“The basic book of accounting is called journal. Precisely it is the book of prime entry which means- Day book. Trader records his total daily transactions in it. The process of recording the transactions into journal is called ‘Journalizing’.” – Rowland
“The Journal’ or ‘Daily record’ as originally used was a book of prime entry in which transactions were copied in order of date from a memorandum or waste book. The entries as they were copied, were classified into debits and credits, so as to facilitate their being correctly posted afterwards in the ledger.” – Carter
“A journal is a book, employed to classify or sort out transactions in a form convenient for their subsequent entry in the ledger.” – Cropper
Thus journal may be described as a book in which the transactions are recorded in the order of occurrence i.e. in chronological order. It is called a book of prime entry or orginal entry because all business transactions are entered first in this book. The process of writing a transaction in journal is known as journalizing and the transaction written in journal is known as journal entry.
The journal has two functions:
- To analyze each transaction into debt so as to enable their posting in the ledger and
- To arrange transactions, chronologically i.e. order of date.
Need of Journal: journal is needed and is useful in the following respects.
(a) Convenient recording of a transactions;
(b) Maintaining and preserving the identity of a transactions;
(c) Ascertaining the true nature of transaction-with the help of narrations and
(d) Maintain permanent record of information.
Every transaction to be recorded in the books of accounts must be backed by some documentary evidence which is known as voucher. For example: Receipts; Pay-in-slips; bills; invoices; debit note; credit note etc; are all vouchers.
Debit and Credit
As is clear from the form of account given above it is divided in two parts. Left-hand side is known as ‘debit side’ and right hand side is known as ‘credit side’. Amounts entered on the debit side (left hand side are called debits and amounts on the credit side) right-hand side) are called credits. ‘To debit’ means to make and entry in the left-hand side of an account’ and ‘to credit’ have no other meaning in accounting. Abbreviation used for debit is Dr. and for credit Cr.
Classification of accounts (equation based)
The classification of accounts according to Accounting Equation Approach is given below: Classification of accounts according to accounting equation approach.
Rules of debit and credit (equation based)
Dual aspect concept in accounting implies that every accounting transaction would be expressed by a debit amount and an equal and opposite credit amount. Thu, the rule that for each transaction debit amount must equal the credit amount has absolutely no exception. The quality of debits and credits may be expressed in the form of an equation.
If each account was to be considered in isolation it would make no difference whether increases were recorded on the debit side or on the credit side but since the accounts are inter-dependent therefore a system of recording increases and dresses on the two sides had to be fixed. Traditional or conventionally increases in asset accounts are recorded on the debit side while increases in liabilities and capital are recorded on the credit side. The above rule ensures that when account balances are totaled will confirm to the accounting equation discussed above. It gives rise to the following rules.
1) Increase in asset accounts are debits, decreases are credits
2) Increases in liability accounts are credits, decreases are debits.
3) Increases in owner’s equity accounts are credits, decreases are debits.
Total classes of accounts maintained by any business will include the accounts relating to expenses, losses, revenues and profits in addition to assets, liabilities and proprietor’s funds. Rules of debit and credit regarding assets, liabilities and capital have been stated above and the rules for expenses/losses and revenues/profits can be derived from the same.
4. Increases in expenses/losses accounts are debits.
Since the expenses and losses when incurred and suffered lead to reduction in the capital and decreases in owner’s equity accounts are debits, therefore increases in expenses and losses accounts are Debits.
5. Increases in revenues/profit accounts are credits.
Classification of accounts (traditional)
The classification of accounts and rules of debit and credit based on such classification are given below.
Accounts recording transactions relating to individuals or firms or company are known as personal accounts. Personal accounts may further be classified as:
I. Natural person’s personal accounts: The accounts recording transactions relating to individual human beings e.g., Anand’s a/c, Ramesh’s a/c, Pankaj’s a/c, are classified as natural person’ personal accounts.
II. Artificial person’s personal accounts: The accounts recording transactions relating to limited companies, bank, firm, institution, club, etc. e.g. Delhi Cloth Mill; M/S Singh & Singh; Hans Raj College/ Gymkhana Club are classified as artificial persons’ personal accounts.
