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      The two accounts that are required to be taken into consideration for recording the cash withdrawn by the proprietor from the business for his personal use are (1) Drawings Account and (2) Cash Account (if cash is withdrawn from the business) or Bank Account (if money is withdrawn from the bank).

     The two accounts that are required to be taken into account for recording the goods withdrawn by the proprietor from the business for his personal use are (1) Drawings Account and (2) Purchases Account (If the goods are withdrawn at cost price) or Sales Account (if the goods are withdrawn at selling price or if goods are withdrawn at cost price frequently).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

Points to be Noted while Passing Journal Entries:

Points to be Noted While passing Journal Entries: From Sr.No.21

     21. Whenever cash is paid for repairing a property, say, furniture, machinery, motor vehicle or building, the two accounts involved in the transaction are (1) repairs account (and not the concerned asset account) and (2) cash account. The concerned property account is not at all involved, as cash is paid towards the repair charges of the property, and not towards the cost of the property.

     22. Whenever some investments or securities, say, shares or debentures, are purchased, the two accounts involved in the transaction are (a) investments account (and not purchase account) and (b) cash account.

     Another point to be noted in the context of the purchase of investments is that, while recording the investments purchased, and not the face value of the investments purchased. For instance, if shares of the face value of Rs.1,000 are purchased at a cost of Rs.950, the amount to be taken into account for the recording of the investments purchased is the cost price of the investment viz., Rs.950 and not the face value of the investment, viz., Rs.1,000.

     One more point to be borne in mind, in the context of the purchase of investments, is the treatment of brokerage, if any, paid on the purchase of investments. The brokerage paid on the purchase of the investment should be added to the purchase price of the investment, and the entry for the purchase of investments should be passed with the total cost of the investments, i.e., the purchase price of the investments plus the brokerage paid on the purchase of the investments.

     23. Whenever some investments or securities, say, shares or debentures are sold, the two accounts involved are (1) cash account (2) investments account (and not the sales account).

     Another point to be noted in the context of the sale of investments is that, while recording the investments sold, the amount to be taken into account is the net sale price of the investments, i.e., the sale price of the investments minus the brokerage, if any, paid for the sale of investments.

     24. Whenever cash is paid to a person for an expense, say, salary, rent or wages, the two accounts involved in the transaction are (1) concerned expenses account (and not the party'saccount) and (2) cash account. The personal account of the party to whom the payment is made on account of the expense is not at all involved, because payment is made to him for the service already rendered by him to us, and he is not liable to pay us any amount at a later date.

     25. Whenever the business pays carriage, freight or transport charges of the goods despatched to a buyer, the two accounts involved in the transaction are (1) concerned expense account, say, carriage account or freight account and (2) cash account.

     On the other hand, if the business pays carriage, freight or some other transport charges on the goods despatched to a buyer on the buyer's account, the two accounts involved in the transaction are (1) buyer's personal account (but not carriage or freight or any other transport charges account) and (2) cash account.

     26. Whenever cash is received from a party on account, it means that the party already owes us some amount and now he is paying us some money. So, the two accounts involved in the transaction are (1) cash account and (2) party's personal account (i.e. the personal account of the party from whom the money is received on account).

     Similarly, whenever cash is paid to a party on account, it means that we already owe him some money, and now we are paying him some amount. So, the two accounts involved in the transaction are (1) party's personal account (i.e., the personal account of the party to whom the payment is made) and (2) cash account.

     27. Whenever an expense is paid in cash, say, salary paid in cash or rent paid in cash, the two accounts involved in the transaction are (1) concerned expense account, say, salary account or rent account, and (2) cash account.

     On the other hand, if an expense is incurred, but is not paid (i.e., due to a party), the two accounts involved in the transaction are (1) concerned expense account, say, salary account or rent account and (2) outstanding expenses account, say, outstanding salaries account or outstanding rent account (or the party's account, i.e., the account of the party to whom expense is due).

     Similarly, whenever an income is received in cash, say, interest received in cash or commission received in cash, the two accounts involved in the transaction are (1) cash account and (2) concerned income account, say, interest account or commission account. On the other hand, if an income is earned, but is not received, then, the two accounts involved in the transaction are (1) outstanding income account, say, outstanding interest account or outstanding commission account or the party's account, (i.e., the account of the party from whom the income is due) and (2) concerned income account, say, interest account or commission account.

     28. If cash is received from a party, say, from B, on account, we can name that party's account (i.e., B's personal account) as B's Account. But if cash is received from a party, say, from B, as loan, then, we have to name the party's personal account, i.e., B's personal account as B's Loan Account, and not as B's Account.

