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Accounts doubt.

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Hi There are some one time profits which are transferred to the capital reserve account which is later shown in the liabilities side in the balance sheet. I'd like to know the reason why are these profits shown in the liability side.(i know that capital reserve is reserve and it has to be in the liability side). Thank you.

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4 Replies

pratik upadhyay (AUDIT COMPLIANCE OFFICER) (469 Points)
Replied 24 May 2012

i think u are unaware of separate identity priciple of accountancy. Entity & its owners are different from each other ,although in case of sole propritorship &partenership ,they are actually ONE and not different but while making accounts we follow separate identity rule.....thats why capital contributed by them is shown on liabilies side of B/s. similarly the profits ,whether capital or revenue,belong to owners and are shown on liabities side.

Manish Kumar Sharma (Article) (103 Points)
Replied 24 May 2012

I agree with pratik, the entity concept is a basic concept of accountany, and this plays a very vital role in prepration of accounts. The reason for this assumption is to have a fair presentation of financial statements. The personal transactions of the owners should not be allowed to distort the financial statements of the enterprise, though the profit is earned by the owner of the concern but it should be reported as a liability of the business untill and unless the owner withdrew the same.

Tejaswi Kasturi (student-cpt) (427 Points)
Replied 25 May 2012

When we put profit on liability side we asume that the business and the owners of hte business are seperate entities. The business owes the person who invested in the business by the way of capital profits acquired through investment. Its like interest accrued on a loan which would be shown on liability side.

Mayank Mall (CA-Final) (316 Points)
Replied 25 May 2012

Actually capital reserve account in itself can be utilised for very few purposes....bonus issue, write-off of misc. exp., write-off sec. premium.....few more. So as all these purposes either result in increase of owner's share, or in writing off the deferred expenditure or similar nature expenses shown as assets coz of the expectation of return from them for a long period of more than a year. Going for the logic, if asset is to be reduced then so should liability be, thus CR a/c is liab. also Cap. Reserve account as results in inc. in owner's fund without change in any asset thus naturally onlly possibility is inc. in one and dec. in another liability as share capital is a liab, which is undoubtedly clear, I suppose.

And, leaving the logic....profit is to be distribted among owner's after deducting expenses, be it one time profit of capital nature or revenue nature, thus as CR A/C is formed out of those profits, it is a liability.

Foremost, what guys above said, entity concept holds prior hand here.