Answer to Question #229865 in Economics for uuu

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

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