     Similarly, if cash is given to a party, say, A, on account, we can name that party's account (i.e., A's personal account) as A's Account. But if cash is given to a party, say, A, as loan, then, we have to name the party's personal account (i.e., A's personal account) as A's Loan Account (and not as A's Account).

     29. Cash discount is a discount allowed by the business to its debtor, at the time of receipt of money from the debtor, for his prompt payment, or the discount received by a business from its creditor at the time of payment of money to the creditor, for the prompt payment made to him. It has to be recorded in the books of the business.

     Whenever cash discount is allowed by the business to a debtor, the two accounts involved in the transaction are (1) discount allowed account and (2) debtor's account (but not cash account). Cash Account is not at all involved, as the discount is not paid in cash, but is just reduced from the amount due from the debtor.

     Whenever cash discount is received by the business from a creditor, the two accounts involved in the transaction are (1) creditor's account (but not cash account) and (2) discount received account. Cash Account is not involved, as the discount is not received in cash, but is reduced from the amount due to the creditor.

     30. Trade discount is a reduction in the selling price allowed by a manufacturer to a wholesaler, or by a wholesaler to a retailer to enable the buyer to sell the goods at the catalogue price (i.e., the price mentioned in the price list) and yet make some profit for himself. Trade discount is always deducted from the catalogue price, and only the net price is taken into account by both the seller and the buyer, while recording the transaction in their respective books. That means, trade discount should not be separately recorded at all either in the books of the seller or in the books of the buyer.

           ......To be Continued in new post from Sr. No.31

Points to be Noted while Passing Journal Entries: From Sr.11

Points to be Noted while Passing Journal Entries: 

....Contd....

     11. Whenever the personal or private expenses of the proprietor, such as his life insurance premium, income-tax, club bill and charity given on his personal account are paid by the firm, those transactions should be recorded in the books of the business. The two accounts required to be taken into consideration for recording those transactions are (1) Drawings Account (and not the expense account, i.e., not the life insurance premium account, the income-tax account, the club bill account or charity account) and (2) Cash Account.

     Similarly, whenever the household or domestic expenses of the proprietor, such as the rent, water charges and electricity charges of the proprietor's residence, salaries of the proprietor's domestic servants, school and college fees of the proprietor's children, etc. are paid by the business, those transactions should be recorded in the books of the business. The two accounts required to be taken into account for recording those transactions are (1) Drawings Account (and not the concerned private expenses account) and (2) Cash Account.

      12. Whenever goods are involved, no doubt, the term 'goods account' can be used for the goods in the various contexts. But it is preferable to split the goods account into (a) purchased account, (b) sales account, (c) purchases returns, returns outwards or returns to suppliers account, (d) sales returns, returns inwards or returns from debtors account, (e) opening stock account and (f) closing stock account, and use the relevant term in the relevant context. That is to say, the term 'purchases account' can be used for the goods purchased by the business. The term "sales account" can be used for the goods sold by the business. The term "purchases returns account", "returns outwards account"or "returns to suppliers account" may be used for the goods returned by the business to the suppliers. The term "sales returns account", returns inwards account", or "returns from customers account" may be used for the goods returned to the business by the customers. The term "opening stock account" may be used for the goods lying in the business unsold at the beginning of the accounting year. The term "closing stock account" can be used for the goods lying unsold with the business at the end of the accounting year.

     13. Generally, purchases account, sales account, purchases returns account and sales returns account as treated as real accounts, and the rules applicable to real accounts, viz., 'Debit what comes in and credit what goes out', is applied to these accounts, while journalising the transactions involving these accounts.

     However, these accounts can be treated in an alternative way. That is, these accounts can be treated as nominal accounts, and the rules applicable to nominal accounts, viz., 'Debit expenses and losses and credit incomes and gsins', can be applied to these accounts.

     If these accounts are treated as nominal accounts, purchases have to be treated as expenses, sales have to be treated as incomes, purchases returns have to be treated as incomes and sales returns have to be treated as expenses.

     14. When it is not clearly stated in the transaction whether goods are bought for cash or on credit, the purchase should be considered as cash purchase, if the name of the supplier (i.e., seller) of goods is not stated. On the other hand, if the name of the supplier is mentioned, the purchase should be considered as credit purchase.

     Similarly, when it is not clearly stated in the transaction whether goods are sold for cash or on credit, the sale should be regarded as a cash sale, if the name of the customer (i.e., the purchaser) is not stated. On the other hand, if the name of the customer is mentioned, the sale should be treated as a credit sale.

