ICAI Notes- Unit 1: Basic Accounting Procedures- Journal Entries - 2 | Principles and Practice of Accounting - CA Foundation PDF Download

Modern Classification of Accounts

Real, nominal and personal accounts is the traditional classification of accounts. Now, let us see the modern and more acceptable classification of accounts:-

Let us solve the same example with the modern approach now:-

Journal

Transactions are first entered in this book to show which accounts should be debited and which credited. Journal is also called subsidiary book. Recording of transactions in journal is termed as journalizing the entries. It is the book of original entry in which transactions are entered on a daily basis in a chronological order.

Journalising Process

All transactions may be first recorded in the journal as and when they occur; the record is chronological; otherwise it would be difficult to maintain the records in an orderly manner. Debits and credits are listed along with the appropriate explanations. There are basically two types of journals:- 

1. General journal 
2. Specialized journal 

The latter is used when there are many repetitive transactions of the same nature. The form of the journal is given below:

The columns have been numbered only to make clear the following but otherwise they are not numbered. The following points should be noted: 

1. In the first column the date of the transaction is entered-the year is written at the top, then the month and in the narrow part of the column the particular date is entered. 
2. In the second column, the names of the accounts involved are written; first the account to be debited, with the word “Dr” written towards the end of the column. In the next line, after leaving a little space, the name of the account to be credited is written preceded by the word “To” (the modern practice shows inclination towards omitting “Dr.” and “To”). Then in the next line the explanation for the entry together with necessary details is given-this is called narration. 
3. In the third column the number of the page in the ledger on which the account is written up is entered. 
4. In the fourth column the amounts to be debited to the various accounts concerned are entered. 
5. In the fifth column, the amount to be credited to various accounts is entered.

Points to be taken into account while recording a transaction in the Journal

1. Journal entries can be single entry (i.e. one debit and one credit) or compound entry (i.e. one debit and two or more credits or two or more debits and one credit or two or more debits and credits). In such cases, it is important to check that the total of both debits and credits are equal.
2. If journal entries are recorded in several pages then both the amount column of each page should be totalled and the balance should be written at the end of that page and also that the same total should be carried forward at the beginning of the next page.

An entry in the journal may appear as follows:

We will now consider some individual transactions.

(i) Mohan commences business with ₹ 50,00,000 in his bank account. This means that the firm has ₹ 50,00,000 in bank. According to the rules given above, the increase in an asset has to be debited. The firm also now owes ₹ 50,00,000 to the proprietor, Mohan as capital. The rule given above also shows that the increase in capital should be credited. Therefore, the journal entry will be:

(ii) Out of the above, ₹ 25,000 is withdrawn from the bank. By this transaction the bank balance is reduced by ₹ 25,000 and another asset, cash account, comes into existence. Since increase in assets is debited and decrease is credited, the journal entry will be:

(iii) Furniture is purchased for ₹ 12,00,000. Applying the same reasoning as above the entry will be:

(iv) Purchased goods for ₹ 4,00,000. The student can see that the required entry is:

(v) Purchased goods for ₹ 10,00,000 on credit from M/s Ram Narain Bros. Purchase of merchandise is an expense item so it is to be debited. ₹ 10,00,000 is now owing to the supplier; his account should therefore be credited, since the amount of liabilities has increased. The entry will be:

(vi) Sold goods to M/s Ram & Co. for ₹ 6,00,000. Amount is received in cheque. The amount of bank increases and therefore, the bank amount should be debited; sale of merchandise is revenue item so it is to be credited. The entry will be:

(vii) Sold goods to Ramesh on credit for ₹ 13,00,000. The Inventories of goods has decreased and therefore, the goods account has to be credited. Ramesh now owes ₹ 13,00,000; that is an asset and therefore, Ramesh should be debited. The entry is:

(viii) Received cheque from Ramesh ₹ 13,00,000. The amount of bank increased therefore the bank account has to be debited. Ramesh’s liability towards firm has decreased in fact in this case he no longer owes any amount to the firm now, i.e., this particular form of assets has disappeared; therefore, the account of Ramesh should be credited. The entry is:

