Journal Part 1

Download PDF of This Page (Size: 194K)

Every business keeps all business transactions which are in financial nature. A book that is prepared by recording all the business transactions date wise and in the order of their occurrence is called “Journal”. The process of recording transactions in the journal is known as ‘Journalising’. All the transactions are known as entries. Entries are as per double entry system (credit and debit as per the rules of specific accounts). Journal is also known as ‘Book of Original Record’ or ‘Book of primary entry’.

Small Business houses maintain single book for all transactions. But big companies need to maintain different types of books as there are many transactions. These books are called Special Journals in which transactions are recorded based on nature of transaction. Ex: All cash transactions in Cash Book.

Format of Journal:

Every page of Journal has five columns.

Date: Record the date of the transactions with its month and accounting year. We write year only once at the top.

Particulars: Details of the accounts affected by a transaction. In the first line, Debited account is written and at the end of the line Dr. is written. In the second line, some space is left and written ‘To’, followed by credited account. In the third line, narration is done to describe the transaction. Narration should be short, clear and kept in brackets. A horizontal line is drawn after every journal entry to separate it from other entry.

Ledger Folio: The transaction entered in a Journal is posted to the various related accounts in the ‘ledger’. Under LF we enter the journal page number pertaining to the entry.

Debit Amount (Dr. Amount): The amount to be debited is written against the same line in which the debited account is written.

Credit Amount (Cr. Amount): The amount to be credited is written against the same line in which the credited account is written.

Note: At the end of each page, both the Dr. and Cr. columns are summed up and they should be equal. The totals are carried forward to the next page with the words ‘total carried forward (c/f) and then at the top of the next page in Particulars column, we write totals brought forward (b/f) and the amount of totals is written in the respective amount columns.

Example: Journal

Table of Journal
Title: Table of Journal

Date

Particulars

L.F.

Dr. Amount (Rs.)

Cr. Amount (Rs.)

2006

April 1

Rent A/c ……….... Dr

To Cash A/c

(Rent paid in Cash)

4000

4000

Process of Journalising:

  • Identify The Accounts: the affected accounts of an accounting transaction are identified. Example: The transaction of “goods worth Rs.10000 are purchased for Cash” affected by two accounts ‘Purchases’ A/c and ‘Cash’ A/c.

  • Recognise the type of Account: As per three basic accounts i.e, Personal A/c, Real A/c, Nominal A/c.

  • Apply the Rules of Debit and Credit as per type of A/c.

    Personal account rule: Debit the receiver and Credit the giver.

    Real A/c rule: Debit what comes in and Credit what goes out.

    Nominal A/c rule: Debit all expenses and losses and Credit all incomes and gains.

Compound and Adjusting Entries:

There can be entries that affect more than two accounts; such entries are called compound or combined entries i.e, entry contains more than one debit or credit or both.

  • By debiting one account and crediting more than one account.

  • By debiting more than one account and crediting one account.

  • By debiting more than one account and also crediting more than one account.

Note: To make the compound entry it is necessary that the transactions must be of the same date and one account is common.

Examples of Compound Entries:

  1. Bad Debt: A business concern receives Rs 8000 of Rs10,000 due from Harish. He is unable to pay the balance amount, thus, the remaining amount becomes a bad debt for the business.

    The compound entry for this transaction will be:

    Image of Example Bad Debit

    Image of Example Bad Debit

    Image of Example Bad Debit

  2. Discount Allowed and Received: Discount is allowed to encourage a customer to pay the due amount before due date. This is called cash discount.

    Image of Example Discount allowed and Received

    Image of Example Discount Allowed and Received

    Image of Example Discount allowed and Received

Note: When the customer buys goods in bulk quantity some discount may be allowed to encourage more sales. This discount is called Trade Discount. When the bill is prepared the amount of trade discount is deducted from the total amount payable. No entry is made for this type of discount in the journal i.e. it is not recorded in the books of accounts.

Adjusting Entry: All transactions may not take place in same accounting year. There can be two situations:

(a) Amount has been received or paid which belongs to more than one accounting year.

(b) Amount of expense or of revenue for the current year stands due and not paid.

In the above two cases adjustments are needed to be made. Then those entries are called adjusting journal entries.

  1. Outstanding Expenses: If expenses are not paid during the year, it becomes outstanding expense for that year. It is liability for that year. So, outstanding account will be credited.

    Example: Salaries are outstanding for Rs.5,000 for December 2006

    Table of Outstanding Expenses
    Title: Table of Outstanding Expenses

    Date

    Particulars

    L.F.

    Dr. Amount (Rs.)

    Cr. Amount (Rs.)

    2006

    Dec

    Salaries A/c ……….... Dr.

    To Salaries outstanding A/c

    (Salaries remaining unpaid for the month of December)

    5000

    5000

  2. Prepaid Expenses: Sometimes expenses relating to the next year will be paid in advance. In such a case, the amount is not treated as expense for this year. It should be treated as asset for this year. So, that asset will be debited.

Image of Example Insurance is prepaid

Image of Example Insurance is Prepaid

Image of Example Insurance is prepaid

Accrued Income: In case, income has been earned but it has not been received till now, it is an accrued income. Accrued Income is an asset, as there will be an increase in the asset, it will be debited.

Image of Example Accrued Rent Income

Image of Example Accrued Rent Income

Image of Example Accrued Rent Income

Income received in Advance: Sometimes we receive advances. They are not considered as income for the current year and they will be considered as liability for the current year.

Example: if Rent is received in advance for the period January and February 2007 in

Image of Example Income received in Advance

Image of Example Income Received in Advance

Image of Example Income received in Advance