Chandrasekhar commenced business with debtors of Rs.3,000. Pass the journal entry.

Note: This transaction means that the proprietor has brought his private debtors (i.e., the amounts due to him from debtors on private account) into the business. (That is, the private debtors of the proprietor are treated as the debtors of the business.)

     When the proprietor brings his private debtors into the business, the two accounts involved in the transaction are (a) debtors account and (b) capital account.

     Debtors account is a personal account. When the private debtors of the proprietor are brought into the business (i.e., when the private debtors of the proprietor are treated as the debtors of the business), the business discharges or frees the debtors from their debts to the proprietor. This, in effect, means that the debtors get a benefit (i.e., discharge of their debt to the proprietor) from the business. As the debtors are the receivers of benefit from the business, the debtors account has to be debited.

     Capital account is a personal account. When the proprietor brings his private debtors into the business (i.e., when the private debtors of the proprietor are treated as the debtors of the business), the proprietor gives up his claim against the private debtors in favour of the business. This, in effect, means that the proprietor has given a benefit to the business. As the proprietor is the giver of benefit to the business, capital account has to be credited.

     The journal entry for this transaction will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                  Debtors Account.    Dr.            3,000    

                   To Capital Account.                        3,000

                 (Being the debtors

                    brought into  the 
                   business by the 

                   proprietor)

Commencement of business with stock of goods:

Commencement of business with stock of goods:

Illustration 1.

     Chiranjeevi commenced business with stock of Rs.5,000. Pass the journal entry.

Note: This transaction means that the proprietor has brought his private stock of goods (i.e., the stock of goods which he had in his house) into the business. So, the two accounts involved in this transaction are (a) stock account and (b) capital account. Stock account is a real account. When the private stock of goods is brought into the business by the proprietor, stock of goods comes into the business. So, stock account has to be debited.

     Capital Account is a personal account. When the proprietor brings his private stock of goods into business, he is the giver of benefit to the business. So, capital account has to be credited.

     The journal entry for this transaction will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                  Stock Account.    Dr.               5,000.     

                   To Capital Account.                        5,000

                 (Being the stock of

                   goods brought into 

                  the business by the 
                   proprietor)

Commencement of business or introduction of capital into the business by the proprietor:

Commencement of business or introduction of capital into the business by the proprietor:

     Generally, a businessman commences business with cash. But, sometimes, he may commence business with cash as well as other assets, or with assets as well as liabilities, or only with borrowed money (i.e., only with liabilities). So, it is better to know the journal entry to be passed or introduction of capital by the proprietor under the various circumstances.
     Let us consider this point with some examples or illustrations.

Illustration 1.

     Gopalkrishna commenced business with cash Rs.5,000.

(Or)

     Gopalkrishna started business with Rs.5,000.

(Or)

     Cash brought in by Gopalkrishna as capital Rs.5,000.

(Or)

     Gopalkrishna introduced into the business Rs.5,000.

(Or)

     Gopalkrishna introduced into the business a capital of Rs.5,000.

(Or)

      Gopalkrishna started business with a capital of Rs.5,000.

(Or)

      Gopalkrishna invested in the business Rs.5,000.

(Or)

      Gopalkrishna started business with an investment of Rs.5,000.

(Or)

     Received from Gopalkrishna, the proprietor, Rs.5,000.

     Pass the journal entry.

Note:  Each of the above transactions means that the proprietor brings into the business cash of Rs.5,000 as capital. So, the two accounts involved in each of the transactions are (a)  Cash Account and (b) Capital Account. Cash Account should be debited, as cash comes into the business. Capital Account should be credited, as the proprietor is the giver of benefit, i.e., cash, to the business. The journal entry for each of these transactions will be

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                  Cash Account.    Dr.               5,000.     

                   To Capital Account.                        5,000

                 (Being the cash 

                   introduced into the

                   business by the 

                   proprietor as capital)

Illustration 2.

     Samson commenced business with Rs.10,000 received from his father-in-law as presents. Pass the journal entry.

Note: This transaction means that the proprietor has brought into the business as capital the cash of Rs.10,000 received by him from his father-in-law as presents. In short, this transaction means that the proprietor brought into the business cash of Rs.10,000 as capital. So, the two accounts in this transaction are (a) Cash Account and (b) Capital Account. Cash Account should be debited, as it comes into the business. Capital Account should be credited, as the proprietor is the giver of benefit, i.e., cash, to the business.

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                  Cash Account.    Dr.               10,000.     

                   To Capital Account.                        10,000

                (Being the cash 

                 brought into the

                 business by the

                 proprietor as

                 capital)

Illustration 3.

     Manon invested in the business the sale proceeds of his ancestral house Rs.50,000. Pass the journal entry.

      The sale proceeds of ancestral house invested in the business by Manon should be regarded as cash introduced in the business by Manon, the proprietor, as capital. So, the two accounts involved in this transaction are (a)  Cash Account and (b) Capital Account. Cash Account should be debited, as cash comes into the business. Capital Account should be credited, as the proprietor is the giver of benefit, i.e., cash, to the business.

The journal entry for this transaction will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                  Cash Account.    Dr.               50,000.     

                   To Capital Account.                        50,000

                (Being the cash 

                 brought into the

                 business by the

                 proprietor as

                 capital)

Illustration 4.

     

     Bandanna introduced into the business his private income of Rs.2,000. Pass the journal entry.

Note: The private income introduced into business by Bandanna should be treated as cash introduced into the business by Bandanna, the proprietor, as capital. So, the two accounts involved in this transaction are (a) Cash Account and (b) Capital Account. Cash Account should be debited, as cash comes into the business. Capital Account should be credited, as the proprietor is the giver of benefit, i.e., cash, to the business. 

