Meaning of Journal:
- The word Journal is derived from Latin word “Jour” which means a day. So, Journal is called a daily book or day book. A Journal is a chronological record of accounting transaction showing the name of accounts that are to be debited and credited along with the amount and supplementary information about the transaction. Journal is the first step in accounting process
Advantages of Journal:
The journal provides following advantages in recording process:
- It helps in cross checking of ledger in case trial balance does not agree.
- It provides the chronological record of transaction.
- It discloses the complete effects of transaction.
Format and Considerations of Journal:
The following is the generally accepted format of journal.
The following are the considerations while journalizing the transaction:
- The of date transaction is entered in the date column.
- The amount to be debited is entered at the first line and amount to be credited in second line followed by the brief description in account titles and description column.
- The reference number of the concerned ledger to be posted is shown in the posting reference(PR) number.
- The amount for debit is recorded in the debit column.
- The amount for the credit is recorded in credit column.
General Journal:
- It is an accounting entry in which just one account is debited and one is credited. The use of simple journal entries is encouraged as a best practice, since it is easier to understand these entries.
Compound Journal:
- A compound journal entry is an entry in which there is more than one debit, more than one credit, or more than one of both debits and credits. It is a combination of several simple journal entries.
Here are some Important journal Entries:
1. Capital Account:
The amount invested in the business whether in the means of cash or kind by the proprietor or owner of the business is called capital. The capital account will be credited, and the cash or assets brought in will be debited.
Journal Entry:
2. Drawings Account:
Withdrawal of any amount in cash or kind from the enterprise for personal use by the proprietor is termed as Drawings. The Drawings account will be debited, and the cash or goods withdrawn will be debited.
Journal Entry:
3. Expenses Paid:
Any amount spent in order to purchase or sell goods or services that generates revenue in the business is called expenses. The Cash Account will be decreased with the amount paid as expenses, so it will be credited and Expenses will be debited.
Journal Entry:
4. Income Received:
Any monetary benefit arising from the business can be termed as income. The Cash Account will be increased with the amount received as income, so it will be debited and Income Account will be credited.
Journal Entry:
5. Goods:
Goods are those items in which a business deals. In other words, goods are the commodities that are purchased and sold in a business on a daily basis. Goods are denoted as ‘Purchases A/c’ when goods are purchased, and ‘Sales A/c’ when they are sold.
Goods Account is classified into five different accounts for the purpose of passing journal entries:
A. Purchases Account: When goods are purchased in cash or credit, donated, lost, or withdrawn for personal use, in all these cases, goods are denoted as Purchases A/c.
Journal Entry:
- Goods purchased for cash
- Goods Donated
- Goods are withdrawn for personal use
- Goods lost by fire
B. Sales Account: When goods are sold, then it is represented as Sales A/c.
Journal Entry:
C. Purchase Return or Return Outwards Account: When purchased goods are returned to the supplier, it is denoted as Purchase Return A/c or Return Outwards A/c.
Journal Entry:
D. Sales Return or Return Inwards Account: When goods sold are returned by the customers, it is termed as Sales Return or Return Inwards A/c.
Journal Entry:
E. Stock: The left over unsold goods at the end of a financial year is represented through stock. Closing Stock is the valuation of goods leftover at the end of a financial year, and Opening Stock is the valuation of goods an enterprise has at the beginning of a financial year.
Journal Entry:
6. Transactions:
Transactions related to the purchase and sale of goods can be of two types, Cash or Credit.
A. Cash Transactions: Cash transactions are those transactions in which payment is made or received in cash at the time of purchase or sale of goods. Cash transactions can be identified by-
- When the Name of the Party and Cash both are given in the transaction;
- When only Cash is given in the transaction;
- When the Name of the Party and Cash both are not given.
Journal Entry:
B. Credit Transactions: Credit transactions are those transactions in which payment is not made or received at the time of purchase or sale of goods. Credit transactions can be identified by:
- When only the Name of the Party is given in the transaction.
Journal Entry:
7. Assets:
Assets (Machinery, Building, Land, etc.) can also be purchased or sold in cash or on credit. It is not represented through Purchases, but with the name of the Asset.
Journal Entry: (When Assets are Purchased)
Journal Entry: (When Assets are Sold)
8. Depreciation:
Depreciation is the decrease in the value of assets due to use or normal wear and tear.
Journal Entry:
9. Discount:
A discount is a concession in the selling price of a product offered by a seller to its customers. According to nature, there are two types of discount:
A. Discount Allowed
B. Discount Received
A. Discount Allowed: When at the time of sales or receiving cash, any concession is given to the customers, it is called discount allowed.
Journal Entry:
B. Discount Received: When at the time of purchase or paying cash, any concession is received from the seller, it is called discount received.
Journal Entry:
According to the business point of view, there are two types of Discount:
A. Trade Discount
B. Cash Discount
A. Trade Discount: The discount provided by the seller to its customers at a fixed percentage on the listed price mostly on bulk purchases is called a trade discount. Trade discount is not shown separately in the journal entry.
Journal Entry:
B. Cash Discount: A Cash discount is offered to those customers who make quick payments or payment is made by them within a fixed period.
Journal Entry:
10. Amount Paid or Received in Full/Final Settlement:
A business may allow or receive a discount at the time of full and final settlement of the accounts of debtors or creditors.
Journal Entry:
11. Bad Debts:
When the goods are sold to customers on credit, there can be a situation where a few of them fail to pay the amount due to them because of insolvency or any other reason, the amount that remains unrecovered is called Bad Debts.
Journal Entry:
12. Outstanding Expenses:
Outstanding expenses are those expenses that are related to the same accounting period in which accounts are being made but are not yet paid.
Journal Entry:
13. Prepaid or Unexpired or Advance Expenses:
Such expenses which are concerned with the next financial year, but have been paid in the current year are called prepaid expenses.
Journal Entry:
14. Income Due or Accrued Income:
An income that has been earned, but not yet received in the current financial year is called Accrued Income.
Journal Entry:
15. Income Received in Advance or Unearned Income:
An income that has not been earned yet, but has been received in advance is called Unearned Income.
Journal Entry:
16. Loan Taken:
A business can take an amount of money as a loan from a bank or any outsider. In return, the business has to pay interest.
A. Loan is taken from a bank or person:
Journal Entry:
B. Interest charged by the bank or person and then paid:
There can be a situation where the interest is charged first and then paid. There will be two Journal Entries in this case.
i. Journal Entry: (On charging of interest)
ii. Journal Entry: (On payment of interest)
C. Interest paid to bank/person on the loan:
In this case, only a single entry is passed because interest is directly paid.
Journal Entry:
17. Loan Given:
Businesses can also provide loans to any person or entity.
A. Loan is given to a person:
Journal Entry:
B. Interest charged and then received on loan given:
There can be a situation where the interest is charged first and then received. There will be two Journal Entries in this case.
i. Journal Entry: (On charging of interest)
ii. Journal Entry: (On receiving of interest)
18. Bad Debts Recovered:
When the amount that is earlier written as bad debts is now recovered, it is called bad debts recovered.
Journal Entry:
19. Banking Transactions:
All businesses make many transactions with the bank in their day-to-day activity. Journal Entries related to banking transactions are as follows:
1. When cash is deposited in the bank:
Journal Entry:
2. When cash is withdrawn from the bank:
Journal Entry:
3. When cash is withdrawn from the bank for personal use:
Journal Entry:
