Financial Accounting Journal - Accounting Basics

What is a Journal in Financial Accounting?

All the financial entries are recorded on daily basis in a book, which is known as Journal. The entries passed in the journal are known as journal entries and the process by which a transaction is recorded in a journal is known as journalizing. The journal entries are passed in accordance with the rules of debit and credit of the double entry system.

1
2
3
4
5
Date
Particulars
L.F.
Amount
Debit
Credit
xx-xx-xx
... ... ... ... A/cDr.
To ... ... ... ... A/c
(... ... Narration... ...)
xx
xx
xxxx
xxxx

Column 1: The date of transaction is represented by the first column.

Column 2: Line 1 (... ... ... ...) represents the name of account to be debited.

Line 2 (... ... ... ...) represents the name of account to be credited.

Line 3 for narration of transaction.

Column 3: The page number of the ledger account on which the entry is posted is represented in Ledger Folio.

Column 4 : Amount(s) to be debited.

Column 5 : Amount(s) to be credited.

Notes

  • In case of multiple transactions for a single day, a single journal entry with the total amount of all the transactions is passed.
  • If either of debit or credit entry is same or corresponding entry differs, then a combined entry can be passed, which is known as Compound entry. For instance,
1
2
3
4
5
Date
Particulars
L.F.
Amount
Debit
Credit
Xxxx
... ... ... ... A/cDr.
... ... ... ... A/cDr.
To ... ... ... ... A/c
(Narration... ... ... ...)
xx
xx
xx
xx
xx
xxxx

How the transactions are analyzed and treated in Financial Accounting?

The accounting entries that are commonly used in the business and how these transactions are treated in the books of accounts are as follows:

