Journalising Transactions

Meaning of Account Understand the rules of debit and credit

applicable to different type of business transactions

Identify the stages of accounting cycle Appreciate the role of journal in recording

business transactions Pass appropriate entries for recording

transactions in the journal

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It is a summarized record of relevant transactions at one place relating to a particular head. It records amount as well as direction of transactions

Conventionally, the left side of an account is known as the debit (abbreviated Dr.) side and the right side as the credit (abbreviated Cr.) side. The account balance is always of the higher side.

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Assets: tangible and intangible items that the company owns that have value. Tangible assets are physical entities such as land, buildings, vehicles, equipment, cash, computer systems and inventory. Intangible assets include Accounts Receivables, patents, and contracts etc.Liabilities: money that the company owes to others (e.g. mortgages, vehicle loans)Equity: that portion of the total assets that the owners or stockholders of the company fully ownRevenue or Income: money the company earns from its sales of products or services, and interest and dividends earned from marketable securitiesExpenses: money the company spends to produce the goods or services that it sells (e.g. office supplies, utilities, advertising, rent, entertainment, travel etc.)

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These are simply additions to or subtraction from an account

Increase in assets and expenses are debits, decreases are credits

Increase in Liability, Owner’s Capital and Revenue/ Income are credits, decreases are debits

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Debit for increase (+) Debit for increase (+) Credit for decrease (-)Credit for decrease (-)

Debit for increase (+) Debit for increase (+) Credit for decrease (-)Credit for decrease (-)

Any Expense AccountAny Expense AccountAny Asset AccountAny Asset Account

Debit for decrease (-) Debit for decrease (-) Credit for increase (+)Credit for increase (+)

Debit for decrease (-) Debit for decrease (-) Credit for increase (+)Credit for increase (+)

Any Revenue AccountAny Revenue AccountAny Liability AccountAny Liability Account

All the business transactions are categorized into three types:◦ Transactions related to persons◦ Transactions related to properties and assets◦ Transactions related to income and expenses

Depending upon the types of transactions, the accounts under which the transactions are recorded are classified into personal, real and nominal accounts.

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Personal account includes accounts of persons and organizations with whom the business deals.

Types of personal accounts:◦ Natural personal accounts: It includes accounts of persons such

as John’s Account.◦ Artificial personal accounts: It includes accounts of organizations

such as accounts of company, club and Government.◦ Representative personal accounts: It includes accounts that

represent a group of persons such as outstanding salaries account for employees.

Rule of debit and credit◦ Debit the receiver◦ Credit the giver

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Real accounts represent accounts of properties and assets.

Types of real accounts:◦ Tangible real accounts: It represents accounts of things that

can be touched or measured, such as cash account, furniture account and stock account.

◦ Intangible real accounts: It represents accounts of things that cannot be touched, such as patent account and goodwill account.

Rule of debit and credit:◦ Debit what comes in◦ Credit what goes out

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Nominal accounts represent accounts for incomes, gains, expenses and losses.

Example: rent account, rates account , insurance account, loss by fire account, discount, legal expenses, postage, stationary, advertisement, bad debts, depreciation etc.

Rule of debit and credit:◦ Debit all expenses and losses◦ Credit all incomes and gains

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All the entries are to be recorded with the business point of view In case of goods purchased, Purchases A/C is debited not the

goods A/C In case of sale of goods, Sales A/C is credited because goods are

sold to generate an income during the year If owner withdraws cash or goods, Drawing A/C is to be debited If cash is paid to a specific person for benefits received or cash is

received from a particular person for providing benefits, then the particular expenses or income accounts need to be debited or credited and not the personal accounts of these persons

If an mount is due to be paid for any benefit received, then it is transferred to “outstanding expenses a/c till the time payment is made

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The mount is due to be received for the services rendered, then its transferred to “accrued income a/c” till the time amount is received

In case of purchase and sales transactions: if nothing is mentioned (name), then consider it as a cash transaction

Unless instructed to the contrary, assume that all transactions for the purchase or sale of goods are on credit.

Name of the buyer or seller in the case of cash sale or cash purchase need not be given as money is simply exchanged for goods

Where word paid is used are cash transactions Purchase A/C for purchase of goods and Sales A/C for sales of

goods

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The amount of trade discount is deducted from the gross value of goods purchased or sold but not specifically shown in the transaction

Cash discount is always calculated on the amount of cash transactions and not on credit transactions after deducting trade discount (if any)

Purchase returns is recorded in Purchase return A/C or Returns Outward

Sales return is recorded in Sales Return A/C or Returns Inward

Any expenditure incurred on purchase of fixed assets should be capitalized and debited to the particular asset account

If a debtor becomes insolvent, it is treated as a business loss and transferred to an account called Bad Debts A/c

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Journal is a book that records all daily transactions in the chronological order of date.

It is also known as book of original entry. The process of recording a transaction in

Journal is known as Journalising.

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DateDate ParticularsParticulars L.F.L.F.DebitDebitRs.Rs.

CreditCreditRs.Rs.

Illustration: John starts a business with capital of Rs. 20,000 on Jan 1, 2000. He purchased furniture for cash of Rs. 5,000 on Jan 5, 2000. He paid rent for business premises of Rs. 2,000 on Jan 10, 2000.

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The stages involved in accounting cycle are:◦ Creating Journal for recording transactions◦ Creating Ledger for classifying the transactions

recorded in Journal◦ Preparing Trial Balance, Trading Account, Profit

and Loss Account and Balance Sheet for summarising the results of transactions

◦ Computing accounting ratios for determining the liquidity, solvency and profitability of business

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Practice the exercise questions of Chapter 3

From A Text Book of Accounting for Management by Maheshwari