Books of Original Entry- Journal

 

Meaning

The term Journal has been derived from the French word ‘Jour’ which means a diary. Journal is the basic book of original entry. All the business transactions are first of all recorded in this book in the chronological order (date-wise) with the help of vouchers supported by the source documents. All the business transactions are recorded as per rule of debit and credit with precise description called as narration. Journal book is also known as book or original entry or book of prime entry.

Features of Journal

1.   All the business transactions are recorded first of all in the chronological order in the Journal.

2.   It records both credit and debit aspects of a transaction according to Double Entry System of Book Keeping.

3.   Each Journal entry is accompanied with a brief explanation in the form of ‘Narration’ for easy understanding of the transaction.

4.   Transactions are recorded in the Journal on daily basis.

5.   Since a journal entry has debit and credit aspect with equivalent amount so they can be easily posted into ledger accounts to know account wise detail.

Advantages of Journal

1.   Reduces the possibility of committing error.

2.   Provides complete detail of transaction.

3.   Provides chronological record of transaction.

4.   Facilitates ledger posting of transaction.

Disadvantages of Journal

1.   Not suitable in case of large volume of transactions.

2.   Does not reveal cash balance.

3.   Does not act as a substitute of ledger.

4.   Complex system of recording.

Format of Journal

 
Date- This column records the date, month and year of the transaction.

Particulars- As per dual aspect, every transaction has two aspects i.e. one account is to be debited and other has to be credited. In the first line, name of the account to be debited is written and the word ‘Dr.’ is also written towards the end of the column. In the second line, name of the account to be credited in written. The credit account starts with the word ‘To’, a few space away from the margin to make it distinct from the debit account. In the third line ‘Narration’ i.e. a brief description of the transaction is written.

L.F. (Ledger Folio)- The column records the page number of ledger book where the posting of this account has been made.

Dr. Amount- In this column, amount of account debited is written.

Cr. Amount- In this column, amount of account credited is written.

Classification of Accounts and Rules of Double Entry System

1. Personal Accounts- The accounts related to an individual, firm, company, institution etc. are called personal accounts.

·         Natural Personal Accounts refer to accounts of human beings. Example Ram’s A/c, Mohan's A/c etc.

·         Artificial Personal Accounts refer to accounts of firm, company, institutions etc. are personal accounts but they do not have physical existence like human beings so these accounts are known as artificial personal accounts.

·         Representative Personal Accounts represent a particular person or group of person is termed as representative personal account. Examples- Wages Outstanding A/c, Prepaid Rent A/c, Accrued Commission A/c etc.

Rule- Debit the Receiver and Credit the Giver

2. Real Accounts- The accounts of all the assets of the business whether tangible or intangible are termed as real account.

• Tangible Real Accounts- All those assets of the business which can be seen, touched, felt and measured in terms of money are called tangible real accounts. Example- Cash A/c, Furniture A/c etc.

• Intangible Real Accounts- All those assets of the business which are measurable in terms of money but which cannot be seen, touched, felt are called intangible real accounts. Example- Goodwill A/c, Trade Mark A/c etc. 

Rule- Debit what comes in and credit what goes out 

3. Nominal Accounts- All the accounts related to expenses, losses, revenue, income and gains are termed as nominal accounts. Examples- Purchases A/c, Salary A/c, Rent A/c, Discount A/c etc.

        Rule- Debit the losses and expenses and credit the gains and incomes. 

Meaning of Goods in Accounting

        Goods are the commodities in which the business deals. Goods may be classified as:

1. Purchases A/c

2. Sales A/c

3. Purchases Return A/c

4. Sales Return A/c

5. Stock A/c

Discount

Discount is any type of reduction in the price by the seller to the buyer. It may be of two types:

(1)        Trade Discount

(2)        Cash Discount

1. Trade Discount: Trade discount is allowed by the manufacturer to the wholesaler or by the wholesaler to the retailer on list price of the goods at a fixed percentage rate. It is allowed on both on cash sales and on credit sales. No separate entry is passed for trade discount in the book of accounts both by the buyer and by the seller of the goods.

Example: A sells goods to Y of the list price Rs. 10,000 at a trade discount of 10%. Pass Journal entry in the books of both the parties:

2. Cash Discount: Cash discount is allowed by the seller of goods to the customer for making prompt payment or early payment. It is always recorded in te books of both the parties. Discount A/c is debited when it is allowed to the customer and it is credited when discount is received by the buyer of the goods. If both trade discount and cash discount are allowed, then trade discount is deducted first and thereafter, cash discount is deducted.