S.No.
Transaction Nature
Analysis and Treatment
1
Capital
Capital account is considered as a personal account. When capital is introduced by the owner in the form of cash, goods or services, the entry is as follows:
Cash/Goods/Asset A/c
Dr.
xx
To Capital A/c
xx
(Being cash/goods/assets introduced as capital)
2
Drawing Account
When money is withdrawn by the owner of the business, for personal use, it is termed as drawing. At the end of the accounting year, the balance in the Drawing account is transferred to Capital account.
Drawing A/c
Dr.
xx
To Cash A/c
xx
(Being withdrawal of cash for personal use)
Notes:
1. Capital may be introduced or withdrawn any time during the accounting year.
2. Some other expenses of the owner may be incurred, which are paid directly on behalf of the owner. For instance, payment of insurance, taxes, electricity, phone bills etc.
3. Business account and personal account of proprietor are different as owner of the business and business, both are separate entities.
3
Trade Discount
The buyer is facilitated trade discount directly by the seller on the sales invoice. In these cases, buyers can be wholesellers, traders or manufacturers, who either sell the material to the customers or use in manufacturing process.
Treatment– Journal entry is not passed for these cases. On the net of trade discount, the sale is booked. In the same way if trade discount is obtained from the supplier, on the net of trade discount the purchase is booked.
4
Cash Discount
The buyer is facilitated a cash discount by the seller, but which is different from that of trade discount. By using cash discounts, the debtors are inspired to make their due payments. For instance, 5% cash discount may be allowed by the seller for the payment received in a week’s time as against the original time limit of 3 weeks.
Treatment- If A allowed a discount of 5% to B, then
In the books of A:
Cash A/c
Dr.
xx
Discount A/c
Dr.
xx
To B A/c
xxxx
(Being 5% discount allowed to B on payment of Rs........)
In the books of B:
A A/c
Dr.
xxxx
To Discount A/c
xx
To B A/c
xx
(Being payment of Rs xx made to A and getting a discount of 5%)
Note- In the above case, discount is a loss to A and income to B.
5
Bad Debts
A part of the credit sale that is not recovered from debtors like insolvency are considered as bad debts of the company. Bad debts are the loss to the company.
Treatment:
(1) To book bad debts
Bad Debts A/c
Dr.
xx
To Debtor A/c
xx
(Being loss on account of bad debts)
(2) To recover bad debts
Cash A/c
Dr.
xx
To bad debts recovery A/c
xx
(Being recovery of bad debts)
6
Expenses on purchase of Goods
Some of the expenses are incurred on purchase of goods such as inward freight, cartage, uploading charges etc.
Treatment:
Inward freight/Cartage/Octroi A/c
Dr.
xx
To Cash A/c
xx
(Being freight charges paid on purchase of goods)
7
Expenses on Sale of Goods
Some of the expenses are incurred on sale of goods such as freight outward, insurance charges etc.
Treatment:
Freight outward/Insurance Expenses A/c
Dr.
xx
To Cash A/c
xx
(Being freight charges paid on sale of goods)
8
Expenses on Purchase of Assets
The expenses on the purchase of fixed assets such as transportation charges, installation charges etc.
Treatment:
Expenses incurred on purchases of fixed asset are added in the value of fixed assets and could not be treated like expenses on purchases of goods:
Fixed Asset A/c
Dr.
xx
To Cash A/c
xx
(Expenses incurred on purchase of asset)
9
Payment of Expenses
Treatment:
Expenses A/c
Dr.
xx
To Cash A/c
xx
(Being expenses incurred)
10
Outstanding Expenses
The expenses that remain outstanding at the end of the financial year but are due, have to be booked which are due for payment and are paid in the next accounting year. For instance, the salary due on the last day of the accounting year to be paid in the next year.
Treatment:
Salary A/c
Dr.
xx
To salary outstanding A/c
xx
(Being salary for the month of .........due)
11
Prepaid Expenses
Sometimes expenses are paid in advance such as insurance paid three months before the close of the accounting year. Since insurance is usually paid for the whole year, in this case, the insurance for nine months is treated as prepaid insurance. Similarly, rent for the first month of next accounting year may be paid in advance.
Treatment:
Prepaid Expenses A/c
Dr.
xx
To Expenses/Cash A/c
xx
(Being prepaid expenses for month paid)
Note:Expenses account is replaced with the respective head of expense account.
12
Income Received
Treatment:
Cash/Debtor A/c
Dr.
xx
To Income A/c
xx
(Being Income received in cash)
Note:Income account will be replaced with the respective head of Income account.
13
Banking Transactions
(1) Cheque deposited in bank
For some of the cases like cheque received from party deposited in the bank, cheque directly deposited by the party, payment made by the party through NEFT or RTGS or cash directly deposited by the party in the bank account, the entry remains the same.
Bank A/c
Dr.
xx
To Debtor A/c
xx
(2) Payment made to party through cheque
Cheque issued to party or directly deposited in his bank account, or payment made through either by NEFT, RTGS, or cash directly deposited in his bank account. Entry remains same in all the above cases except in the case of cash deposited in his bank account.
Debtor A/c
Dr.
xx
To Bank A/c
xx
(Being payment made through ..... )
If cash is directly deposited in the bank account, the entry is as follows:
Debtor A/c
Dr.
xx
To Cash A/c
xx
(Being payment made through ..... )
(3) Cash withdrawn for office Expenses
Cash A/c
Dr.
xx
To Bank A/c
xx
(Being cash withdrawn from bank for office use)
(4) Cash deposited with Bank
Cash A/c
Dr.
xx
To Cash A/c
xx
(Being cash withdrawn from bank for office use)
Note:The above entries No. 3 & 4 are called‘contra’entries.
(5) Bank charge debited by bank
In some cases, the account is debited by bank for some charges against service provided by them. For instance, cheque book issuing charges, demand draft issuing charges, Bank interest, etc.
Bank Commission/Charges A/c
Dr.
xx
To bank A/c
xx
(Bank charges/commission/interest debited by bank)
14
Interest on Capital
Interest on capital, introduced by sole proprietor or partners of the firm: This entry is passed on the last date of the accounting year as follows:
Interest on capital A/c
Dr.
xx
To Capital A/c
xx
(Being interest @..... on capital provide)
15
Payment on behalf of others
Some of the expenses may be on behalf of the debtors or creditors.
Debtors/Creditors A/c
Dr.
xx
To Cash/Expenses A/c
xx
(Being expenses debited to party, paid on his behalf)
16
Advance received against supply of goods/services
For the supply of the goods or services, sometimes customers pay advance amount, which is adjusted later.
Bank/Cash A/c
Dr.
xx
To Advance from Customers A/c
xx
(Being advance received from xxxxxxxx)
17
Advance paid against supply of goods/services
Sometimes advance amount is paid to the supplier against the supply of goods or services.
Advance against supply of goods A/c
Dr.
xx
To Cash/Bank A/c
xx
(Being advance paid against supply of goods/services)

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