III. Representative personal account: The accounts recording transactions relating to the expenses and incomes are classified as nominal accounts. But in certain cases (due to the matching concept of accounting) the amount, on a particular date, is payable to the individuals or recoverable from individuals. Such amount (i) reltes to the particular head of expenditure or income and (ii) represents persons to whom it is payable or from whom it is recoverable. Such accounts are classified as representative personal accounts e.g., “wages outstanding account”, pre-paid insurance account, etc.
The accounts recording transaction relating to tangible things (which can be touched, purchased and sold) such as goods, cash, building, machinery etc., are classified as intangible real accounts.
Whereas the accounts recording transactions relating to tangle things (which do not have physical shape) such as goodwill, patents and copy rights, trade marks etc., are classified as intangible real accounts.
The accounts recording transactions relating to the losses, gains, expenses and incomes e.g., Rent, salaries, wages, interest, bad debts etc. are classified as nominal accounts.
As already discussed, wherever a nominal account represents the amount payable to or receivable from certain persons it is known as representative personal account.
Steps to Journalizing
The process of recording a transaction in the journal is called ‘Journalizing’. The various steps to be followed in journalizing the business transactions are given below.
- Step 1: Ascertain what accounts are involved in a transaction.
- Step 2: ascertain what the nature of accounts involved is.
- Step 3: Ascertain which rule of debit and credit is applicable for each of the accounts involved.
- Step 4: Ascertain which account is to be debited and which is to be credited.
- Step 5: Record the date of transaction in the ‘date column’.
- Step 6: Write the name of the account to be debited very close to the left hand side (i.e., the line demarcating the ‘date column’ and the ‘particular column)’ along with the abbreviation ‘Dr.’ on the same line against the name of the account in ‘particulars column’ and the amount to be debited in the ‘debit amount column’ against the name of the account.
- Step 7: Write the name of the account to be credited in the next line preceded by the word ‘To’ at a few spaces towards right in ‘particulars column’ and the amount to be credited in the ‘credit amount column’ against the name of the account.
- Step 8: Write ‘narration’ (i.e., a brief description of the transaction) within brackets in the next line in ‘particulars column’
- Draw a line across the entire ‘Particulars column’ to separate one Journal Entry from the other.
Characteristics of Journal
1. Journal is a book of original entry because transaction is recorded at first stage in this book.
2. Journal is the first step in the recording process of double entry system of book-keeping.
3. Journal is also known as day book or diary because transactions are recorded in it on day to day basis as and when they take place.
4. Journal is a chronological record of all transactions taking place according to the order of occurrence.
5. Every entry in journal is accompanied with narration which describes, briefly, true nature and context of the transactions.
6. Amount of the transaction is recorded in both debit and credit column-side by side. It helps in maintaining arithmetical accuracy of the books.
7. Journal and ledger are interred linked because next step after journal is the ledger.
Rules of Debit
1. Personal account is debited when
i. A person owes us for receiving the benefit e.g. credit sales by the business.
ii. Obligation of the business is discharged or reduced e.g. payment to a creditor.
iii. A person becomes liable to business for performance in future e.g. prepaid insurance.
2. Real account is debited when
i. Some asset is purchased
ii. Value of the asset increases
3. Nominal account is debited when
i. Expenditure is incurred e.g. payment of salary, rent etc.
ii. Loss is suffered due to some reason like fire, theft etc.
Rules of Credit
1. Personal account is credited when
i. Business owes to some one for benefit received e.g. goods purchased on credit.
ii. Obligation towards business is discharged or reduced by a person e.g., receipt from a debtor.
iii. Liability of the business towards someone increases for getting some service or benefit e.g., salaries/wages outstanding.
2. Real account is credited when
i. Asset is sold
ii. Asset value decreases due to depreciation etc.
3. Nominal account is credited when
i. Business earns income by way of interest, dividend; commission etc.
ii. Business gains e.g., bad debts recovered etc.
Some Specimen Transactions (Illustration)
Let us consider few transactions to understand as to how the journal entries are recorded:
(1) Amar started business with Rs. 10,000.
This means that Amar is a personal account and he is the giver of Rs. 10,000 to the business. Business has received Rs. 10,000 cash. As per the rules ‘debit what comes in and credit the giver.
Hence the journal entry is:
|Cash account ….Dr.