     15.  Whenever the goods are purchased from a party for cash, the accounts involved in that transaction are (1) purchases account and (2) cash account. The personal account of the seller is not at all involved, because he has been paid for the goods at the time of the purchase itself, and there is no liability on our part to pay him the value of the goods later.

     Similarly, whenever the goods are sold to party for cash, the two accounts involved in that transaction are (1) cash account and (2) sales account. The personal account of the purchaser is not at all involved, because he has paid us the value of the goods at the time of the sale itself, and there is no liability on his part to pay us the value of the goods later.

     16. Whenever the goods are purchased from a party on credit, the two accounts involved in the transaction are (1) purchases account and (2) the supplier's (i.e., seller's) account. The supplier's account is involved, because he has not been paid for the purchase at the time of purchase, and there is a liability on our part to pay him the value of the goods purchased at a later date.

     Similarly, whenever the goods are sold to a party on credit, the two accounts involved are (1) customer's account (i.e., the purchaser's account) and (2) sales account. The customer's account is involved, because he has not paid us the value of the goods sold to him at the time of sale, and he is liable to pay us the value of the goods sold to him on a future date. 

     17. Purchases returns are, generally, out of credit purchases (i.e., out of goods purchased on credit). But, sometimes, purchases returns may be out of cash purchases (i.e., out of goods purchased for cash). As such, unless we are clearly told that the purchases returns are out of cash purchases, we must always assume that the purchases returns are out of credit purchases.

     If the purchases returns are out of credit purchases, then, the two accounts involved in the purchases returns are (1) creditor's or supplier's account and (2) purchases returns account. (On the other hand, if the purchases returns are out of cash purchases, we must assume that the business has received cash for those purchases returns. If such an assumption is made, the two accounts involved in the purchases returns will be (1) cash account and (2) purchases returns account).

     Similarly, sales returns are, generally, out of credit sales (i.e., out of goods sold on credit). But, sometimes, they may be out of cash sales (i.e., out of goods sold for cash). As such, unless we are clearly told that the sales returns are out of cash sales, we must always assume that the sales returns are out of credit sales.

     If the sales returns are out of credit sales, then, the two accounts involved in the sales returns will be (1) sales returns account and (2) debtor's or customer's account. (On the other hand, if the sales returns are out of cash sales, we must assume that the business has paid cash for those sales returns. If such an assumption is made, the two accounts involved in the sales returns are (1) sales returns account and (2) cash account).

     18. If a property, say, furniture or machine is purchased and if it is not clearly stated in the transaction whether the asset is purchased for cash or on credit, we should assume that the asset is purchased for cash, if the name of the seller of the asset is not given. On the other hand, if the name of the seller of the asset is given, we should assume that the asset is purchased on credit.

     Similarly, if an asset, say, furniture or machine is sold, and if it is not clearly stated in the transaction whether the asset is sold for cash or on credit, we should assume that the asset is sold for cash, if the name of the purchaser of the asset is not given. On the other hand, if the name of the purchaser of the asset is given, we should assume that the asset is sold on credit.

     19. Whenever a property, say, furniture, motor vehicle, machine, building or land, not intended for resale, but meant for use in the business, is purchased, the purchases account is not at all involved. Only the concerned property account, i.e., the furniture account, the motor vehicle account, the machinery account, the building account or the land account, is involved. (The purchases account is involved only when goods, i.e., things meant for resale, are purchased).

     Similarly, whenever a property, say, furniture, motor vehicle, machine, building or land is sold, the sales account is not involved. Only the concerned property account (i.e., the furniture account, motor vehicles account, machinery account, building account or land account) is involved. (The sales account is involved only when goods, i.e., things intended for resale, are sold).

     20. Whenever an expense is incurred on the purchase of an asset or on the transport of an asset to our business premises or on the installation of an asset in our business premises, the amount of an expenses incurred for the purchase of the asset, the amount of expenses incurred on the transport or installation of the asset should be considered as a part of the cost of the concerned asset (and not as expense account), as that increases the ultimate cost of the asset. So, the two accounts involved in that transaction are (1) the concerned asset account (and not the expense account) and (2) cash account. For instance, if some brokerage is paid for the purchase of an asset, say, a motor car, the two accounts involved in the transaction are (1) motor car account (and not brokerage account) and ,(2) cash account. Similarly, if carriage or freight is paid for the transport of an asset, say, a machine, purchased to our business premises, the two accounts involved in the transaction are (1) machinery account ,(and not carriage or freight account) and (2) cash account. So also, if some expenses are incurred on the installation of an asset, say, machine purchased, in our business premises, the two accounts involved in the transaction are (1) machinery account ,(and not installation charges account) and (2) cash account.

