Contingent liabilities are not taken into account for

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liability arises and in the case of favourable decision, there is no liability at all. Contingent liabilities are not taken into account for the purpose of totaling of balance sheet. 4.3.5.3 Capital or Owners Equity As mentioned earlier in this chapter owners’ equity is the residual interest in the assets of the enterprise. Therefore, the owners’ equity section of the balance sheet shows the amount the owners have invested in the entity. However, the terminology 'owners' equity, varies with different forms of organisations depending upon whether the enterprise is a joint stock company or sole proprietorship / partnership concern. Sole Proprietorship / Partnership Concern: The ownership equity in a sole proprietorship or partnership Is usually reported on the balance sheet as a single amount for each owner rather than distinction between the owner's initial investment and the accumulated earnings retained in the business. For e.g. in a sole-proprietor's balance sheet for the year 2016, the capital account of the owner may appear as follows. Rs Owner's capital as on 1/1/2016 50,000 Add 2016-Proflt 30,000 80,000 Less 2016-Drawlngs 5,000 Owner's capital as on 31/12/2016 75,000 Joint Stock Companies: In the case of Joint stock companies, according to the legal requirements, owners’ equity is divided into two main categories. The first category called share capital or contributed capital is the amount the owners have invested directly in the business. The second category of owners’ equity is called retained earnings. Share capital is the capital stock pre-determined by the company at the time of registration. It may consist of ordinary share capital or preference share capital or both. The capital stock is divided into units called as shares and that is why the capital is called as share capital. The entire predetermined share capital called as authorised capital need not be raised at a time. That portion of authorised capital which has been issued for subscription as of a date is referred to as issued capital. Retained earnings is the difference between the total earning to date and the amount of dividends paid out to the shareholders to date. That is, the difference represents that part of the total earnings that have been retained for use in the business. It may be noted that the amount of retained earnings on a given date is
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47 the accumulated amount that has been retained in the business from the beginning of the Company's existence up to that date. The owners’ equity Increases through retained earnings and decreases when retained earnings are paid out in the form of dividends. Adjusting items for preparing balance sheet. adjustment Adjusting entry Treatment in balance sheet 1.Outstanding expenditure Expenses a/c. Dr To Outstanding esp./c Shown on liabilities side 2.Prepaid expenses Prepaid expenses. a/c Dr To expenses. a/c Shown on the asset side 3.Closing stock Closing stock a/c Dr To Trading .a/c Shown on the asset side 4.Accrued income Accrued income. Dr To income a/c Shown on the asset side 5.Depreciation a. Depreciation a/c Dr To Asset a/c b. Depreciation a/c To provision for depreciation a/c Shown by
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