Concept of Journal Entries

Concept of Journal:

 The first book of accounting in which business transactions are recorded is called Journal.  Journal entry is the recording of transaction in this Journal book. Here, in the journal, transactions are recorded in chronological order-that is, in the order in which they occur. After every journal entry we write narration which explains in short about the transaction.

Journal is divided into five vertical columns: Date, Particular, Ledger folio, Debit amount and Credit amount. Like this:

	Journal		Dr	Cr
Date	Particulars	L.F	Amount	Amount
1/12014	Cash A/c                              Dr		1000
	To Capital A/c			1000
	(Being introduce cash in bus.)

Date column represents date of the transaction. One thing we need to take care in writing date is to not repeat year and months in the column.

 Particular column is for recording related accounts on that transaction and description of that account with debit and credit. First we write debit account by writing “Dr” parallel to it and below it secondly, we write credit account by writing “To”.

Ledger folio column is not filled in at the time of recording of transaction but when we post related accounts to the ledger, the page number of that ledger should be written in this ledger folio column indicating that if anyone wants to check the ledger of this account they can see that page.

Debit and Credit column is for writing amount of the transaction.

Let’s do the journal entry:

1)    Started business with cash Rs 100000

2)    Purchased goods for Rs 50000

3)    Purchased goods on credit from Sachin Rs 40000

4)    Sold goods on credit to Dhoni for Rs 20000

5)    Sold goods in cash for Rs 10000

6)    Borrowed from Yuvraj Rs 25000

7)    Purchased furniture from Amitabh ji  Rs 12000

8)    Withdrawn from bank for office use Rs 4000

9)    Withdrawn goods worth Rs 4000 for personal use.

10)                       Received an advance from customer Rs 8000.

11)                       Interest allowed by bank Rs 2500.

Let’s analyze the following transaction:

1)    Cash is being given by the owner to the business. Here for business’ point of view (entity concept) cash-- a real account is coming in and golden rules says debit what comes in, so we need to debit cash by Rs 100000.

Capital-personal account is represented as owner account, and the golden rule about personal account says debit the receiver and credit the giver of benefit. Here owner is giving and he is represented as capital so, capital account should be credited with Rs 100000.

2)    Purchase is an expense and all the expenses comes under the head of nominal account which says all the expenses should be debit, hence, purchase should be debited. Cash is going out and real account says credit what goes out so it should be credited.

3)      Purchase is an expense it should be debited.

                 Here Sachin—personal account is the giver of benefit to the business entity so it should be credited.

4)    Sales in an income so it should be credited. On the other hand, Dhoni –personal account is the receiver of the benefit from the business entity so, he should be debited.

5)    Sale is an income it should be credited. On the other hand, cash is coming in so it should be debited.

6)    By borrowing money is coming in the business so cash should be debited. On the other hand, yuvraj –the personal account is giving benefit to the business so it should be credited as he is giving money in the form of loan so “loan from yuvraj” should be credited.

7)    Furniture an asset is coming in so ,it should be debited doubtlessly. Amitabh is giving benefit to the business by giving furniture on credit so Amitabh should be credited.

8)    By withdrawing from bank for office use cash is coming in, so it should be debited and bank—the personal account is giving money to the business so it should be credited as real account says debit the receiver and credited the giver of the benefit to the business entity.

9)    Drawn for personal use means drawings which is represented as owner. Owner is drawing goods for personal use. Owner is a personal account and he is receiving the benefit from the business entity by drawings goods in free so he should be debited and as owner is represented by drawings so drawing should be debited. On the other hand, purchase is an expense but here purchase is decreasing because of withdrawing goods so it should be credited.

{It should be noted that golden rule about nominal account says “debit the expense and credit the income” but when expense is decreasing it should be credited and when income is decreasing it should be debited.}

10)                       Here cash is coming in so it should be debited.  On the other hand, advance received from customer a personal account which says debit the receiver and credit the giver of the benefit to the business entity so it should be credited.

11)                       Here bank is the receiver of the interest and thus, it should be debited.  Bank interest an income is a nominal account and it should be credited.

