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:
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)
proprietor brought
into the business)
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