(x) Paid rent ₹ 1,00,000. The bank balance has decreased and therefore, the bank account should be credited. No asset has come into existence because the payment is for services enjoyed and is an expense. Expenses are debited. Therefore, the entry should be:

(xi) Paid ₹ 22,000 to the clerk as salary. Applying the reasons given in (x) above, the required entry is:

(xii) Received ₹ 2,20,000 interest. The bank account should be debited since there is an increase in the bank balance. There is no increase in any liability; since the amount is not returnable to any one, the amount is an income, incomes are credited. The entry is:

When transactions of similar nature take place on the same date, they may be combined while they are journalised. For example, entries (x) and (xi) may be combined as follows:

When journal entry for two or more transactions are combined, it is called composite journal entry. Usually, the transactions in a firm are so numerous that to record the transactions for a month will require many pages in the journal. At the bottom of one page the totals of the two columns are written together with the words “Carried forward” in the particulars column. The next page is started with the respective totals in the two columns with the words “Brought forward” in the particulars column.

Illustration 4: Analyse transactions of M/s Sahil & Co. for the month of March, 2022 on the basis of double entry system by adopting the following approaches:
(A) Accounting Equation Approach.
(B) Traditional Approach. Transactions for the month of March, 2022 were as follows (figures are in ‘000): 

1. Sahil introduced capital through bank of ₹ 4,000. 
2. Cash withdrawn from the City Bank ₹ 200. 
3. Loan of ₹ 500 taken from Mr. Y. 
4. Salaries paid for the month of March, 2022, ₹ 300 and ₹ 100 is still payable for the month of March, 2022. 
5. Furniture purchased ₹ 500. 

Required
What conclusions one can draw from the above analysis?
Sol: 
(A) Analysis of Business Transaction: Accounting Equation Approach
The accounting equation is
Assets = Liabilities + Capital

(B) Analysis of Business Transactions: Traditional Approach

Conclusion:
It is evident from above analysis that procedure for analysis of transactions, classification of accounts and rules for recording business transactions under accounting equation approach and traditional approach are different. But the accounts affected and entries entered/passed remains the same under both approaches. Thus, the recording of transactions in affected accounts on the basis of double entry system is independent of the method of analysis followed by a business enterprise. In other words, accounts to be debited and credited to record the dual aspect remains the same under both the approaches. 

Illustration 5: Journalise the following transactions. Also state the nature of each account involved in the Journal entry.
Following figures are given in (‘00) 

1. December 1, 2022, Ajit started business with capital ₹ 4,00,000 
2. December 3, he withdrew cash for business from the Bank ₹ 2,000. 
3. December 5, he purchased goods by making payment through bank ₹ 15,000. 
4. December 8, he sold goods for ₹ 16,000 and received payment through bank. 
5. December 10, he purchased furniture and paid by cheque ₹ 2,500. 
6. December 12, he sold goods to Arvind ₹ 2,400. 
7. December 14, he purchased goods from Amrit ₹ 10,000. 
8. December 15, he returned goods to Amrit ₹ 500. 
9. December 16, he received from Arvind ₹ 2,300 in full settlement. 
10. December 18, he withdrew goods for personal use ₹ 1,000. 
11. December 20, he withdrew cash from business for personal use ₹ 2,000. 
12. December 24, he paid telephone charges ₹ 110. 
13. December 26, amount paid to Amrit in full settlement ₹ 9,450. 
14. December 31, paid for stationery ₹ 200, rent ₹5,000 and salaries to staff ₹ 2,000 from bank.
15. December 31, goods distributed by way of free samples ₹ 2,000

Sol:

Illustration 6: Show the classification of the following Accounts under traditional and accounting equation approach:
(a) Building; (b) Purchases; (c) Sales; (d) Bank Fixed Deposit; (e) Rent; (f) Rent Outstanding; (g) Cash; (h) Adjusted Purchases; (i) Closing Inventory; (j) Investments; (k) Trade receivables; (l) Sales Tax Payable, (m) Discount Allowed; (n) Bad Debts; (o) Capital; (p) Drawings; (q) Interest Receivable account; (r) Rent received in advance account; (s) Prepaid salary account; (t) Bad debts recovered account; (u) Depreciation account, (v) Personal income-tax account.
Sol:

Illustration 7: Transactions of Ramesh for April are given below. Journalise them.