Example: Ram sold goods of the list price of Rs. 30,000 at a trade discount of 10% and cash discount of 5% to Mohan. Pass Journal entry in the books of both the parties:

Entries of Specific Nature

1.   Bad Debts: Bad Debts is the amount that has become irrecoverable from a debtor. The following Journal entries are passed in case of Bad Debts:

(i)    When whole amount is irrecoverable-

Bad Debts A/c                     Dr.

     To Debtor’s Personal A/c

(Being amount not recoverable written off as bad debts)

(ii)    When amount is partly irrecoverable-

Cash or Bank A/c                Dr.    (with the amount received)

Bad Debts A/c                    Dr.    (with the amount not received)

     To Debtor’s Personal A/c  (with the total amount of debtor)

(Being amount received and balance amount not recoverable written off as bad debts)

 

2.   Bad Debts Recovered: Sometimes, the amount written off as bad debt from a customer is realised in the next accounting year. The amount so realised is a gain now as it was previously considered as a loss (bad debt). In such a case, Journal Entry passed is:

Cash or Bank A/c                                Dr.

        To Bad Debts Recovered A/c

(Being bad debts recovered which was previously written off)

3. Drawing of goods: If the proprietor of the firm takes goods from the firm for his personal use, it is called as drawings. The entry passed is:

              Drawing A/c                              Dr.

                   To Purchases A/c

            (Being goods withdrawn for personal use)

 

4. Goods given away as charity: The goods given away as charity reduces the purchases of goods. The entry passed is:

              Charity A/c                                 Dr.

                   To Purchases A/c

            (Being goods given as charity)

 

5. Distribution of goods as free samples: Goods are often distributed as free samples to promote the sales. It is a part of advertisement expenses and it is deducted from purchases. The entry passed is:

              Advertisement A/c                       Dr.

                   To Purchases A/c

            (Being goods distributed as free samples)

 

6. Goods is used for making the assets: Goods may be used for making an asset. Example- A timber merchant used wood for making table and chairs for office. The entry passed is:

              Furniture A/c                              Dr.

                   To Purchases A/c

            (Being goods used for making furniture for office)

 7. Goods lost by fire/theft: In both the cases, purchase of goods is reduced and it is a loss to the business. The entry passed is:

           

            Loss by Fire/Theft A/c                  Dr.

                    To Purchases A/c

 

    (a) If goods is not insured  

            Profit & Loss A/c              Dr.

                   To Loss by Fire/Theft A/c

           

    (b) If goods is fully insured  

          Insurance Co.                     Dr.

                   To Loss by Fire/Theft A/c

 

(c) On recovery of insurance claim  

                Bank A/c                            Dr.

                           To Insurance Co.

 

(d) When insurance company admit partial claim  

            Insurance Co.                     Dr.     
            Profit & Loss A/c                 Dr.

                       To Loss by Fire/Theft A/c

 Some special entries at the end of the year

 

1. Outstanding Expenses- Outstanding expenses refer to the expenses, which have become due for payment during the accounting period, but have not been paid yet. Entry will be-

            Expense A/c                       Dr.

                    To Expense Outstanding A/c

2. Prepaid Expenses- Prepaid expenses refer to the expenses which have been paid in advance. Entry will be-

            Prepaid Expense A/c            Dr.

                    To Expense A/c

3. Accrued Income- Accrued income refers to an income, which has been earned during the accounting period, but has not yet received. Entry will be- 

            Accrued Income A/c            Dr.

                    To Income A/c

4.  Unearned Income- Unearned income refers to an income, which has been received in advance. Entry will be-

              Income A/c                       Dr.

                    To Unearned Income A/c

5. Depreciation- Depreciation is the fall in the value of fixed assets due to normal wear and tear, passage of time or expected obsolescence or any other reason. Entry will be-

            Depreciation A/c                  Dr.

                    To Fixed Assets A/c

6. Interest on Capital- As business is considered to be a distinct entity from its owners, it is usual for the business to pay interest on the capital invested by the owner. Entry will be-

            Interest on Capital A/c         Dr.

                    To Capital A/c

7. Interest on Drawings- If the business allows interest on capital, it should also charge interest on drawings made by the owner from his capital.

             Drawings A/c                     Dr.

                    To Interest on Drawings A/c

8. Income Tax Paid- For sole proprietorship and partnership business, payment of income tax is treated as drawings of owner/partner. Entry will be-

            Drawings A/c                      Dr.

                    To Cash/Bank A/c

Origin of Transactions and Preparation of Vouchers

 

Introduction

        All accounting transactions are recorded in books of accounts on the basis of written evidence such as cash memo, invoices, cash receipt, pay-in-slip, debit note and credit note etc. The evidences are called ‘Source Documents’.

