Download Journal Entry's in Accounting and more Cheat Sheet Accounting in PDF only on Docsity!
Profit and Loss Account to ascertain the profit earned or loss incurred during an accounting period. Balance Sheet to ascertain the financial position of the business as on a particular date.
Generally, a business enterprise has numerous transactions every day during an accounting period. Unless the transactions are recorded and analysed, it is not possible to determine the impact of each transaction in the above two basic statements. Traditionally, accounting is a method of collecting, recording, classifying, summarising, presenting and interpreting financial data aspect of an economic activity. The series of business transactions occurring during the accounting period and its recording is referred to an accounting process/mechanism. An accounting process is a complete sequence of accounting procedures which are repeated in the same order during each accounting period. Therefore, accounting process involves the following steps or stages:
1. Identification of transaction
In accounting, only business transactions are recorded. A transaction is an event which can be expressed in terms of money and which brings change in the financial position of a business enterprise. An event is an incident or a happening which may or may not being any change in the financial position of a business enterprise. Therefore, all transactions are events but all events are not transactions. A transaction is a complete action, to an expected or possible future action. In every transaction, there is movement of value from one source to another. For example, when goods are purchased for cash, there is a movement of goods from the seller to the buyer and a movement of cash from buyer to the seller. Transactions may be external (between a business entity and a second party, e.g., goods sold on credit to Hari or internal (do not involve second party, e.g., depreciation charged on the machinery).
Illustration: State with reasons whether the following events are transactions or not to Mr. K. Mondal, Proprietor. (i) Mr. Mondal started business with capital (brought in cash)Rs. 40,000. (ii) Paid salaries to staff Rs. 5,000. (iii) Purchased machinery for Rs. 20,000 in cash. (iv) Placed an order with Sen & Co. for goods for Rs. 5,000. (v) Opened a Bank account by depositing Rs. 4,000. (vi) Received pass book from bank. (vii) Appointed Sohan as Manager on a salary of Rs. 4,000 per month. (viii) Received interest from bank Rs. 500. (ix) Received a price list from Lalit.
Solution: Here, each event is to be considered from the view point of Mr. Mondal’s business. Those events which will change the financial position of the business of Mr. Mondal, should be regarded as transaction. (i) It is a transaction, because it changes the financial position of Mr. Mondal’s business. Cash will increase by Rs. 40, and Capital will increase by Rs. 40,000. (ii) It is a transaction, because it changes the financial position of Mr. Mondal’s business. Cash will decrease by Rs. 5, and Salaries (expenses) will increase by Rs. 5, (iii) It is a transaction, because it changes the financial position of Mr. Mondal’s business. Machinery comes in and cash goes out. (iv) It is not a transaction, because it does not change the financial position of the business. (v) It is a transaction, because it changes the financial position of the business. Bank balance will increase by Rs. 4,000 and cash will decrease by Rs. 4,000.
4. Summarising
Summarising is the art of making the activities of the business enterprise as classified in the ledger for the use of management or other user groups i.e. Sundry debtors, Sundry creditors etc. Summarisation helps in the preparation of Profit and Loss Account and Balance sheet for a particular fiscal year.
5. Analysis and Interpretation
The financial information or data as recorded in the books of a account must further be analysed and interpreted so to draw useful conclusions. Thus, analysis of accounting information will help the management to assess in the performance of business operation and forming future plans also.
6. Presentation or reporting of financial information
The end users of accounting statements must be benefited from analysis and interpretation of data as some of them are the ‘stock holders’ and other one the ‘stake holders’. Comparison of past and present statement and reports, use of ratio and trend analysis are the different tools of analysis and interpretation.
From the above discussion one can conclude that accounting is a art which starts and includes steps right from recording of business transactions of monetary character to the communicating or reporting the results thereof to the various interested parties.
3.2 VOUCHER
Each transaction is recorded in books of accounts providing all the required information of the transaction. Since each transaction has an effect on the financial position of the business, there should be a
documentary evidence to establish the monetary accounts at which transactions are recorded and also the transactions are properly authorised. The common documents that are generally used are as under: (i) Payment voucher; (ii) Receipt voucher; and (iii) Transfer voucher. (i) A Payment voucher usually on a printed standard form, is a record of payment. When payment is made for an expense, generally a bills is prepared to record full particulars of the claim by the person or organisation receiving payment. From the bill, the accounting department prepares a voucher for each payment to be made, no matter whether the amount that is paid for the goods purchased, or to pay employee’s salaries, or to pay for services or to pay for any other asset acquisition. (ii) A Receipt voucher is a document which is issued against cash receipts. It may also be a printed standard form. This document shows that a certain sum of money was received from a person or organisation and also, contains information of the purpose for which the money is received. It is signed by a responsible employee, authorised by the management to receive the money. (iii) A Transfer voucher is used to record the residuary transactions. An internal transaction or a transaction not involving any cash payment or cash receipt, is recorded in the transfer voucher. Examples are: Goods purchased on credit; depreciation of assets, outstanding expenses, accrued income, etc.
credited and lastly, the narration (i.e. a brief explanation of transaction) are entered.