Let’s record these in journal format.

	Journal		Dr	Cr
Date	Particulars	L.F	Amount	Amount
1/1/2014	Cash A/c                              Dr		100000
	To Capital a/c			100000
	(Being introduce cash in bus.)
2	Purchase a/c                      Dr		50000
	To Cash a/c			50000
	(Being goods purchase )
3	Purchase a/c                      Dr		40000
	To Sachin a/c			40000
	Being goods are purchased on
	credit)
4	Dhoni a/c                           Dr		20000
	To sales a/c			20000
	(Being goods are sold on
	credit)
5	Cash A/c                              Dr		10000
	To sales a/c			10000
	(being cash sales)
6	Bank a/c                               Dr		25000
	To loan fron yuvraj a/c			25000
	(Being loan taken fromyuvraj)
7	Furniture a/c                        Dr		12000
	To Amitabh a/c			12000
	(Being furniture purchased
	on credit from Amitabh)
8	Cash A/c                              Dr		4000
	To Bank			4000
	(Being cash withdrawn from
	bank for office use)
9	Drawings a/c                      Dr		4000
	To purchase a/c			4000
	(Being goods are drawn for
	personal use)
10	Cash A/c                              Dr		8000
	To customer a/c			8000
	(Being advance received from
	customer)
11	Bank a/c                               Dr		2500
	To bank interest a/c			2500
	(Being interest received
	from bank)

Now look at the journal entries for special type of transaction:

Purchase Return:

	Journal		Dr	Cr
Date	Particulars	L.F	Amount	Amount
1/1/2014	Party A/c                              Dr		-
	To purchase return a/c			-
	(Being goods returned and party account is debited)
2	Purchase return a/c           Dr		-
	To Purchase a/c			-
	(Being goods purchase and purchase account is credited)

Similarly sales return entry should be made like this.

Goods distributed as free sample:

	Journal		Dr	Cr
Date	Particulars	L.F	Amount	Amount
1/1/2014	Free Sample a/c                 Dr		100000
	To Purchase a/c			100000
	(Being introduce cash in bus.)

Discount Allowed:

If discount is allowed on cash sales

	Journal		Dr	Cr
Date	Particulars	L.F	Amount	Amount
1/1/2014	Discount Allowed A/c         Dr		00
	To sales a/c			00
	(Being discount allowed on Cash sales)

If discount is allowed on credit sales:

	Journal		Dr	Cr
Date	Particulars	L.F	Amount	Amount
1/1/2014	Discount Allowed A/c          Dr		**
	To Party a/c			**
	(Being discount allowed on credit sales)

Similarly opposite entry will be for discount received.

Outstanding expenses:

Date	Particulars	L.F	Amount	Amount
1/1/2014	Expense A/c          Dr		**
	To outstanding expense a/c			**
	(Being outstanding expenses charged to the expense account)

The opposite entry will be for accrued income.

Prepaid expenses:

Date	Particulars	L.F	Amount	Amount
1/1/2014	Prepaid Expense A/c          Dr		**
	To Expense a/c			**
	(Being prepaid expense expenses charged to the expense account)

Bad debt:

Date	Particulars	L.F	Amount	Amount
1/1/2014	Bad debt A/c          Dr		**
	To Party a/c or sundry debtor a/c			**
	(Being discount allowed on credit sales)

Sub division of journal:

Sub division of Journal:

When the transactions in the business entity are numerous, journal alone is inadequate to record all such transactions that’s why, journal has the following sub division:

1)    Cash Book—to record cash transaction

2)    Petty Cash Book—to record petty cash payments.

3)    Sales Day Book—to record credit sales.

4)    Purchase Day Book—to record credit purchase

5)    Sales Return Day Book—to record sales return.

6)    Purchase Return Day Book—to record purchase return

7)    Bills Receivable Book—to record bills receivable

8)    Bills Payable Book—to record bills payable.

     09) Journal proper—to record residuary transaction---used for rectifying error.

We will learn step by step about all these sub divisions in my upcoming post.