ACCOUNTING MECHANISMS &

FINANCIAL STATEMENTS

Business transactions are

created Analyze & Record the Transaction

Post the information

from the Journal to the

Ledger

Prepare a Trail Balance

Journalize Adjusting Entries

Post Adjustments

from the Journal to the Ledger

Prepare an Adjusted

Trial Balance

Journalize Closing Entries

Post closing Entries from the Journal to

the Ledger

Prepare a Post-

Closing Trial

Balance

Prepare the Financial

Statements

MEANING AND DEFINITION OF JOURNAL

The word ‘Journal’ has been derived from the French word ‘Jour’ meaning daily records.

The Journal records all daily transactions of a business in the order in which they occur.

According to Robert Anthony, “The Journal is a chronological record of accounting transactions showing the names of the accounts that are to be debited or credited, the amounts of debits and credits, and any useful supplementary information about the transactions.”

Performa of Journal

Date

Particulars

L.F. Dr. (Rs)

Cr. (Rs)

RULES OF DEBIT AND CREDIT

Debits represents increases in value of assets and expenses and decreases in income, liabilities and equity.

Credits represent increases in liabilities, equity and income and decreases in assets and expenses.

CLASSIFICATION OF ACCOUNTS

Personal account

Real account

Nominal account

PERSONAL ACCOUNTS

Natural personal account: E.g. Vijay’s account, Sanjay’s account.

Artificial personal account: E.g. limited company, co-operative society.

Representative personal account: E.g. when the rent is due to landlord, outstanding rent account is opened in the books. Thus, the outstanding rent account represents the account of landlord to whom the rent is payable.

Golden Rule: Debit the Receiver

Credit the Giver

REAL ACCOUNTS

Tangible real account: it can be touched felt and measured. E.g. cash account, building account, furniture account.

Intangible real account: E.g. patent account, goodwill account.

Golden Rule: Debit What Comes In,

Credit What Goes Out.

NOMINAL ACCOUNTS

These accounts are opened in the books of accounts to simply explain the nature of the transactions.

These accounts are also known as Revenue and expense accounts or temporary accounts.

E.g. salary paid, rent paid.

Nominal accounts mainly include accounts of expenses, losses, income and gains.

Golden Rule: Debit all Expenses or Losses

Credit all Income or Gains

Rent paid

Rent A/c Nominal account Dr

Cash A/c Real A/c Cr

Salaries paid

Salaries A/c Nominal A/c Dr

Cash A/c Real A/c Cr

Interest Received

Cash A/c Real A/c Dr

Interest A/c Nominal A/c Cr

Furniture purchased

Furniture A/c Real A/c Dr

Cash A/c Real A/c Cr

Outstanding for salaries

Salaries A/c Nominal A/c Dr

Outstanding Salaries A/c Personal A/c Cr

Paid to Suresh

Suresh personal A/c Dr

Cash A/c Real A/c Cr

Examples of Journal entries

1. Mr. A commences business with a capital of Rs 1,00,000.

2. Goods purchased from Mr. Y for cash Rs 5,000.

3. Goods purchased worth Rs 20,000 on credit from Mr. A.

4. Goods returned to Mr. X.

5. Goods sold to Mr. X for cash Rs 7,000.

1. Cash A/c Dr 1,00,000

To Capital A/c 1,00,000

(Being commencement of business)

2. Purchases A/c Dr 5,000

To Cash A/c 5,000

(Being goods purchased for cash)

3. Purchases A/c Dr 20,000

To A’s A/c 20,000

(Being purchased goods on credit)

4. Mr. X’s A/c Dr 100

To Purchase return A/c 100

(Being goods returned to Mr. X)

5. Cash A/c Dr 7,000

To Sales A/c 7,000

(Being goods sold for cash)

Examples of Journal entries

1. Goods sold to Mr. Y for Rs 4,000

2. Goods returned by Mr. Z

3. Machinery sold for Rs 12,000

4. Salaries paid for Rs 3,200

5. Amount received from Mr. Z Rs 990 and discount allowed Rs 10

1. Mr. Y’s A/c Dr 4,000

To Sales A/c 4,000

(Being goods sod to Mr. Y on Credit)

2. Sales return A/c Dr 100

To Mr. Z’s A/c 100

(Being goods returned by Mr. Z)

3. Cash A/c Dr 12,000

To Machinery A/c 12,000

(Being machinery sold)

4. Salaries A/c Dr 3,200

To Cash A/c 3,200

(Being salaries paid)

5. Cash A/c Dr 990

Discount A/c Dr 10

To Mr. Z’s A/c 1,000

(Being amount received from Mr. Z and discount allowed)

Examples of Journal entries

1. Amount paid to Mr. K for Rs 1,980 and discount allowed Rs 20.

2. Depreciation on furniture Rs 2,000

3. Interest on capital Rs 1,000

4. Amount withdrawn by the proprietor for personal or domestic or private use Rs 3,000.

5. Distribution of goods as free sample Rs 100.

1. Mr. K’s A/c Dr 2,000

To Cash A/c 1,980

To Discount A/c 20

(Being amount paid to Mr. K and discount received)

2. Depreciation A/c Dr 2,000

To Furniture A/c 2,000

(Being depreciation charged on furniture)

3. Interest on capital A/c Dr 1,000

To Capital A/c 1,000

(Being interest on capital)

4. Drawing A/c Dr 3,000

To Cash A/c 3,000

(Being amount withdrawn by the proprietor)

5. Free samples or Advertising A/c Dr 100

To purchases A/c 100

(Being distribution of goods as free samples)

Shalini Arora set up Ace Marketing Ltd to provide consultancy. During a short period, the company completed the following transactions:

a) Shalini invested cash in Ace’s share capital Rs 20,000

b) Billed customers for services provided Rs 5,600

c) Paid assistant’s salary Rs 600

d) Bought computer on credit Rs 4,400

e) Received cash from customers billed earlier Rs 1,350

f) Took a bank loan Rs 5,000

g) Paid for computer in d) Rs 2,000

h) Received fee for professional services Rs 8,250

i) Paid dividends Rs 1,100

Prepare Journal entries to record the above transactions.

Sum 1.xlsx

Journalize the following transactions. Also state the nature of each account involved in the Journal entry.

1. 1st December 2013, Mr. F started business with cash Rs 50,000.

2. Dec 3, he paid into the Bank Rs 10,000

3. Dec. 5, he purchased goods for cash Rs 20,000.

4. Dec. 8, he sold goods for cash Rs 7,000.

5. Dec. 10, he purchased furniture and paid by cheque Rs 4,000.

6. Dec. 12, he sold goods to Arvind Rs 4,000.

7. Dec. 14, he purchased goods from Amrit Rs 10,000.

8. Dec. 15, he returned goods to Amrit Rs 5,000.

9. Dec. 16, he received from Arvind Rs 3,960 in full settlement.

10. Dec. 18, he withdrew goods for personal use Rs 1,000.

11. Dec. 20, he withdrew cash from business for personal use Rs 2,000.

12. Dec. 24, he paid telephone charges Rs 1,000

13. Dec. 26, cash paid to Amrit in full settlement Rs 4,900.

14. Dec. 31, paid for stationery Rs 200, rent Rs 500 and salaries to staff Rs 2,000

15. Dec. 31, goods distributed by way of free samples Rs 1,000.