Column 3 (L.F.) : L.F. stands for ledger folio which means page of the ledger. In this column are entered the page numbers on which the various accounts appear in the ledger.
Column 4 (Dr. Amount) : In this column, the amount to be debited against the ‘Dr.’ Account is written along with the nature of currency.
Column 5 (Cr. Amount) : In this column the amount to be credited against the ‘Cr.’ Account is written along with the nature of currency.
Advantages of Using Journal
Journal is used because of the following advantages: ∑ A journal contains a permanent record of all the business transactions. ∑ The journal provides a complete chronological (in order of the time of occurrence) history of all business transactions and the task of later tracing of some transactions is facilitated. ∑ A complete information relating to one single business transaction is available in one place with all its aspects. ∑ The transaction is provided with an explanation technically called a narration. ∑ Use of the journal reduces the possibility of an error when transactions are first recorded in this book. ∑ The journal establishes the quality of debits and credits for a transaction and reconciles any problems. If a business purchases a bicycle, it is necessary to decide whether the bicycle represents ordinary goods or machinery. Further any amount paid is debited to bicycle account and credited to cash account.
∑ The use of journals avoids omission or duplication of transactions or parts of transaction. Without the journal the accountant would be forced to got to the individual account to enter debits and credits. Therefore it is possible for accountant to miss part of a transaction, duplicate all or part of a transaction or incorrectly record debits and credits. Even with the Journal, it is still possible to omit transactions and make other errors. However, the Journal reduces these problems. ∑ Once a transaction is recorded in the journal, it is not necessary to post it immediately in the ledger accounts. In this, way, the journal allows the delayed posting.
In connection with the journal, the following points are to be remembered: ∑ For each transaction, the exact accounts should be debited and credited. For that, the two accounts involved must be identified to pass a proper journal entry. ∑ Sometimes, a journal entry may have more than one debit or more than one credit. This type of journal entry is called compound journal entry. Regardless of how many debits or credits are contained in a compound journal entry, all the debits are entered before any credits are entered. The aggregate amount of debits should be equal to the aggregate amount of credits. ∑ For a business, journal entries generally extend to several pages. Therefore, the total are cast at the end of each page, against the debit and credit columns, the following words and written in the particular column, which indicates, carried forward (of the amount on the next page) “Total c/f”.
(iii) Representative Personal Accounts : The accounts which represent some person such as wage outstanding account, prepaid insurance account, accrued interest account are considered as representative personal accounts.
2. Real Accounts
Real accounts are the accounts related to assets/properties. These may be classified into tangible real account and intangible real account. The accounts relating to tangible assets such as building, plant, machinery, cash, furniture etc. are classified as tangible real accounts. Intangible real accounts are the accounts related to intangible assets such as goodwill, trademarks, copyrights, franchisees, Patents etc.
3. Nominal Accounts
The accounts relating to income, expenses, losses and gains are classified as nominal accounts. For example Wages Account, Rent Account, Interest Account, Salary Account, Bad Debts Accounts.
RULES FOR DEBIT AND CREDIT Type of Accounts Rules for Debit Rules for Credit (a) Personal Account
Debit the receiver Credit the giver
(b) Real Account Debit what comes in Credit what goes out (c) Nominal Account
Debit all expenses and losses
Credit all incomes and gains
Illustration : How will you classify the following into personal, real and nominal accounts? (i) Investments (ii) Freehold Premises (iii) Accrued Interest
(iv) Punjab Agro Industries Corporation (v) Janata Allied Mechanical Works (vi) Salary Accounts (vii) Loose Tools Accounts (viii) Purchases Account (ix) Indian Bank Ltd. (x) Capital Account (xi) Brokerage Account (xii) Toll Tax Account (xiii) Dividend Received Account (xiv) Royalty Account (xv) Sales Account
Solution Real Account : (i), (ii), (vii), (viii), (xv). Nominal Account : (vi), (ix), (xi), (xii), (xiii), (xiv) Personal Account : (iii), (iv), (v), (x)
Journalizing
Journalism is the process of recording journal entries in the Journal. It is a systematic act of entering the transaction in a day book in order of their occurrence i.e., date-wise or event-wise. After analysing the business transactions, the following steps in journalising are followed: (i) Find out what accounts are involved in business transaction. (ii) Ascertain what is the nature of accounts involved? (iii) Ascertain the golden rule of debit and credit is applicable for each of the accounts involved. (iv) Find out what account is to be debited which is to be credited. (v) Record the date of transaction in the “Date Column”.
