Points to be Noted while Passing Journal Entries:
....Contd....
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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