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.
8.1 JOURNALISING PROCESS
All transactions are 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. 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:
(i) 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.
(ii) 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.
(iii) In the third column the number of the page in the ledger on which the account is written up is entered.
(iv) In the fourth column the amounts to be debited to the various accounts concerned are entered.
(v) In the fifth column, the amount to be credited to various accounts is entered.
8.2 POINTS TO BE TAKEN INTO CARE 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 b usiness wit h 5,000. This means t hat the firm has ` 5,000 cash. According to the rules given above, the increase in an asset has to be debited to it. The firm also now owes 5,000 to the proprietor, Mohan as capital. The rule given above also shows that the increase in capital should be credited to it. Therefore, the journal entry will be:
(ii) Out of the above, 500 is deposited in the bank. By this transaction the cash balance is reduced by 500 and another asset, bank account, comes into existence. Since increase in assets is debited and decrease is credited, the journal entry will be:
(iii) Furniture is purchased for cash 200. Applying the same reasoning as above the entry will be:
(iv) Purchased goods for cash 400. The student can see that the required entry is:
(v) Purchased goods for 1,000 credit from M/s. Ram Narain Bros. Purchase of merchandise is an expense item so it is to be debited. 1,000 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 cash 600. The amount of cash increases and therefore, the cash 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 300. The Inventories of goods has decreased and therefore, the goods account has to be credited. Ramesh now owes ` 300; that is an asset and therefore, Ramesh should be debited. The entry is:
(viii)Received cash from Ramesh 300. The amount of cash increased therefore the cash account has to be debited. Ramesh no longer owes any amount to the firm, i.e., this particular form of assets has disappeared; therefore, the account of Ramesh should be credited. The entry is:
(ix) Paid to M/s Ram Narain Bros. 1,000. The liability to M/S Ram Narain Bros. has been discharged; therefore this account should be debited. The cash balance has decreased and, therefore, the cash account has to be credited. The entry is:
(x) Paid rent 100. The cash balance has decreased and therefore, the cash account should be credited. No asset has come into existence because of the payment; the payment is for services enjoyed and is an expense. Expenses are debited. Therefore, the entry should be:
(xi) Paid 200 to the clerk as salary. Applying the reasons given in (x) above, the required entry is:
(xii) Received 20 interest. The cash account should be debited since there is an increase in the cash 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.
Analyse transactions of M/S Sahil & Co. for the month of March, 2011 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, 2011 were as follows:
1. Sahil introduced cash 40,000
2. Cash deposited in the City Bank 20,000.
3. Cash loan of 5,000 taken from Mr. Y.
4. Salaries paid for the month of March, 2011, 3,000 and 1,000 is still payable for the month of March, 2011.
5. Furniture purchased 5,000.
What conclusions one can draw from the above analysis?
Solution (A) Analysis of Business Transaction: Accounting Equation Approach
(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 in affected accounts remain 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 remain same under both the approaches.
Illustration 4 Journalise the following transactions. Also state the nature of each account involved in the Journal entry.
1. December 1, 2011, Ajit started business with Cash 40,000.
2. December 3, he paid into the Bank 2,000.
3. December 5, he purchased goods for cash 15,000.
4. December 8, he sold goods for cash 6,000.
5. December 10, he purchased furniture and paid by cheque 5,000.
6. December 12, he sold goods to Arvind 4,000.
7. December 14, he purchased goods from Amrit 10,000.
8. December 15, he returned goods to Amrit 5,000.
9. December 16, he received from Arvind 3,960 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 1,000.
13. December 26, cash paid to Amrit in full settlement 4,900.
14. December 31, paid for stationery 200, rent 500 and salaries to staff 2,000.
15. December 31, goods distributed by way of free samples 1,000.
Illustration 5 Show the classification of the following Accounts under traditional and accounting equation approach: (a) Building; (b) Purchases; (c) Sales; (d) Bank 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.
Illustration 6 Transactions of Ramesh for April are given below. Journalise them.
Illustration 7 Pass Journal Entries for the following transactions in the books of Gamma Bros.
(i) Employees had taken inventory worth 10,000 (Cost price 7,500) on the eve of Deepawali and the same was deducted from their salaries in the subsequent month.
(ii) Wages paid for erection of Machinery 8,000.
(iii) Income tax liability of proprietor 1,700 was paid out of petty cash.
(iv) Purchase of goods from Naveen of the list price of 2,000. He allowed 10% trade discount, 50 cash discount was also allowed for quick payment.
Solution Journal Entries in the books of Gamma Bros.
9. ADVANTAGES OF JOURNAL
In journal, transactions recorded on the basis of double entry system, fetch following advantages:
1. As transactions are recorded on chronological order, one can get complete information about the business transactions on time 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 the correctness of the entry through these narrations.
3. Journal forms the basis for posting the entries in the ledger. This eases the accountant in their work and reduces the chances of error.