(p) Paid salary by cheque (q) Received donation in cash (r) Paid to Ram by cheque (s) Paid salary (t) Paid rent by cheque (u) Goods withdrawn for personal use (v) Paid an advance to suppliers of goods (w) Received an advance from customers (x) Paid interest on loan (y) Paid instalment of loan (z) Interest allowed by bank.
Solution ANALYSIS OF TRANSACTIONS
Transaction
Accounts involved^ Nature ofaccounts How affected^ Whether tobe debited or credited
(a) Cash A/c Real Cash is coming in Debit Capital A/c Personal Ramesh is the giver Credit (b) Cash A/c Real Cash in coming in Debit Loan from Nikhil A/c Personal Nikhil is the giver Credit (c) Furniture A/c Real Furniture is coming in Debit Cash A/c Real Cash is going out Credit (d) Furniture A/c Real Furniture is coming in Debit Mohan’s A/c Personal Mohan is the giver Credit (e) Purchases A/c Real Goods are coming in Debit Cash A/c Real Cash is going out Credit (f) Purchases A/c Real Goods are coming in Debit Ram’s A/c Personal Ram is the giver Credit (g) Cash A/c Real Cash is coming in Debit Sales A/c Real Goods are going out Credit (h) Hari’s A/c Personal Hari is the receiver Debit Sales A/c Real Goods are going out Credit (i) Cash A/c Real Cash is coming in Debit Hari’s A/c Personal Hari is the giver Credit (j) Ram’s A/c Personal Ram is the receiver Debit Cash A/c Real Cash is going out Credit (k) Bank A/c Personal Bank is the receiver Debit Cash A/c Real Cash is going out Credit (l) Drawings A/c Personal Ramesh is the receiver Debit Cash A/c Real Cash is going out Credit
Transaction
Accounts involved^ Nature of accounts
How affected Whether to be debited or credited
(m) Cash A/c Real Cash is coming in Debit Bank A/c Personal Bank is the giver Credit (n) Drawings A/c Personal Ramesh is the receiver Debit Bank A/c Personal Bank is the giver Credit (o) Cash A/c Real Cash is coming in Debit Shyam’s A/c Personal Shyam is the giver Credit (p) Salary A/c Nominal Salary is an expense Debit Bank A/c Personal Bank is the receiver Credit (q) Cash A/c Real Cash is coming in Debit Donation A/c Nominal Donation is a gain Credit (r) Ram’s A/c Personal Ram is the receiver Debit Bank A/c Personal Bank is the giver Credit (s) Salary A/c Nominal Salary is an expense Debit Cash A/c Real Cash is going out Credit (t) Rent A/c Nominal Rent is an expense Debit Bank A/c Personal Bank is the giver Credit (u) Drawing’s A/c Personal Ramesh is the receiver Debit Purchases A/c Real Goods are going out Credit (v) Advance to Suppliers A/c Personal Suppliers are the receivers Debit Cash A/c Real Cash is going out Credit (w) Cash A/c Real Cash is coming in Debit Adv. from Customers A/c Personal Customers are the givers Credit Interest on Loan A/c Nominal Interest on loan is an expense
(x) Debit
Cash A/c Real Cash is going out Credit (y) Loan A/c Personal Lender is the receiver Debit Cash A/c Real Cash is going out Credit (z) Bank A/c Personal Bank is the receiver Debit Bank Interest A/c Nominal Bank Interest is a gain Credit Illustration : Prepare Journal in the books of K.K. Co. from the following transactions: 1999 Rs. 1999 Rs. Dec. 1 Started business with a capital of 50,000 Dec. 15 Purchased goods from Ram 4, Dec. 6 Paid into bank 20,000 Dec. 18 Paid wages to workers 300 Dec. 8 Purchased goods for cash 4,000 Dec. 20 Recd. from Pankaj Allowed him discount Rs. 50
1,
Dec. 9 Paid to Ram 1,980 Dec. 22 Withdrawn from bank 3, Dec. 9 Discount allowed by him 20 Dec. 25 Paid Ram by cheque 500 Dec. 10 Cash sales 3,000 Dec. 31 Withdrawn for personal use 200 Dec. 12 Sold to Hari for cash 2,
- Cash A/c Dr. 1, Discount Allowed A/c Dr. 50 To Pankaj A/c 1, (Being cash received from Pankaj and allowed him discount Rs. 50)
- Cash A/c Dr. 3, To Bank A/c 3, (Being cash withdrawn from bank)
- Ram A/c Dr. 500 To Bank A/c 500 (Being paid by cheque)
- Drawings A/c Dr. 200 To Cash A/c 200 (Being withdrawn for personal use) Grand Total 90,050 90,
3.3.2 Goods Account
Generally, the term goods include every type of property such as Land, Building, Machinery, Furniture, Cloth etc. However, in accountancy its meaning is restricted to only those articles which are purchased by a businessman with an intention to sell it. For example, if a businessman purchased typewriter, it will be goods for him if he deals in typewriter but if he deals in other business say clothes then typewriter will be asset for him and clothes will be goods.
