The process of recording transactions is known as journalising. Such transaction is separately recording after determining the particular amounts to be debited and credited. The first column in a journal is date which shows the date of transaction. The second column is of particulars. In this column the account to be debited is written in the first line starting from the left hand corner of this column. At the end of this line ‘Dr’ is written. In the second line, the account to be credited is written leaving sufficient margin on the left side. The word ‘TO’ is written before the second line. After writing the two accounts, a brief explanation of the transaction (also called narration) is written within brackets. The explanation can he simple and there is no need to start the narration with the actual transaction (language).
The third column shows. L.F. The fourth column is of debit and the fifth for credit. The word ‘Amount’ ‘Rs.’ are written in the last two columns.
Following is the format of the journal showing the recording of the transaction, such as Rs. 8000 paid towards rent on 15 Jan. 2005.
Format of Journal
Date Particulars L.F. Dr. Cr.
Amount Amount
(Rs.) (Rs.)
2005 Rent A/c Dr — 8000 May 15 To Cash A/c 8000
(Being rent paid
in cash)
Rules of journalising
The rules of journalising various types of accounts are as follows:
Personal accounts
According to this rule ‘Debit the receiver, credit the giver’. For example if Rs. 10,000 paid cash to Divya, the entry will be
Amount
Debit Credit
Rs. Rs.
(i) Divya (Receiver’s) Dr A/c 10,000
To Cash A/c 10,000
(For Cash paid)
(ii)
For example Rs. 15,000 received from
DIVYA the entry will be
Cash A/c Dr
To (Giver’s A/c) Divya
(Being cash received)
real accounts
According to this rule “Debit what comes in and credit what goes out.” For example Furniture purchased for
Rs. 50,000 the entry will be
Furniture A/c Dr 50,000
To Cash A/c 50,000
(For furniture purchased for cash)
Nominal accounts
(i) As per this rule, debit all expenses and losses. For example Rs. 8000 spent for the payment of interest, the entry will be
Interest A/c Dr 8000
To Cash A/c 8000
(Being Interest paid)
(ii) Similarly credit all incomes and profits/gains.
For example Rs. 12000 are received as commission, the entry will be
Cash A/c Dr 12,000
To Commission A/c 12000
(Being Commission received)
Meaning of goods
Goods are all those things which are purchased for sale. If a purchase is made for personal use, the thing purchased is not known as goods.
Goods account can be classified into four accounts for the purpose of passing journal entries;
Purchases Account : When goods are purchased, purchases account is debited and not goods account. As per the rule: ‘Debit what comes in’, Purchase account is debited and Cash/Creditors account in credited.
Sales Account : When goods are sold, cash or party’s account is debited instead of goods account. As per the rule, “Credit what goes out.” Sales account is credited and Cash/Debtor account is debited.
Purchases Returns Account : This account is also known as ‘Returns Outwards Account.’ This account is credited as per the rule “Credit what goes out.”
Sales Returns Account : This account is also called ‘Returns Inwards Account.’ This account is debited as per the rule “Debit what comes in”.
In the case of transaction of sales and purchases of goods, it is to be ascertained whether a transaction is for cash or credit because the entry is to be passed according to that. If, in the transaction, the word ‘cash’ is used clearly, only then it will be a cash transaction otherwise it should be treated as a credit transaction, such as:
(a) Goods for Rs. 50,000 purchased for cash: It will be taken as cash transaction.
(b) Goods for Rs. 50,000 purchased from Varun. It will be taken as credit transaction.
(c) Goods for 50,000 purchased from Varun for Cash : It will be treated as cash transaction.
Discount
Discount is of two types :
Trade discount.
Cash discount
Trade Discount : This discount is allowed by a seller to its customers at fixed percentage of sales-price of goods. No separate entry is passed in journal for trade discount as it is discounted in the cash memo or invoice of the goods.
Cash Discount : This discount is allowed to the customers for making prompt payment of goods and services. It motivates customers to make the payment at the earliest. Since the discount is allowed at the time of payment, the entry for cash discount is made alongwith the amount received. As discount is a nominal account, it is debited when it is allowed to a customer and is credited when it is received.
Compound journal entries
Sometimes, two or more transactions, relating to one particular account take place on the same date. In such cases, instead of making separate entries for each transaction, a compound entry is passed. For example, Ram paid Rs. 500 towards interest, Rs. 8,000 towards rent and Rs. 200 towards conveyance allowance on 1 June 2005 their compound entry will be as follows:
2005 Interest A/c Dr. 500
June 1 Rent A/c Dr. 8000
Conveyance A/c Dr. 200
To Cash A/c 8700
(For payments made in cash)
Opening journal entry
In the beginning of the new year, every business enterprise starts new books of accounts. The closing balances of the last year have to be brought forward to the next year. These balances find first place in the new books of account. As it is the first entry, it is called the opening entry. As such, the accounts of all assets are debited. In case the balance of capital account is not given in the sum, it is calculated by deducting the total of liabilities from the sum total of assets. If the total of liabilities exceeds the total amount of assets, the difference is treated as goodwill and it is debited in the opening entry.
