Introduction
When a debtor like Rahul becomes insolvent, the process of settling debts involves distributing his estate to creditors. In this case, Rahul owes 2000 rupees and a final dividend of 60 paisa in a rupee is declared. Here’s how to record this in the journal.
Calculation of Dividend
- Total amount owed: 2000 rupees
- Dividend declared: 60 paisa (or 0.60 rupees) per rupee
Dividend Calculation
- Total Dividend = Total Amount Owed × Dividend per Rupee
Total Dividend = 2000 × 0.60 = 1200 rupees
Journal Entry for Dividend Distribution
The journal entry to record the distribution of the final dividend is:
- Debit: Creditors Account 2000 rupees
- Credit: Bank/Cash Account 1200 rupees
- Credit: Loss Account 800 rupees
Explanation of the Entry
- Debit Creditors Account: This reflects the total amount owed to creditors being settled.
- Credit Bank/Cash Account: This indicates the cash paid out to creditors as a dividend.
- Credit Loss Account: This signifies the loss incurred due to the insolvency, as creditors do not receive the full amount owed.
Conclusion
This journal entry effectively illustrates how Rahul’s insolvency is accounted for in financial records. It highlights the importance of accurately reflecting dividends and losses in the books to ensure proper financial management.