Mahesh wants to start his business and for that he decides that he will take loan for Rupees 7 Lakhs from the Bank of Baroda. He also decides to use his saving worth 3 lakhs in the bank account to start the business. Discuss how these two transactions will be recorded in the books of accounts by passing the relevant journal entries? How these transactions will be reflected in the Books of accounts (that' is in the financial statements)? Lastly, conclude your answer by stating the applicability of which accounting assumption/s you did the above-mentioned accounting treatment/ recognition and presentation in the books of accounts. (10 Marks)
Answers
Answer:
what is the answer of these questions
Answer:
Journal Entries
Cash A/C Dr 7,00,000
To Bank Loan A/C 7,00,000
(Loan taken from Bank of Baroda)
Cash A/C Dr 3,00,000
To Capital A/C 3,00,000
(Mahesh invests capital in the business)
Explanation:
In the books of Mahesh
Journal Entries
- Cash A/C Dr 7,00,000
To Bank Loan A/C 7,00,000
(Loan taken from Bank of Baroda)
- Cash A/C Dr 3,00,000
To Capital A/C 3,00,000
(Mahesh invests capital in the business)
The financial statements of any company are Income Statement, Balance Sheet and Cash flow statements.
The given transaction includes Asset(Cash), Internal Liability(Capital) and External Liability(Bank Loan). Thus, it will be recorded in the Balance Sheet as follows-
- Cash : It will appear in the asset side of Balance Sheet.
(Amount = 3,00,000 + 7,00,000 = Rs. 10,00,000/-)
- Capital: Capital is an internal liability of the business. The balance will appear on the liabilities side of Balance Sheet. (Amount: 3,00,000)
- Bank Loan : Bank Loan is an External Liability of the business. will appear on the liabilities side of Balance Sheet. (Amount: 7,00,000)
There are three basic Assumptions in accounting-
Business Entity Assumption :
- According to this assumption, the businessman and the proprietor are treated as two separate entities.
- In the given question, we consider capital as a liability for the business and not an asset.
Money Measurement Concept:
- This assumption states that only those transactions which can be measured in monetary terms should be recorded in the books of accounts.
- In the given question, we record the transactions in monetary terms , i.e. 3,00,000 ; 10,00,000, etc.
Going Concern Concept :
- This assumption states that the firm will not close down in an foreseeable future.
- The Bank of Baroda invests the money in the firm because it is assumed that the firm will not shut down in near future.
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