 

Source Documents

        Source Document is a written document which acts as the documentary evidence of business transactions. It provides complete information of a transaction on the basis of which account are debited or credited. The principle of verifiability and objectivity lays emphasis on source documents.

 

Features of Source Documents

        (a) They act as an evidence of the origin of a business transaction.
        (b) Vouchers are prepared on the basis of source documents.
        (c) They act as proof in the court of law.
        (d) Source documents are required for the purpose of audit and assessment of tax liability.

        (e) These documents are also termed as ‘Supporting Documents’.

 

Most Commonly used Source Documents

1. Cash Memo- Cash Memo is a document prepared by the seller when goods are sold for cash. A specimen of cash memo is as under:

TAX INVOICE

CASH MEMO

G.S. Garments

(Deals in Readymade Clothes)

63/11, Govind Nagar Market, Kanpur

       No. G26              To Dr. Ram Panjwani                         Dated: 6-01-2019

2. Invoice or Bill- An Invoice or Bill is a document prepared by the seller when the goods are sold on credit. It is prepared in duplicate. The original copy of the sales invoice is sent to the purchaser and its duplicate copy is retained as an evidence of sale for recording the transaction in the books of accounting. A specimen of invoice is given below:

3. Receipt- When cash or cheque is received from a customer, a receipt is issued for the amount received. It is prepared in duplicate. The original copy of receipt is issued to the customer while duplicate copy is kept for reference in future. Specimen of receipt is given below:

4. Pay-in-Slip- Pay-in-slip is a document used to deposit cash or cheque into bank. It has two portions, namely pay-in-slip and counterfoil which is returned by the bank to the customer after stamped and signed by the cashier. Counterfoil is not signed if the cheque alongwith the filled pay-in-slip is to be dropped in a box placed in the bank. The counterfoil of pay-in-slip is preserved by the customer which is an evidence that cash/cheque has been deposited in the bank. A specimen of pay-in-slip is given below:

5. Cheque- Cheque is document in writing drawn upon a specified bank with which the account is held and is payable on demand. The name of the party to whom payment is to be made is written after ‘Pay To’. The amount is written both in words and figures. A cheque must be dated and signed by the drawer. Each cheque book has a counterfoil in which the details regarding different cheques that have been issued are filled in. The counterfoil remains with the account holder for future reference. The counterfoil acts as the source document for making entries in the books of accounts.

6. Debit Note- Debit note is prepared and sent by the buyer of the goods to the seller of goods stating that his account has been debited by the buyer of the goods with the specified amount. The reason for preparing debit note may be return of defective goods or goods is not as per sample or goods have been overvalued by the seller or less discount is allowed by the seller etc. The effect of debit note is that the indebtedness of the buyer is reduced to the extent of stated amount.

 

7. Credit Note- Credit note is prepared by the seller of the goods When he receives the sold goods back from the buyer of the goods or for allowing more discount to the buyer. The effect of credit note is that the indebtedness of the customer is reduced to the extent of stated amount. Its specimen is as under:

Voucher

        A voucher is an accounting record of a business transaction that is supported by various source documents. Whenever a transaction takes place, then first of all, entry is recorded on voucher on the basis of source document. Then, on the basis of vouchers, recording is made in the Journal or Subsidiary Books. Source documents are also called source vouchers or supporting vouchers. Examples of source documents are Cash Memo, Invoice or Bill, Receipt, Pay-in-Slip, Cheque, Debit and Credit Notes, etc.

Accounting Vouchers

        Accounting voucher is a written document prepared by the accountant on the basis of supporting vouchers duly counter-signed by another authorized person for the purpose of recording transactions in the books.

Types of Accounting Vouchers

1.   Cash Vouchers

2.   Non-Cash Vouchers or Transfer Vouchers

 

1.   Cash Vouchers- Cash voucher refers to the voucher which is prepared at the time of receipt of cash or while making payment in cash. Cash Vouchers may be of two types:

(a)       Debit vouchers- Debit vouchers are prepared at the time of making payment either in cash or through cheque.

Format of Debit Voucher-

(b)       Credit vouchers- Credit vouchers are prepared when cash is received.

Format of Credit Voucher-

 2. Non-Cash Vouchers or Transfer Vouchers- Non-Cash vouchers are prepared for non-cash transactions. These vouchers are prepared for transactions such as:

·         Credit Purchase/ Sale of goods

·         Credit Purchase/ Sale of Fixed Assets

·         Sales Return and Purchase Return

·         Provision for Depreciation

·         Writing off Bad Debts

Specimen of Transfer Voucher-

Accounting Equation and Rules of Debit and Credit

Meaning

An accounting equation is a mathematical expression which shows that the assets of a firm are equal to sum of its liabilities and the capital contributed by the owner. In equation form, this relationship is expressed as:

Assets = Liabilities + Capital

The above relationship is known as the Accounting Equation or the Balance Sheet Equation. Recording of business transactions based on Accounting Equation Approach is also called as Modern Approach or American Approach.