Bed debts
In business all transactions are not against cash. If goods are sold on credit and the amount becomes unrecoverable, it is treated as bed debts. Bad debt account is debited and the customer account is credited is this case.
Adjustment entries
When receipts or payments are not settled by the closing of the accounting year, adjusting entries are made to find out the actual net profit. They are as follows:
Depreciation
Depreciation means fall in the value of assets due to use and other reasons. It is a loss for the business. It is a case of increase in expenses and is debited as a loss. The value of the assets if reduced.
Example : Depreciation of building worth Rs. 90,00,000 @ 10%.
Journal Entry
Depreciation A/c Dr 9,00,000
To Building A/c……….. 9,00,000
(Being depreciation charged @ 10% on the building)
Drawing
When the proprietor withdraws money from the business for his personal use it is called drawings. Drawings reduce capital. Any decrease in capital is debited.
Examples : (a) Cash withdrawn
Rs. 40,000.
(b) Goods taken for personal use
Rs. 60,000
(c) Bought motorcycle for personal use Rs. 35,000
Journal Entries
(a) Drawings A/c Dr. 40,000
To Cash A/c 40,000
(Being Cash withdrawn for personal use)
(b) Drawings A/c Dr. 60,000
To Goods A/c 60,000
(Being goods withdrawn for personal use)
(c) Drawings A/c Dr. 35,000
To Cash A/c 35,000
(Being Cash withdrawn for the purchase of Motorcycle for personal use.)
Interest on capital
When interest on capital is allowed to the proprietor it is a case of an expense for the enterprise. Expenses are debited. Interest on capital will also be debited :
Example: Interest on Capital
Rs. 20,00,000 @ 10%
Interest on Capital A/c Dr. 2,00,000
To Capital A/c 2,00,000
(Being interest on Capital Rs. 20,00,000
@ 10%)
Prepaid expenses
If any expense pertaining to the next year has been paid in advance during the current year, it is treated as an asset in the current year. The services for that amount will be received in the next year while the payment has been made during the current year.
Example : Rs. 8000 paid in advance towards insurance for the next year.
Prepaid Insurance A/c Dr. 8000
To Cash A/c 8000
(Being insurance premium paid in advance)
Outstanding expenses
When expenses are not paid fully during the accounting year, it is a case of outstanding expenses for that particular year. It is a liability for the enterprise for that year and for this reason that account is to he credited because liabilities are credited for increase.
Example : If rent Rs. 8000 is outstanding for Feb. 2004, the entry will be as follows :
Rent A/c Dr. 8000
To Outstanding Rent A/c 8000
(Being rent remained unpaid for February)
Income received in advance
When an income is received in advance, it is a liability of the current year. As such, it should not be included in the current year’s income. It will be credited because increase in liabilities is credited. For Example, Rs. 1500 received in advance for the next year :
Journal Entry
Cash A/c Dr. 15000
To Rent received in Advance A/c 15000
(Being rent received in advance for the next year)
Accrued income
In case any income has been earned but not received during the current year, it is known as accrued income. It is an asset of the business because the benefit will be received in the next year but the income belongs to the current year.
Example : Commission Rs. 16000 due but not received during the current year.
Journal Entry
Accrued Commission A/c Dr. 16000
To Commission A/c 16000
(Being Commission due but not received)
Goods given as charity
When goods are given as charity or distributed as free samples for sales promotion, the journal entry will be as follows :
Journal Entry
Charity A/c Dr —
Free Sample A/c Dr —
To Purchases (Goods) A/c………. —
(Being goods given as Charity/Free Sample)
Loss of goods by fire/theft
When some goods are lost due to fire or theft, the journal entries will be as follows:
Journal Entries
Loss of Goods by Theft A/c Dr —
To Purchases A/c —
(Being loss of goods by theft in the enterprise)
Loss of Goods by Fire A/c Dr —
To Purchases A/c —
(Being loss of goods by fire)
Interest on drawings
When interest is charged on drawings, the journal entry will be as follows :
Journal Entry
Drawings A/c Dr. —
To Interest on Drawings A/c —
(Being interest charged on drawings)
Interest on loan
Loan is a long-term debt of the business enterprise taken by financial institution.
Example : 10 per cent interest on a loan of Rs. 10,00,000.
Interest on Loan A/c Dr. 1,00,000
To Loan A/c 1,00,000
(Being interest on loan @ 10%)
Bankruptcy/insolvency
In case a debtor becomes insolvent by the court, full amount cannot be realized from his estate. Only a part payment is received towards first & final payment.
Example : Vishwanath became bankrupt and only 40% of a rupee was received out of Rs. 40,000 form his official receiver :
Journal Entry
Cash A/c Dr. 16,000
Bad Debts A/c Dr. 24,000
To Vishwanath…………….. 40,000
(Being Vishwanath became insolvent and 40 paise a rupee is received from his official receiver.)