To Amar’s capital account
(Being the commencement of business)
(2) Out of the above Rs. 2,000 are deposited in the bank.
This transaction results in opening an account with bank. Bank account may be considered as personal hence receiver is debited. Cash goes out therefore credited. Thus the journal entry is:
|Bank account ….Dr.
To cash account
(Being Cash deposited in the bank)
(3) Purchased office furniture for cash worth Rs. 1,000
This transaction results in acquiring a new asset i.e. furniture. Real account debit what comes in, cash is paid for its purchase- credit what goes out.
|Furniture account ….Dr.
To Cash account
(Being the cash purchase of furniture)
(4) Purchased goods for cash Rs. 1,500
Purchase (of goods) is real account- debit what comes in, paid cash in exchange – credit what goes out.
|Purchase account ….Dr.
To Cash account
(Being cash purchases of goods)
(5) Purchased goods from Birender on credit for Rs. 2,000. Purchases account being the real account will receive debit. Birender’s personal account, being the giver, will receive credit.
|Purchase account ….Dr.
(Being purchases on credit
(6) Sold goods for cash Rs. 3,000
Sales (of goods) are real account – credit what goes out. Received cash in exchange – debit what comes in.
|Cash account ….Dr.
To Sales account
(Being the cash sales of goods)
(7) Sold goods to Chetan on credit for Rs. 3,500
Sales (of goods) the real account – credit what goes out. Chetan personal account – debit the receiver.
To Sales account
(Being the credit sales of goods)
(8) Received cash from Chetan Rs. 3,430. Allowed him discount of Rs. 70
This transaction results in receipt of cash – real account; debit what comes in; allowed discount – nominal account; expenses are debited; Chetan a personal account – credit the giver.
|Cash account ….Dr.
Discount account ….Dr.
(Being cash receipt and discount allowed)
(9) Paid cash to Birender Rs. 1950 in full settlement of his account
In this transaction Birender is personal account; he is the receiver – debit the reciver; account settled by paying Rs. 50 less is the discount availed – nominal account – credit income and cash-real account – credit what goes out.
Discount account ….Dr.
To Cash account
(Being payment of cash in settlement)
(10) Paid salaries Rs. 500
Salary is an expense; nominal account; expenses are debited. Cash (real account goes out: Credit what goes out.
|Salaries account ….Dr.
To Cash account
(Being the payment of salaries)
(11) Received commission Rs. 100
Cash has been received, debit what come in. Commission received is income. Incomes are credited.
|Cash account ….Dr.
To Commission account
(Being the receipt of commission)
(12) Charged depreciation for full year on furniture @ 10%
Depreciation in the value of an asset is a loss, it is nominal item and the rule is debiting the losses. The value of asset has decreased hence credit furniture account.
|Depreciation account ….Dr.
To furniture account
(Being depreciation on Rs. 1000 @ 10%)
Note on goods in-trade or stock-in-trade or merchandise is the term used to denote the goods which are purchased and sold by a particular business in routine course. For example furniture for a dealer of furniture is known as ‘goods” but for every business other than that of furniture is an asset.
Goods account is, normally, not opened instead it is sub-divided into for accounts namely purchases; sales; Returns inwards and Returns outwards. It is for convenience and practical utility.
Hints for Journalizing
The following discussion will help you in diagnosing the transaction with a view to find out which accounts are relevant for passing the journal entry.
1. Treatment of cash/credit transaction.
i.Purchased goods for Rs. 1,200 cash.
ii.Purchased goods for Rs. 1,200
iii.Purchased goods for Rs. 1,200 from Arun.
