What will be the journal entry for commencing business with cash and loan?
Answers
Explanation:
cash
Cash A/c needs to be Debited and Capital Account needs to be credited. As Business has received Cash which is an Asset for the Organisation and it needs to Credit the Capital Account as it the liability for business to return the amount invested by the promoter.
Loans
debit cash / bank
credit capital
Depending on the size of the loan and/or the payment methods the following entry would be made to the journal.
Cash will be debited for the amount received
Notes Payable will be credited for the amount borrowed
More than likely the loan will be a substantial amount if starting a business and therefore will be paid out in a period consisting of more than a year.
Therefore it would be recorded as a NOTE payable. However, if the company or person feels that they can make the full repayment of the loan in one year or less the accounts would change as follows
Cash will be debited
Accounts Payable will be credited.
Unfortunately this will not give us any Owners Equity or Capital. The accounting balance stays "balanced" because Assets = Liabilities + Owners Equity
Usually a person starting a business has to at least match the loan in investments.