Sub-Division of Goods Accounts
The goods account is not opened in accounting books and it is to be noted goods includes purchases, sales, sales returns, purchases return of goods. However, purchase account, sales account, sales return account and purchase return account are opened in the books of account.
Purchases Account: This is opened for goods purchased on cash and credit.
Sales Account: This account is opened for the goods sold on cash and credit.
Purchase Returns Account or Return Outward Account: This account is opened for the goods returned to suppliers.
Sales Returns Account or Return Inward Account: This account is opened for the goods returned by customers.
Opening Entry
In case of going concern at the beginning of the new year, new books of accounts are opened and the balances relating to personal and real Accounts appearing in the books at the close of the previous year are brought forward in new books. The entry for this purpose in the books is called opening entry.
The opening entry is passed by debiting all assets and crediting all liabilities including capital. If the amount of capital is not given then this can be found out with the help of the accounting equation: Assets = Liabilities + capital Capital = Assets- Liabilities
Illustration : On 1st^ April 1998, Singh’s assets and liabilities stood as follows: Assets: Cash Rs. 6,000, Bank Rs. 17,000, Stock Rs. 3,000; Bills receivable 7,000; Debtors 3,000; Building 70,000; Investments 30,000; Furniture 4, Liabilities: Bills payable 5000, Creditors 9000, Ram’s loan 13, Pass on opening Journal entry.
Rs. Rs. Purchases Account Dr. 6, To X 6, (Being goods purchased at 15% trade discount Less list price)
2. Amount paid or received in full settlement or cash
discount
Cash discount is a concession allowed by seller to buyer to encourage him to make early cash payment. It is a Nominal Account. The person who allows discount, treat it as an expenses and debits is his books and it is called discount allowed and the person who receives discount, treat as an income and it is called discount received and credits in his books of account “Discount Received Account.” For example, X owes Rs. 6,000 to Y. He pays Rs. 5,950 in full settlement against the amount due. In the books of X the journal entry will be: Rs. Rs. Y Dr. 6, To Cash Account 5, To Discount Received account 50 (Being Cash paid and discount received) In the books of Y Rs. Rs. Cash Account Dr. 5, Discount Allowed Account Dr. 50 To X 6, (Being cash received and discount allowed)
3. Goods distributed as free samples
Some times business distributes goods as free samples for the purpose of advertisement. In this case Advertisement Account is debited and Purchases Accounts is credited. For example, goods costing Rs. 8000
were distributed as free sample. to record this transactions following entry will be passed: Rs. Rs. Advertisement Account Dr. 8, To Purchases Account 8,
4. Interest on capital
Interest paid on capital is an expense. Therefore interest account should be debited. On the other hand the capital of the business is increases. So the capital account should be credited. The entry will be as follows: Interest on Capital Account Dr. To Capital Account
5. Interest charged on Drawings
If the interest is charged on drawings then it will be an increase in the income of business, so interest on drawings will be credited. On the other hand there will be increase in Drawings or decrease in Capital. So Drawings Account will be debited. To record this, following entry will be passed: Drawing Account or Dr. Capital Account Dr. To Interest on Drawing Account
6. Depreciation charged on Fixed Assets
Depreciation is the gradual, permanent decrease in the value of an assets due to wear and tear and many other causes. Depreciation is an expense so the following entry will be passed: Depreciation Account Dr. To Asset Account