The journal entry for this transaction will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                       Rs.        Rs.

                  Cash Account.    Dr.               2,000.     

                   To Capital Account.                        2,000

                (Being the cash 

                 brought into the

                 business by the

                 proprietor as

                 capital)

Illustration 5.

     Menon commenced business with Rs.8,000 in the bank. Pass the journal entry.

Note: This transaction means that the proprietor deposited Rs.8,000 into the bank account of the business as capital. In other words, it means that the banker of the business received Rs.8,000 from the proprietor as capital. So, the two accounts involved in this transaction are (a) Bank Account and (b) Capital Account. Bank Account should be debited as the bank is the receiver of benefit. Capital Account should be credited, as the proprietor is the giver of benefit.

The journal entry will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                  Bank Account.    Dr.               8,000.     

                   To Capital Account.                        8,000

                (Being the amount

                 deposited into the

                 Bank by the

                 proprietor as

                 capital)

Illustration 6.

     Iyengar commenced business with cash in hanRs.1,500 and cash at bank Rs.3,500. pass the journal entry.

Note:  This transaction means that the proprietor brought into the business cash of Rs.1,500 and deposited into the bank account of the business Rs.3,500 as capital. In other words, this transaction means that the business received cash of Rs.1,500 and the banker of business received Rs.3,500 from the proprietor as capital. So the accounts involved in this transaction are (a) Cash Account and Bank Account and (b) Capital Account. Cash Account should be debited as cash comes into the business, and Bank Account should be debited, as the bank is the receiver of benefit. Capital Account should be credited, as the proprietor is the giver of benefit. So, the journal entry for this transaction will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                 Cash Account.    Dr.               1,500
                 Bank Account.    Dr.               3,500.     

                   To Capital Account.                        15,000

                (Being the 
                   commencement

                   of business by the

                    proprietor with                                                                  cash in hand and
                    Cash at bank)

  Illustration 7.

     Away started business with Rs.15,000, out of which Rs.6,000 was paid into bank. Pass the journal entry.

Note: This transaction can be treated in two ways. They are :

     1. This transaction can be taken to mean that the proprietor brought into the business cash of Rs.9,000 and deposited Rs.6,000 into the bank account of the business.

     2. Alternatively, this transaction can be split into two separate transactions taking place on the same date. They are (a) the proprietor brought into the business cash of Rs.15,000, and (b) the business deposited cash of Rs.6,000 into the bank. So, the journal entry or the journal entries for this transaction will be:

     Under the first method, only one journal entry has to be passed. The journal entry will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

                 Cash Account.    Dr.               9,000
                 Bank Account.    Dr.               6,000☺️.     

                   To Capital Account.                        15,000

                (Being the 
                   commencement

                   of business by the

                    proprietor with                                                                  cash in hand and
                    Cash at bank)

     Under the second method, two journal entries have to be passed, viz., one entry for the cash of Rs.15,000 brought into the business by the proprietor, and the other entry for deposit of cash for Rs.6,000 into the bank. The two journal entries will be:

Journal Entry

Date.        Particulars.          L.F.         Dr.        CR.

                                                                     Rs.      Rs.            

    1.         Cash Account.    Dr.               15,000    

                   To Capital Account.                        15,000

                (Being the cash
                   introduced into 

                   the business by the

                    proprietor as 
                    capital)

    2.        Bank Account. Dr.                 6,000
                 To Cash Account.                               6,000
               (Being the cash 
                deposited into
                bank).                                           

Points to be Noted while Passing Journal Entries: From Sr. No.31

Points to be Noted While Passing Journal Entries: From Sr. No.31

.....Contd...

     31. Whenever some debts (i.e., amounts due from debtors)are written off as bad (i.e., irrecoverable), the two accounts involved in the transaction are (1) bad debts account and (2) concerned debtor's account.

     32. Whenever some bad debts are recovered (i.e., debts written off as bad in earlier year now recovered), the two accounts involved are (1) cash account and (2) bad debts recovered account (and not the concerned debtor's account.

     33. If a journal entry contains only one debit and only one credit it is called a simple journal entry. On the other hand, if a journal entry contains more than one debit or more than one credit or more than one debit and more than one credit, it is called a Compound journal entry.

     A Compound journal entry is, actually, a combination  of two or more simple journal entries. Two or more simple journal entries can be combined into a compound journal entry, if two conditions are satisfied, viz., (a) if the two or more simple journal entries are passed on the same date and (b) if there is a common item (i.e., account), debit item or credit item in those simple journal entries.

     As such, whenever two or more transactions if the same nature (i.e., transactions where there is a common item or account) take place on the same date, a composite, compound or combined journal entry may be passed for them instead of passing a separate journal entry for each of them. For instance, if cash is paid for salaries, wages and rent on the same date, a compound journal entry may be passed for all the three transactions.

     34. In the case of a concern which had been in existence in the previous year, the ledger account balances of the previous year have to be brought forward and recorded in the journal as opening balance at the beginning of the current year through an entry called opening entry. The balances to be recorded in the journal by way of an opening entry are the balances in the concerned assets, liabilities and capital accounts. The asset accounts will be having debit balances, the liabilities accounts will be having credit balances and the capital account also will be, generally, having a credit balance. As such, while passing the opening entry in the journal for recording the balances of assets, liabilities and capital brought forward from the previous year to the current year, each of the asset accounts has to be debited with its debit balance and each of the liabilities accounts has to be credited with its credit balances and capital account has to be credited with the difference between the opening values of assets and the opening values of liabilities.