Sol:

Advantages of Journal

In journal, transactions recorded on the basis of double entry system, fetch the following advantages: 

1. As transactions are recorded in chronological order, one can get complete information about the business transactions on timely basis. 
2. Entries recorded in the journal are supported by a note termed as narration, which is a precise explanation of the transaction for the proper understanding of the entry. One can know about the transactions through these narrations. 
3. Journal forms the basis for posting the entries in the ledger and reduces the chances of error.

Accounting For GST

Introduction to GST 

Goods and Services Tax (GST) is a comprehensive Indirect Tax* which has subsumed multiple Indirect Taxes in India such as State Value added Tax (VAT) which was levied on sale of goods, Excise Duty, which was levied on manufacture or production of goods, Service Tax which was levied on provision of services etc. GST is a single tax on the supply of goods and services, right from the manufacturer to consumer. 

* An indirect tax is a tax whose incidence is borne by the consumers who ultimately consume the product or service. The immediate liability to pay the tax may fall upon another person such as a manufacturer or provider of service or seller of goods, but the same is collected from the person purchasing the goods (recipient of goods or services). 

Pre-GST scenario: Prior to introduction of GST, the following duties were levied:
(a) On manufacture of goods: Excise Duty (levied by Central Government)
(b) On sale of goods within the State: State Value Added Tax (VAT)
(c) On sale of goods outside the State: Central Sales Tax (levied by Central Government)
(d) On provision of services provided: Service Tax (levied by Central Government) 

Since the taxes were levied by different authorities (central and state authorities), it was not possible to take the benefit of credit of taxes paid at different stages. For instance, when a trader received goods (say costing ₹ 1,00,000) from the manufacturer, excise duty (say @ 18% = ₹ 18,000) was levied on the goods sold by the manufacturer. When such trader would sell the goods to the customer, he would charge VAT (assume 18%). However, the trader could not avail the benefit of the credit of the excise duty of ₹ 18,000 paid in respect of the goods purchased from the manufacturer. Accordingly, the ‘cost’ of the goods to the trader would be ₹ 1,00,000 + ₹ 18,000 = ₹ 1,18,000, on which the trader would add his profit margin and levy VAT while selling to the consumer. This created a scenario wherein a tax (in our example, VAT) was levied on the tax (in our example, excise duty) also, in addition to the tax levied on the goods. This cascading effect (tax-on-tax) increased the price of the product, and resulted in an unjust enrichment at the cost of the ultimate consumer. 

Post-GST scenario: 
On introduction of GST, the tax to be levied at all stages right from manufacture up to final consumption was a single tax- GST, with credit of taxes paid at previous stages available as setoff. Thus, in the example above, the GST (erstwhile excise duty) of ₹ 18,000 paid by the trader could be availed as a credit (an asset), for set off against the tax charged by the trader (a liability for the trader, which would be received from the consumer). Hence, the cost of the goods to the trader would be ₹ 1,00,000 only, as ₹ 18,000 can be set off against the GST charged by the trader to the consumer. The tax levied by the manufacturer to the trader becomes ‘input tax’ for the trader, since the goods are purchased by him (it is his input). The tax levied by the manufacturer to the trader, or the trader to the consumer is known as ‘output tax’ (since it is output for both the manufacturer and trader) both for the manufacturer and trader. The ‘input tax’ cannot be added to the cost of the goods or services procured, as it will be adjusted against the ‘output tax’ liability. In a nutshell, since the input tax is availed as a credit, only the value addition (i.e., the profit margin levied by the trader to the consumer in our example) will be taxed, with the burden of tax being borne by the final consumer.

Salient features of GST 

• GST is levied on supply i.e., manufacture or sale of goods and provision of services. In other words, supply is taxable event which own its occurrence creates or attracts the liability to pay tax. 
• Under GST, tax in levied only the value added at each stage of the supply chain. 
• GST is a destination-based consumption tax, i.e. the tax is levied at the place where the goods or services are consumed, rather than the place where they are produced. 
• There is no tax on tax or cascading of taxes under GST system. 
• Under GST, there is a harmonization of laws, procedures and rates of tax across the country. 