            ...... To be contd.....in new post from sr. no. 21

     
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Points to be Noted while Passing Journal Entries:

Points to be Noted while Passing Journal Entries:

     While Passing the journal entries, the following points should be borne in mind:

     1. Though from the legal and practical point of view, the proprietor and the business are regarded as one and the same party, for the purpose of book-keeping (i.e., for the purpose of recording the business transactions in the books of accounts), the business and the proprietor (i.e., owner) of the business must be considered as two distinct (i.e., separate) entities (i.e., parties). In other words, the proprietor of the business must be considered as a distinct or separate party from the business which he owns and controls. In short, the proprietor of the business should be considered as a separate entity or party with whom the business deals.

     As the proprietor and the business are regarded as two separate parties, if there are any transactions between the proprietor and the business, those transactions should be recorded in the books of accounts of the business. For instance, if the proprietor invests money in the business, it should be deemed that the proprietor has given money to the business or the business has received money from the proprietor, and it should be recorded accordingly in the books of the business. Similarly, if the proprietor withdraws money from the business for his personal use, it should be deemed that the proprietor has received money from the business or the business has given money to the bus, and it should be recorded accordingly in the books of the business.

     2. It must be clearly understood that all business transactions are recorded in the books of the business, and not in the books of the proprietor.

     3. It must also be understood that all business transactions are recorded in the books of the business from the point of view of the business, and not from the point of view of the proprietor.

     4. Each business transaction must be independently recorded in the books of accounts. In other words, while Passing a journal entry, each transaction must be regarded as an independent activity or transaction, and so each transaction must be recorded in the journal on its own without considering what has already happened or what will happen later.

     5. While writing the name of a personal account, we can either add or omit the word 'Account' after the name of the person. But while writing the name of a real account or a nominal account, we have to add the word 'Account' after the name of the asset or expense or income.

     6. After passing all the journal entries, the amount columns of the journal should be totalled. The object of totaling the two amount columns is to ensure the arithmetical accuracy, i.e., correctness, if journal entries.

     7. Whenever the proprietor of a business brings in cash or any other thing into the business, an account called the 'Capital' Account'  should be opened in the name of the proprietor in the books of the business, and the cash or any other thing introduced by the proprietor should be recorded in the capital account opened in his name.

     The two accounts that are required to be taken into consideration for recording the cash or any other thing introduced by the proprietor into the business are (1) Cash Account (if cash is brought in) or the account of any other thing, say, stock account or furniture Account (if any other thing is brought in) and (2)Capital Account.

     8. Whenever the proprietor invests in the business the sale proceeds if his private assets, say, the sale proceeds if his residential house, the sale proceeds of his private motor car, etc., that transaction should be recorded in the books of the business as additional capital introduced by the proprietor. As such, the two accounts that are required to be taken into account for recording those transactions are (1) Cash Account and (2) Capital Account (and not the account of the private asset sold).

     Similarly, whenever the proprietor introduces into the business his private incomes, those incomes should be recorded in the books of the business as additional capital introduced by the proprietor. As such, the two accounts required to be taken into account for recording that transaction are (1) Cash Account and (2) Capital Account (and not the income account).

     9. Whenever the proprietor commenced business with loan borrowed from his wife, children or friend, the two accounts that are required to be taken into account for recording the transaction are (1) Cash Account and (2) Wife's Loan Account or Children's Loan Account or Friend's Loan Account (but not his Capital Account).

     10. Whenever the proprietor of a business withdraws cash, goods or any other thing from the business for his personal or domestic use, an account called the 'Drawings Account' should be opened in the name of the proprietor in the books of the business, and the cash, goods or any other thing withdrawn by the proprietor from the business for his personal or private use should be recorded in the Drawings Account opened in name.

     The two accounts that are required to be taken into consideration recording the cash withdrawn by the proprietor for his personal or private use are (1)Drawings Account and (2) Cash Account.

     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 or domestic use are (1) Drawings Account and (2) Purchases Account (if the goods are taken away by the proprietor at the cost price) or Sales Account (if the goods are taken away by the proprietor at the selling price, or if goods are withdrawn by the proprietor at cost price frequently).

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

.......... To be Continued in next post with sr.no.11