iv.Purchased goods for Rs. 1,200 from Arun on cash
Transaction (i) and (iv) are clear as it has been specifically stated that purchases have been made on cash. Thus the entry is:
Purchases account Dr. 1,200
To Cash account 1,200
Transaction (ii) and (iii) are not specific as to whether the purchases are for cash or on credit. However transaction (ii does not mention any name of the supplier; therefore it implies that the purchases are for cash. Similarly transaction (iii) mentions the name of the supplier but is silent regarding cash- it implies that purchases are on credit. Thus the entry for transaction (iii) is
Purchase account Dr. 1.200
To Arun 1,200
2. Treatment of payment on personal/expenses account.
When payment is made to a person against amount due to him as per his ledger accont – the personal account of the creditor should be debited. However if the payment is being made to a person representing business expenditure then the particular expenditure (nominal) account should be debited. For example (i) Paid Rs. 500 to Varun on account; (ii) Paid Rs. 500 to Varun for his salary. In transaction (i) the entry is:
Varun Dr. 500
To Cash account
In transaction (ii) the entry is:
Salary account Dr. 500
To cash account 500
3. Treatment of receipt on personal/income account.
When amount is received from a person against amount recoverable from him as per ledger account – the personal account of the debtor should be credited. However if the amount received represents business income, then the particular income (nominal) account should be credited. For example
i.Received Rs. 800 from Tarun on account.
ii.Received Rs. 800 from Tarun as commission
Cash account Dr. 800
To Tarun 800
Cash account Dr. 800
To Commission account 800
4. Treatment of trade discount
In many cases the seller allows to the buyer deduction off the list price. Such deduction is known as ‘trade discount’. Trade discount as such is not recorded in the books. The transaction is recorded with only the net amount i.e. (list price – trade discount). For example:
Sold goods to Raman list price Rs. 1000, trade discount 10%
Raman a/c Dr. 900
To sales a/c 900
5. Treatment of cash discount (full settlement).
In some cases creditor may allow some concession to his debtor to prompt him to make the payment within the period of credit allowed. Such concession is known as ‘cash discount’. It allowed by the person receiving the payment and represents expenditure. It is availed by the person making the payment and represents income. For example:
(i) Received Rs. 1,000 from Triloki Nath in full settlement against the amount due from him Rs. 1,050.
Cash a/c Dr. 1,000
Discount allowed a/c Dr. 50
To Triloki Nath 1,050
(ii) Paid Rs. 960 to Darbara Singh in full settlement against the amount due to him Rs. 1,000.
Darabara Singh Dr. 1,000
To Cash a/c 960
To Discount received a/c 40
6. Treatment of Bad debts (debtor becoming insolvent)
An amount due from a debtor may become irrecoverable either partially or wholly. Reason may be that he has been declared insolvent or any other. Such irrecoverable amount represents loss to the business and is debited to bad debts account. For example:
Sarkar who owed us Rs. 1,000 is declared insolvent and 60 paisa in the rupee is received as final dividends form his estate.
Cash a/c Dr. 600
Bad debts a/c Dr. 400
To Sarkar 1,000
7. Treatment of Bad debts recovered.
It is evident from the above entry that whenever irrecoverable amount is written off the personal account is credited. If after some time any payment is received a debt previously written of then it represents income and as such should be credited to an accounted styled as ‘bad debts recovered amount’. Personal account must not be credited. For example:
Chandji remitted Rs. 400 against the amount previously written off as bad.
Cash a/c Dr. 400
To Bad debts recovered a/c 400
8. Treatment of personal expenses of the owner.
It is quite common for the proprietor to withdraw cash or goods from the business for personal or domestic use. Sometimes premium on the life policy of the owner may also be paid by the business. Similarly income tax payable by the proprietor may be paid by business. All this represents owner’s personal expenses and are debited to his personal account viz. drawings account. For example:
X withdrew goods for the marriage of his daughter, Nalini, selling price of which was Rs. 800 (25% is added to the cost for fixing the selling price).
X’d drawing a/c Dr. 640
To Purchases a/c 640
Note that drawings account has been debited by Rs. 640; representing cost of purchases (100/125X800) and purchases account has been credited at cost price.
9. Treatment of payment/receipt on behalf of customer or supplier.
In some cases business might pay expenses on behalf of its customers. Such payments do not constitute the expenditure of business. Hence it should be debited to the personal account of the concerned customer. For example:
Paid cartage on behalf of our customer Mr. Bhushan Rs. 50
Bhushan Dr. 50
To Cash a/c 50
Similarly business might receive any amount on behalf of its supplier. Such receipt does not become the income of business. Hence it should be credited to the personal account of the supplier. For example.
Received interest Rs. 70 on behalf of our supplier Mr. Sashi.