·         Accounting Equation is based on the ‘Dual Aspect Principle’.

·         For every debit, there is a credit of equal amount in one or more accounts and vice-versa.

·         Total claims (those of outsiders and of the proprietor) will always equal the total assets of the firm.

·         Every transaction affects the accounting equation but accounting equation always holds true after every transaction as it is based on dual aspect concept of accounting.

 

Types of Transactions Affecting Accounting Equation

1.   Increase in one Asset and Decrease in other Asset. (Example- Purchase of goods in cash)

2.   Increase in an Asset and simultaneously Increase in Liability. (Example- Purchase of goods on credit)

3.   Increase in Asset and Increase in Capital. (Example- Interest received) 

4.   Decrease in Asset and simultaneously Decrease in Liability. (Example- Payment to Creditors)

5.   Decrease in Asset and simultaneously Decrease in Capital. (Example- Rent paid)

6.   Increase in one Liability and Decrease in other Liability. (Example- Acceptance of Bills Payable)

 

Balance Sheet

Balance Sheet is a statement prepared with a view to measure the exact financial position of a business on a certain fixed date. Assets are shown on the right hand side of the Balance Sheet and all the Liabilities (i.e. external liabilities and capital) are shown on the left hand side of the Balance Sheet. The total of both sides of the Balance Sheet must be always equal. Format of Balance Sheet is-

Some Questions with Solutions

Que.1 Show the accounting equation on the basis of the following transactions and prepare Balance Sheet on the basis of last equation:  
                                                                                        (Rs.)
1.   Ram commenced business with cash                              30,000
2.   Purchased goods for cash                                              10,000
3.   Bought furniture for cash                                                5,000
4.   Bought goods on credit                                                 15,500
5.   Paid rent                                                                       1,500

6.   Sold goods costing Rs. 8,000 for cash                            11,000

Solution-                                         Accounting Equation

           

 Que.2  Prepare accounting equation from the following            (Rs.)
1.   Commenced business with cash                                     1,00,000
2.   Cash deposited into bank                                                 60,000
3.   Bought goods from X for Rs. 20,000 and paid Rs. 5,000 immediately.
4.   Sold goods for Rs. 20,000 for cash which costs Rs. 15,000.
5.   Returned goods to X being defective Rs. 1,000.
6.   Borrowed loan Rs. 30,000 from bank. 

7.   Paid wages Rs. 6,000 and wages still outstanding Rs. 1,000.

Solution-                                         Accounting Equation

Que.3  Monu had the following transactions:                             (Rs.)
1.   Started business with cash                                            1,00,000
2.   Cash deposited into bank                                                 60,000
3.   Bought a machine by raising a bank loan                           50,000
4.   Bought goods for cash Rs. 20,000 and on credit Rs. 40,000     
5.   Goods bought for cash was sold to Amit                            25,000
6.   Amit returned goods worth                                                5,000
7.   Amit settled his account by paying                                   19,500
8.   Paid instalment of bank loan Rs. 20,000 and paid interest by
    cheque Rs. 2,000

9.  Charge 10% depreciation on machine. 

Solution-                                         Accounting Equation

Que. 4 X started business on 1^st April, 2019 with a capital of Rs. 1,20,000. During the year, he introduced further capital Rs. 30,000 but withdrew Rs. 25,000 during the year for personal use. At the end of the year, his assets worth Rs. 2,00,000 and liabilities amounting to Rs. 30,000. Determine his capital at the end of the year and profit or loss incurred during the year ending 31^st March, 2020.

Solution-

          Capital (at end)   = Assets (end) – Liabilities (end)

                                   = 2,00,000 – 30,000

                                   = 1,70,000 Rs.

        Capital (at end)    = Capital (Opening) + Additional Capital – Drawing + Profit       

         1,70,000             = 1,20,000 + 30,000 – 25,000 + Profit

           Profit                = 1,70,000 – 1,25,000

                                   = 45,000 Rs.

RULES OF DEBIT AND CREDIT

Que. 5 Open T-shape account of furniture and put the following transactions and balance it:                            

        (i) Bought furniture Rs. 18,000

        (ii) A part of furniture sold Rs. 5,000

        (iii) Bought new furniture Rs. 10,000

        (iv) Charge depreciation on furniture on furniture Rs. 3,000

Solution-

Furniture A/c