Answer to Question #226212 in Economics for Peter Masih

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. (10 Marks)

Answer 1

The loan in the amount of 7 lakhs will be recorded as a liability and then transferred as share capital. Own savings in the amount of 3 lakhs will be reflected as share capital. Since 7 lakhs were taken as a loan, an assumption was applied about the solvency of this market participant, that is, a guarantee in the form of authorized capital.