Refund of tax
Where there is refund of tax, the amount received will increase the cash and capital.
Journal Entry
Cash A/c Dr —
To Capital A/c —
(Being refund of income tax paid excess by the firm)
Bad debts and bed debts recovered
In case a debtor does not pay the amount due to him it is treated as bad debt. When the debtor pays this amount later on, it is called bad debts recovered Account.
Journal Entries
Bad Debts A/c Dr
To Rahul —
(Being bad debts written off)
Cash A/c Dr
To Bad Debts Recovered A/c —
(Being the amount written off as bed debts
realized now).
Expenses paid on purchase of machinery
When some amount is spent for the purchase and installation of an asset, it is debited to the Machinery Account.
Journal Entry
Machinery A/c Dr —
To Cash A/c —
(Being amount paid for the purchase and installation of machinery)
Distribution of Goods among Employees
Sometime, goods are distributed among the employees of the business, it comes under compensation to employees or part of salary.
Journal Entry
Salary A/c Dr —
To Purchases A/c —
(Being free distribution of goods among employees)
Advantages of journal
Complete Information : Journal contains complete information of a transaction alongwith explanation, known as narration.
Chronological Record : It gives datewise record of transactions in the enterprise.
Reduced Chances of Errors : Debit and credit of a transaction is noted side by side. The possibility of mistakes are quite less.
Limitations of journal
With all the advantages of journal, there are some limitations of it. They are as fallows:
It will take a lot of time if all the transactions are to be entered in the journal.
To avoid pressure of work on the accountant, cash entries have to be recorded in a separate book known as cash book.
In big business houses there are so many transactions that it in practically impossible to be recorded in chronological order. On account of the above limitations, journal is used only in small business organisations. Only those transactions are recorded in journal by big institutions which cannot be entered into subsidiary books. Specimen Journal Entries
On Sale of Goods :
Cash A/c Dr
To Sales A/c
(Being goods sold for cash)
On Receipt of Rent :
Cash A/c Dr
To Rent A/c
(Being rent paid)
On Payment of Expenses :
Expenses A/c Dr
To Cash A/c
(Being expenses made)
On Purchases of Machinery :
Machinery A/c Dr
To Cash A/c
(Being Machinery Purchased for Cash)
On Purchase of any other Assets :
Assets A/c (By Name) Dr
To Cash A/c
(Being assets (by name) purchased for Cash)
On Purchase of Goods :
Goods A/c Dr
To Cash A/c
(Being goods purchased for cash)
On Capital invested in cash :
Cash A/c Dr
To Capital A/c
(Being Capital invested in cash)
On Capital invested by Cheque :
Bank A/c Dr
To Capital A/c
(Being Capital invested by cheque)
On Cash withdrawn for Personal use :
Drawings A/c Dr
To Cash A/c
(Being cash withdrawn for personal use)
On goods sold on credit to Rajni :
Rajni Dr
To Sales A/c
(Being goods sold on credit to Rajni)
On receipt of Cash from Rajni :
Cash A/c Dr
To Rajni
(Being Cash received from Rajni for payment of goods sold on credit)
Goods purchased on credit from Bansilal :
Purchases A/c Dr
To Bansilal
(Being goods purchased on credit from Bansilal)
1. On Payment of cash to Bansilal for goods :
2. Purchased on Credit in the past
Bansilal Dr
To Cash A/c
(Being Cash paid to Bansilal for goods purchased on credit from him in the past)
Closing Journal Entries
(i) Trading A/c Dr
To Opening Stock A/c
To Purchases A/c
To Sales Returns A/c
To Direct Expenses A/c
(Being closing entries for items on credit side)
(ii) Sales A/c Dr
Purchases Returns A/c Dr
Closing Stock A/c Dr
To Trading A/c
(Being closing entries for items on the credit
side of the Trading A/c)
(iii) Trading A/c Dr
To Profit & Loss A/c (Profit)
(Being transfer of gross profit to
Profit and Loss A/c)
(iv) Profit & Loss A/c (Loss) Dr
To Trading A/c
(Being gross loss transferred to
Profits & Loss A/c)
profit & loss account
(i) Profit & Loss A/c Dr
To Indirect Expenses A/c
(Being closing entry for indirect expenses
appearing as debit of P&L A/c)
(ii) Incomes and Gain A/c Dr
To Profit & Loss A/c
(Being closing entries for transfer
of Incomes and gain)
(iii) Profit & Loss A/c Dr
To Capital A/c
(Being transfer of net profit)
(iv) Profit & Loss A/c Dr
To Profit & Loss Appropriation A/c
(Being transfer of net profit)
calculation of closing stock
Closing Stock = Opening Stock + Purchases–Purchases Returns–Sales + Sales Returns + Direct Expenses.
or
Closing Stock = Opening Stock + Net Purchases + Direct Expenses–Sales–Gross Loss
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