Expert: Arthur Naman - 2/17/2009

Question
QUESTION: The problem i have is my boss makes a lot of cash transactions which are not paid from our business bank account. we recently quired some lands which he paid cash for. how do i journalize this transactions. i need your help.

And also under which account do i put directors loan account, is it a current asset, and please explain the difference between directors loan account and directors current account, please help


ANSWER: If non-corporate cash is used for corporate purchases, it is normally classified as either a loan or capital contribution. The transaction is:

debit the asset purchased
credit either a loan account or capital contributions account.

If a loan account is used, it would be a shareholder loan account.

As far as directors loans, I presume you are talking about loans to directors. Thus the loans are typically a current asset, titled something like "directors loans receivable." I am not aware of a "directors current account" or what it is used for.

If further clarification is needed, please ask.



---------- FOLLOW-UP ----------

QUESTION: Thank you very much Sir for solving my problem. I must say it was precise and straight forward.

My second problem is with rental income. How do i treat rental income.

We recently rented out one of our offices to a client, whom paid us check of 42,000 Dollars for One year. How do i journalize this transaction

Thank You.

Answer
The journal entry for recording a receipt of cash for rental income is:

Cash (or checking account) -- debit $42,000
Rental income -- credit $42,000

This assumes there is no need to record the monthly rental income if there is:

cash -- debit $42,000
Unearned income -- credit $42,000

Then for each month:

Unearned income -- debit $3,500
Rental income -- credit $3,500

Where 42,000 / 12 = 3,500.