Cash a/c Dr. 70
To shashi 70
10. Treatment of exchange of new asset with old one.
Sometimes business may exchange its old asset with new one – only the diference in value is paid in cash. In such cases asset account needs debit only with the actual amount paid in cash.
Exchanged old furniture for new; the value of old furniture was Rs. 350 while the value of new furniture was Rs. 900 balance paid in cash.
Furniture a/c Dr. 550
To Cash 550
11. Treatment of goods given as charity/advertisement
Business might distribute goods as ‘free samples’ to advertise its products. In some cases it may also distribute goods as charity to boost its image. Both ‘advertisment’ and ‘charity’ are expenses of the business, hence should be debited and purchases account should be created. For example:
Gave away as charity goods costing Rs. 100 and cash Rs. 51
Charity a/c Dr. 151
To purchase a/c 100
To Cash a/c 51
12. Treatment of goods lost in accident/fire.
In certain case a business might suffer loss of goods due to some accident or fire etc. destroyed or damaged goods might have been insured also. In such cases total value of goods lost or destroyed is credited to purchases account and the (i) insurance claim admitted is debited to Insurance Company (ii) balance is debited to loss by accident/fire account. For example:
Goods worth Rs. 4,000 were destroyed in a fire. Stock of goods was insured against fire to the extent of 80% of their value. Insurance company paid proportionate claim in cash.
Cash a/c Dr. 3,200
Loss by fire a/c Dr. 800
To purchases a/c 4,000
13. Treatment of depreciation charged on fixed assets.
Fixed assets are those properties/possessions of the business which are used for carrying on of business viz. plant, machinery, building etc. Depreciation is the permanent decrease in the value of an asset due to wear and tear; passage of time and obsolescence. Depreciation is treated as business expenditure. Depreciation account is debited and the respective asset account is credited. For example:
Plant purchased for Rs. 70,000. Provide depreciation @ 10% p.a. for full year on original cost.
Depreciation A/c Dr. 7,000
To plant a/c 7,000
14. Treatment of payment/receipt of representative personal accounts.
At the close of the previous accounting year a business might have incurred expenditure which remained unpaid. It is known as ‘outstanding expenditure’. It is a representative personal account. When actual payment is made in current accounting period the concerned account is debited and cash account is credited. For example:
Salary due in December, 2009 were paid in January, 2010 Rs. 5,000
Outstanding Salaries a/c Dr. 5,000
To Cash a/c 5,000
Similarly income accrued due but not received in the previous accounting period is known as ‘Income accrued due’ and is representative personal account. On actual receipt the concerned account is credited and cash account is debited. For example:
Rent accrued due, on building let-out, in December 2009 amounting to Rs. 5,000 received in January 2010.
Cash a/c Dr. 5,000
To Accrued rent a/c 5,000
Compound (combined) journal entries
In most of the cases journal entry has one account to be debited and one account to be credited it should be termed as simple journal entry. In some cases entry may contain more than one debit or more than one credit or both. In such cases the entry is known as compound journal entry. Compound entries are passed only when the following conditions are satisfied.
i.Transactions take place on the same day;
ii.One aspect of these transactions is common and
iii.Number of accounts involved is more than two.
Actually when more than one entry is combined it becomes a compound entry. Compound entries may assume me anyone of the following forms:
i.Debiting one account and crediting two or more accounts.
ii.Debiting tow or more accounts and crediting one account.
iii.Debiting several accounts and crediting several accounts.
The following example makes the process of passing compound entries clear.
- Moti Lal starts business with Rs. 10,000 cash and a building worth Rs. 50,000.
- Purchased goods worth Rs. 20,000 out of which goods with Rs. 12,000 was on credit from Shyam Lal.
- Sold goods on credit worth Rs. 16,000 to Ram Nath.
- Received Rs. 15,600 from Ram Nath in full settlement of his account.
- Paid Rs. 11,800 to Shyam Lal in full settlement of Rs.. 12,000 due to him.
- Paid wages Rs. 500 and salaries Rs. 2,000
- Purchased machinery from Marshal and Sons for Rs. 2,000 on Credit.
- Depreciation of Rs. 200 was provided on the machinery at the year end.
- Withdrew Rs. 500 from the business for personal expenses.
- A cheque amounting to Rs. 500 deposited in the bank was returned dishonored.