Answer to Question #229946 in Accounting for parh

Question

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. 

Answer 1

In these two transactions, the journal entries will be as follows

Dr Bank 7 Lakhs

Cr Long term Loan Payable

Dr Bank 3 lakhs

Cr Drawings 3 lakhs

The overall journal entry will be;

Dr Bank 10 lakhs

Cr Capital 10 lakhs

In the financial statements, the balance sheet will have

Assets as

Bank 10 lakhs

Capital as

Capital 3 lakhs

Long term liabilities

Loan Repayable

Long term loan 7 lakhs

The accounting assumption used above is the basic one that; Assets = Liabilities + Capital

Further, double entry system has come into place where one has to prepare journal to come up with the final figures for the financial statements.