Types of Taxes under GST 

Before going through the types of taxes under GST, it is important to understand the concept of intra-State supply and inter-State supply under GST which determines the type of tax to be charged by the supplier. The Concept of intra-state supply and inter-state supply depends upon on the location of the supplier and place of supply (place of supply is the place where goods/services are consumed. 

As a general rule, where the location of the supplier and the place of supply of goods or services are in the same State/Union territory, it is treated as intra-State supply of goods or services respectively. 

Similarly, where the location of the supplier and the place of supply of goods or services are in (i) two different States or (ii) two different Union Territories or (iii) a State and a Union territory, it is treated as inter-State supply of goods or services respectively.

GST has a dual aspect with the Centre and States simultaneously levying on a common tax base. There are three main components of GST which are:
(i) Central Goods and Service Tax (CGST) is levied and collected by the Centre on the “Intra -State” supply of goods and services.
(ii) State Goods and Services Tax (SGST) is levied and collected by the State Governments (including Union Territories with legislature, for example Delhi, Pondicherry, Jammu and Kashmir) on “Intra state” supply of goods and services
(iii) Union Territory Goods and Service Tax (UTGST) is levied and collected by Union Territories without Legislatures [i.e. Andaman and Nicobar Islands, Lakshadweep, Ladakh, Dadra and Nagar Haveli & Daman and Diu and Chandigarh] on “intra-state” supply of goods and services.
(iv) Integrated Goods and services tax (IGST): It is the GST levied on the “inter state” supply of goods and services and is collected by the Centre. IGST is equivalent to the sum total of CGST and SGST. 

GST is a “Consumption Based Tax“ i.e. the tax is received by the State in which the goods or services are consumed and not by the state in which the goods and services are manufactured.

Input and Output GST 

The tax paid by the recipient on procurement of goods /services is called Input tax. An entity at each stage is permitted to avail credit of GST paid on the purchase of goods and /or availment of services and can set off this credit against the GST payable on the goods and/or services supplied by him. Thus, the final consumer bears the GST charged in the supply chain, with set-off benefits at all the previous stages. Hence, the tax will be levied only on the value added, which results in avoiding double taxation. For example, if tax payable by a manufacturer on the output, i.e. final product is ₹750 and he has already paid tax on ₹500 on input, i.e. purchases, then he can claim ‘Input Credit’ of ₹500 and he needs to deposit only ₹250 in cash.

Output tax means the GST charged on supply of goods or services made by a supplier.
Input tax means the credit of Input tax already paid.

Utilisation of Input Tax Credit under GST 
Tax credit of CGST, SGST and IGST can be utilized in the following manner: 

• Utilization of IGST Credit: IGST credit has to be first utilized against IGST liability and if any balance is still available, the same can be utilized against CGST or/and SGST in any order and in any proportion. 
• Utilization of CGST Credit: CGST credit has to be first utilized against CGST liability and if any balance is available, same can be utilized against IGST. However, CGST credit cannot be utilized against SGST. 
• Utilization of SGST Credit: SGST credit has to be first utilized against SGST liability and if any balance is available, same can be utilized against IGST. However, SGST credit cannot be utilized against CGST.
  

Double entry book-keeping with GST 
The Double entry book-keeping records need to show the GST values separately so that the purchases, expenses and sales are posted net i.e. without the addition of GST. 

Journal entry in case of Sales of Goods or services

Journal entry in case of Purchase of Goods or services

Journal entry in case of Utilization of Input Tax Credit towards payment of Output Tax

Illustration 8: Journalise the following transactions in the books of Mr. Rohit:
(i) Purchased goods from Sahil for ₹ 50,000 plus CGST and SGST @ 9% each.
(ii) Purchased goods from Sam for ₹ 40,000 at a trade discount of 10% plus CGST and SGST @ 9% each. ₹ 20,000 was paid immediately and balance payable after 3 months.
(iii) Goods costing ₹ 20,000 withdrawn for personal use. Such goods were purchased by paying CGST and SGST @ 9% each.
(iv) Paid rent to Gagandeep for ₹ 20,000 plus CGST and SGST @ 6% each.
(v) Goods costing ₹ 5,000 (before trade discount of 10% ) returned to Sam. Such goods were purchased by paying CGST and SGST @ 9% each.
(vi) Purchased furniture for ₹ 44,800 including IGST @ 12%.
(vii) Purchased machinery from M/s Symphony industries for ₹ 1,40,000 plus CGST and SGST @ 9% each. Paid ₹ 1,00,000 immediately and balance to be paid after two months.
Sol:

