How will you deal with the following items in Accounting Equation:
1. Provision for Interest on Capital.
2. Charge Interest on Drawings.
3. Accrued Income.
4. Unearned Income.
5. Prepaid Expenses.
6. Outstanding Expenses
Answers
Provision for Interest on Capital --
Interest on capital is an expense to the firm and is debited to the profit and loss appropriation account. Interest is payable to the partners and hence, the partner's capital account is credited with the amount of interest. In case of loss, no interest will be allowed on capital.
Charge Interest on Drawings --
Cash or Goods withdrawn by the Businessman for his personal use from the business is called Drawings. In Such a case, Interest is charged on such drawings from the Businessman. Interest on drawings is an income for the business, So interest on drawings account is credited.
Accrued Income --
Accrued profit has been obtained but is not yet receivable. By definition, mutual funds or other pooled assets which accumulate income over some time but only payout to shareholders once a year accrue their income.
Unearned Income --
Unearned income is a term coined by Henry George to refer to income gained through ownership of land and other monopoly. Today the term often refers to income received by virtue of owning property, inheritance, pensions and payments received from public welfare.
Prepaid Expenses --
Prepaid expenses are future expenses that have been paid in advance. In other words, prepaid expenses are costs that have been paid but are not yet used up or have not yet expired.
Outstanding Expenses --
An Outstanding Expense is an expense which is due but has not been paid. An expense becomes outstanding when the company has taken the benefit, but the related payment has not been made
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