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When the shares are issued to promoters for the services rendered by them _____ A/c will be debited.
- a)Cash or Bank A/c
- b)Goodwill A/c
- c)Preliminary expenses A/c
- d)None
Correct answer is option 'B'. Can you explain this answer?
Most Upvoted Answer
When the shares are issued to promoters forthe services rendered by th...
Goodwill a/c
because of service rendered by promoters goodwill account is reflected
because of service rendered by promoters goodwill account is reflected
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When the shares are issued to promoters forthe services rendered by th...
Understanding the Accounting Entry for Shares Issued to Promoters
When shares are issued to promoters for the services they have rendered, the accounting treatment involves recognizing the value of the services received.
Why Goodwill A/c is Debited
- Nature of Payment: Promoters often contribute their expertise, reputation, and business connections, which may not have a clear monetary value but significantly enhance the company's value.
- Recognition of Intangible Assets: The services rendered by promoters can be viewed as an intangible asset. Goodwill represents the excess value a company has over its identifiable assets and liabilities, often arising from such contributions.
- Accounting Principle: According to accounting principles, when shares are issued in exchange for services, the corresponding entry should reflect the value of those services. Since promoters' contributions add to the company's goodwill, the Goodwill A/c is debited.
Accounting Entry Example
- Debit Goodwill A/c: This recognizes the intangible asset created by the promoters' services.
- Credit Equity Shares A/c: This reflects the issuance of shares to the promoters.
Other Options Explained
- Cash or Bank A/c: This option would apply if cash was received, which is not the case here.
- Preliminary Expenses A/c: This account is used for expenses incurred before the commencement of the business and is not relevant to the issuance of shares for services.
- None: This option is incorrect as there is a valid accounting treatment for the transaction.
In summary, debiting the Goodwill A/c appropriately recognizes the value added by promoters' services when shares are issued.
When shares are issued to promoters for the services they have rendered, the accounting treatment involves recognizing the value of the services received.
Why Goodwill A/c is Debited
- Nature of Payment: Promoters often contribute their expertise, reputation, and business connections, which may not have a clear monetary value but significantly enhance the company's value.
- Recognition of Intangible Assets: The services rendered by promoters can be viewed as an intangible asset. Goodwill represents the excess value a company has over its identifiable assets and liabilities, often arising from such contributions.
- Accounting Principle: According to accounting principles, when shares are issued in exchange for services, the corresponding entry should reflect the value of those services. Since promoters' contributions add to the company's goodwill, the Goodwill A/c is debited.
Accounting Entry Example
- Debit Goodwill A/c: This recognizes the intangible asset created by the promoters' services.
- Credit Equity Shares A/c: This reflects the issuance of shares to the promoters.
Other Options Explained
- Cash or Bank A/c: This option would apply if cash was received, which is not the case here.
- Preliminary Expenses A/c: This account is used for expenses incurred before the commencement of the business and is not relevant to the issuance of shares for services.
- None: This option is incorrect as there is a valid accounting treatment for the transaction.
In summary, debiting the Goodwill A/c appropriately recognizes the value added by promoters' services when shares are issued.
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When the shares are issued to promoters forthe services rendered by them _____ A/c willbe debited.a)Cash or Bank A/cb)Goodwill A/cc)Preliminary expenses A/cd)NoneCorrect answer is option 'B'. Can you explain this answer?
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