* The input tax availed earlier is reversed, because these goods are ‘consumed’ by Mr. Rohit himself. Since he cannot ‘sell’ goods to himself and charged output tax, the input tax thereon is reversed, since in this case Mr. Rohit himself is the ultimate consumer of those goods.

** Since goods are returned to the supplier, the input tax credit availed earlier on those goods is to be reversed, since these goods are no longer available to be sold. Working Note. 1. Furniture purchased is including IGST @ 12%. So, value of furniture excluding IGST = ₹ 44,800 × 100/112 = ₹ 40,000. IGST = ₹ 40,000 × 12% = ₹ 4,800. 

Illustration 9: Journalise the following transactions in the books of Ms. Nidhi traders
July, 2022
3 Sold Goods for ₹ 50,000, charged CGST and SGST @ 6% each.
4 Sold goods to Surjeet for ₹ 28,000 including CGST and SGST @ 6% each.
5 Received ₹ 25,200 from Surjeet in full settlement of his account of ₹ 28,000.
6 Sold goods to Kapil for ₹ 30,000 charged IGST @ 12%. Received ₹ 12,000 immediately and balance to be received after one month.
10 Kapil was allowed rebate of ₹ 5,000 as goods supplied to him were defective. These goods were sold by charging IGST @ 12%.
12 Sold goods to Manpreet for ₹ 1,00,000 at trade discount of 20% and charged IGST @ 12%
13 Goods of list price ₹ 20,000 returned by Manpreet.
17 Received commission of ₹ 15,000, charged CGST and SGST @ 6% each.
Sol:

*Since rebate is on account of defective goods which cannot be sold/utilized further by Kapil, the output GST charged thereon is also reversed. This treatment is like that of Sales Return. If rebate was on account of other reasons (such as prompt payment), Output IGST would not be reversed. 

Working Note: Goods sold to Surjeet is including CGST and SGST @ 6% each. So, sales excluding CGST and SGST = ₹ 28,000 × 100/112 = ₹ 25,000. CGST and SGST = ₹ 25,000 × 6% = ₹ 1,500 each.

Illustration 10: Record the following transactions in a Journal, assuming CGST and SGST@ 6% each.
(i) Sold goods to Mukesh at the list price of ₹ 50,000 less 20% trade discount.
(ii) Sold goods to Mukesh at the list price of ₹ 1,00,000 less 20% trade discount and 5% cash discount.
(iii) Sold goods to Mukesh at the list price of ₹ 1,50,000 less 20% trade discount and 5% cash discount. Out of the amount due 60% is received out of which three-fourth is received by cheque.
Sol:

Note: After allowing cash discount of ₹ 4,000 (₹ 80,000 × 5%), the balance of ₹ 85,600 is received. Since discount is on account of prompt payment, output CGST and SGST is computed on value determine after deducting trade discount.

Working Note: After allowing cash discount of ₹ 6,000 on ₹ 1,20,000, 60% of the balance amount i.e. ₹ 1,28,400 (₹ 1,20,000 + 12% GST ₹ 14,400 – discount ₹ 6,000) is paid in cash and by cheque.
Hence, the amount paid in cash and cheque = ₹ 1,28,400 × 60% = 77,040.
Amount paid by cheque = ₹ 77,040 × 3/4 = ₹ 57,780
Amount paid in cash = ₹ 77,040 x ¼ = 19,260
Mukesh’s A/c = ( ₹ 1,20,000 + ₹ 14,400 – ₹ 6,000 – ₹ 57,780 – ₹ 19,260) = ₹ 51,360

Summary

•  The accounting process starts with the recording of transactions in the form of journal entries.
• The recording is based on double entry system. This book or register called journal is the book of first or original entry.
• Next step is to post the entries in the ledger which is covered in the next unit.