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We will cover the following topics in this chapter:
“The process of recording a transaction in a journal is called journalizing the transactions.”
--Meigs and Meigs and Johnson
Journal is a book that is maintained on a daily basis for recording all the financial entries of the day.
Passing the entries is called journal entry. Journal entries are passed according to rules of debit and credit of double entry system.
Date
Particulars
L.F.
Debit
(Rs.)
Credit
1
2
3
4
5
Xxxx
*******A/c Dr.
To *******A/c
(Narration*********)
xx
xxxx
Column 1: It represents the date of transaction.
Column 2: Line 1 (******) represents the name of account to be debited.
Line 2 (******) represents the name of account to be credited.
Line 3 for narration of transaction Column 3: Ledger Folio (L.F.) represents the page number of ledger account on
which we post these entries.
Column 4 : Amount(s) to be debited.
Column 5 : Amount(s) to be credited.
When two or more transaction of similar nature take place on the same date. Then instead of recording separate entry. A single entry may be written such entry called compound Journal entry can be recorded in the following ways.
Notes:
****A/c Dr.
To*******************A/c
(Narration******************)
Jan 1: Purchase furniture for 2000. Purchase goods for 1000 and Purchase scooter 3000
L.F
Jan1
Furniture A\C Dr.
2000
Purchase A\C Dr.
1000
Scooter A\C Dr.
3000
To Cash A\C Dr.
6000
(Narration : Being Purchase furniture, goods scooter )
Let us go through the nature of transactions and their Journal Entry in our books of accounts. The following accounting entries are commonly used in every business and they come under the category of routine journal entries.
Capital account is personal account. Whenever the owner introduces capital in the form of cash, goods or assets, the entry will be as hereunder:
Cash/Goods/Asset A/c Dr. xx
To Capital A/c xx
(Being cash/goods/assets introduced as capital)
Drawing account is also a capital account. Whenever the owner of the business withdraws money for his personal use, it is called drawing. The balance of Drawing account is transferred to the capital account at the end of the accounting year.
Drawing A/c Dr. xx
To cash A/c xx
(Being withdrawal of cash for personal use)
Trade discount is allowed by seller to buyer directly on their sales invoice. Buyer in this case are usually whole-sellers, traders or manufacturers, who further sell this material to their customers or use the material in their manufacturing process. Rate of discount may vary from customer to customer. No need to pass any journal entry in this case. The sale is booked on the net of trade discount. Similarly, if we get trade discount from our supplier, we book our purchase at the net of trade discount
Cash discount is also allowed by seller to his buyer; still it does not come in the category of trade discount. Cash discount is a sort of scheme to inspire their debtors to release their due payment in time. For example, a seller may allow 5% cash discount, if he gets payment within a week against the time limit of 45 days.
Journal Entry: If A allowed a discount of 5% to B, then
In the books of A
Cash A/c Dr. xx
Discount A/c Dr. xx
To B A/c xxxx
(Being 5% discount allowed to B on payment of Rs........)
In the books of B
A A/c Dr. xxxx
To Cash A/c xx
To Discount A/c xx
(Being payment of Rs........ made to A and getting a discount of 5%)
Note: In the above case, discount is a loss to A and income to B.
Part of credit sale which is unrecovered from debtors due to some reason like insolvency, dishonesty, etc. are called bad debts of the company. Bad debts are loss to the company.
Journal Entry:
(1) To book bad debts
Bad Debts A/c Dr. xx
To Debtor A/c xx
(Being loss on account of bad debts)
(2) To recover bad debts
To bad debts recovery A/c xx
(Being recovery of bad debts)
There are a few types of expenses incurred on the purchases of goods like inward freight, octroi, cartage, unloading charges, etc.
Inward freight/Cartage/Octroi A/c Dr. xx
(Being freight charges paid on purchase of goods)
Expenses are also incurred while selling products to customers such as freight outward, insurance charges, etc.
Freight outward/Insurance Expenses A/c. Dr. xx
(Being freight charges paid on sale of goods)
Sometimes we need to pay expenses on the purchase of fixed assets like transportation charges, installation charges, etc.
Expenses incurred on purchases of fixed asset are added in the value of fixed assets and could not be treated like expenses on purchases of goods:
Fixed Asset A/c Dr. xx
(Expenses incurred on purchase of asset)
Expenses A/c Dr. xx
(Being expenses incurred)
Sometimes expenses remain outstanding at the end of the financial year, but due to the accrual basis of accounting, we need to book those expenses which are due for payment and to be paid in the next accounting year. For example, the salary due on the last day of the accounting year to be paid in the next year.
Salary A/c Dr. xx
To salary outstanding A/c xx
(Being salary for the month of .........due
Sometimes we pay expenses in advance such as insurance paid three months before the closing of the accounting year. Since insurance is usually paid for the whole year, in this case, the insurance for nine months is treated as prepaid insurance. Similarly, rent for the first month of next accounting year may be paid in advance.
Prepaid expenses A/c Dr. xx
To Expenses/ Cash A/c xx
(Being prepaid expenses for month paid)
Note: Expenses account is replaced with the respective head of expense account.
Cash/Debtor A/c Dr. xx
To Income A/c xx
(Being Income received in cash)
Note: Income account will be replaced with the respective head of Income account
Cheque received from party is deposited in bank, Cheque direct deposit by party in our bank account, payment made by party through NEFT or RTGS, or cash directly deposited by party in our bank account. The entry remains same in all the above cases.
Bank A/c Dr. xx
(Being payment received from..... and deposited in bank)
2. Payment made to party through cheque
Cheque issued to party or directly deposited in his bank account, or payment made through either by NEFT, RTGS, or cash directly deposited in his bank account. Entry remains same in all the above cases except in the case of cash deposited in his bank account.
Debtor A/c Dr. xx
To Bank A/c xx
(Being payment made through ..... )
If we deposit cash in his bank account, entry will be as follows:
(3) Cash withdrawn for office Expenses
Cash A/c Dr xx
(Being cash withdrawn from bank for office use)
(4) Cash deposited with Bank
Bank A/c Dr xx
Note: The above entries No. 3 & 4 are called ‘contra’ entries.
(5) Bank charge debited by bank
Sometimes banks debit from our account against some charges for service provided by them. For example, cheque book issuing charges, demand draft issuing charges, Bank interest, etc.
Bank commission/Charges A/c Dr. xx
(Bank charges/commission/interest debited by bank)
Interest on capital, introduced by sole proprietor or partners of the firm: This entry is passed on the last date of the accounting year as follows:
Interest on capital A/c Dr. xx
(Being interest @..... on capital provide)
Some expenses may be on behalf of our debtors or creditors.
Debtors/creditors A/c Dr. xx
To Cash / Expenses A/c xx
(Being expenses debited to party, paid on his behalf)
Sometimes the customers pay an advance amount for the supply of goods/services, which need to be adjusted later:
Bank /Cash A/c Dr. xx
To Advance from Customers A/c xx
(Being advance received from xxxxxxxx)
As above, we may also pay an advance amount to our supplier against supply of goods/services:
Advance against supply of goods A/c Dr. xx
To Cash/Bank A/c xx
(Being advance paid against supply of goods/services)
By: Munesh Kumari ProfileResourcesReport error
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