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Accounting recording

Sandip Kumar Halder (Professional) (43 Points)

28 September 2021

Initial investment is Rs 50000. Accounting done- owner's equity credit Nad cash debit. Please confirm.

Second thing Mr X often putting money to his businesses for his daily running expenses as clients are delaying to pay and its a new start up. For this money accounting -

Option 1 : Mr X under Unsecured loan ( under current asset) credit and cash debit

Option 2 : owner' s contribution to working capital credit and cash debit.

Please suggest.

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10 Replies

prasad Nilugal ( GST Practitioner & Accounts ) (14167 Points)
Replied 28 September 2021

Opinion 1:

Cash A/c Dr
To Unsecured Loan
( Loan paid by mr X to Business )
in
Unsecured Loan will be under Current Liability , Liability side Balance sheet .

we consider as loan because , amount contributed to Business by Mr X is payable to him in future . It's Liability to pay .

CA Raj Doshi (Practising CA) (8723 Points)
Replied 29 September 2021

If Mr. X is running a proprietary business, he cannot show additional cash brought into the business as a loan as a person cannot give loan to himself.

This is a case of additional capital.introduced.

Dr. Cash
Cr. Mr. X capital account.

even capital is a liability and the capital amount is payable to Mr. X in future.

prasad Nilugal ( GST Practitioner & Accounts ) (14167 Points)
Replied 29 September 2021

Mr Doshi sir
Where it is written, that he can not show additional cash brought in to business as a loan .? Business is separate entity , So he and business is separate entity .

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 29 September 2021

Both transactions are correct based on the substance of the transaction. When debt, it is liability, when capital it is credited. As per the financing aspect, working capital becomes a loan and if they follow the business entity concept, owners transaction can be represented like

Cash a/c

To X. Capital a/c

and

Working capital a/c

To Cash a/c

So, if it is treated as unsecured loan then initially recognition is not there due to the dual aspect problem, but, during repayment

X capital a/c

To Payables a/c

and Payables To bank .

instead we can avoid above number of transactions by recognising

Cash a/c

To X unsecured loan.

Since working capital classifies as loan.

prasad Nilugal ( GST Practitioner & Accounts ) (14167 Points)
Replied 29 September 2021

Yes , you are correct Mr Gomes , it is to be treated as Unsecured Loan , since Business and Mr X are separate entity as per Business entity concept .
As per business entity concept , capital brought in the business , we show as Liability side of the balance sheet , because business has to ultimately repay to proprietor so cash brought in the business by Mr X every now and then use for working capital should be treated as loan .

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CA Raj Doshi (Practising CA) (8723 Points)
Replied 29 September 2021

The accounting would be correct but explaining the statutory authorities would be difficult. Instead Capital is also a liability towards the owners.

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yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 29 September 2021

Sir, this is hard to judge because intentions of the owner is unknown. Day to day capital is taken to expenses which consists of both capitals. To me both are correct because the owner must specify if he is investing or planning to draw it from profits.