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Account-3 (Journal Entry and Rules of Journal)

Quantitative Aptitude (Pb Patwari) Accountancy

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FINANCIAL ACCOUNTING

We will cover the following topics in this chapter:

Journal Entry
Compound Journal entry
Rules of Journal

Journal

“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

(Rs.)

Xxxx

*******A/c Dr.

To *******A/c

(Narration*********)

xxxx

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.

Compound Journal Entry

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.

One account credit or one and more account debit.
One account debit or one and more account credit

Notes:

If there are multiple transactions in a day, the total amount of all the transaction through a single journal entry may pass with total amount.
If debit or credit entry is same and the corresponding entry is different, we may post a combined entry for the same. It is called ‘compound entry’ regardless of how many debit or credit entries are contained in compound journal entry. For example,

Date

Particulars

L.F.

Debit

(Rs.)

Credit

(Rs.)

Xxxx

****A/c Dr.

To*******************A/c

(Narration******************)

Xxxx

Jan 1: Purchase furniture for 2000. Purchase goods for 1000 and Purchase scooter 3000

Date	Particulars	L.F	Debit	Credit
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 )

Analysis and Journal Entry of Transactions

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.

1. Capital A/C:

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)

2. Drawing Account

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)

3. Trade Discount

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

4. Cash 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.

5. Bad Debts

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

Cash A/c Dr. xx

To bad debts recovery A/c xx

(Being recovery of bad debts)

6. Expenses on purchase of Goods

There are a few types of expenses incurred on the purchases of goods like inward freight, octroi, cartage, unloading charges, etc.

Journal Entry:

Inward freight/Cartage/Octroi A/c Dr. xx

To Cash A/c xx

(Being freight charges paid on purchase of goods)

7. Expenses on Sale of Goods

Expenses are also incurred while selling products to customers such as freight outward, insurance charges, etc.

Journal Entry:

Freight outward/Insurance Expenses A/c. Dr. xx

To Cash A/c xx

(Being freight charges paid on sale of goods)

8. Expenses on Purchase of Assets

Sometimes we need to pay expenses on the purchase of fixed assets like transportation charges, installation charges, etc.

Journal Entry:

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

To Cash A/c xx

(Expenses incurred on purchase of asset)

9. Payment of Expenses

Journal Entry:

Expenses A/c Dr. xx

To Cash A/c xx

(Being expenses incurred)

10. Outstanding Expenses

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.

Journal Entry:

Salary A/c Dr. xx

To salary outstanding A/c xx

(Being salary for the month of .........due

11. Prepaid Expenses

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.

Journal Entry:

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.

12. Income Received

Journal Entry:

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

13. Banking Transactions

Cheque deposited in bank

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

To Debtor A/c 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:

Debtor A/c Dr. xx

To Cash A/c xx

(Being payment made through ..... )

(3) Cash withdrawn for office Expenses

Cash A/c Dr xx

To Bank A/c xx

(Being cash withdrawn from bank for office use)

(4) Cash deposited with Bank

Bank A/c Dr xx

To Cash A/c xx

(Being cash withdrawn from bank for office use)

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

To Bank A/c xx

(Bank charges/commission/interest debited by bank)