Journal Book– Meaning and Concept
The word Journal is derived from French word ‘Jour’ (means ‘diary’). It is the book of original entry. All business transactions are recorded in Journal in chronological order. So, a Journal book contains record of each transaction in order of date.
Format of Journal Book
A General Format of Journal Book is shown. Normally, is each page of the Journal Book is serially numbered. The Page number is mentioned in Ledger Book posting for cross reference. Some organisation may even use Journal entry serial number for more control.
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Components of Journal Entry
- Date: In Date column, date of transaction is recorded.
- Particulars: In this column, the transacted Ledger Accounts are entered. In first entry, the first account debited in the transaction is recorded as ‘Dr’. In the next line, the account to be credited is written by prefixing word ‘To’ before the name of the account. However, in modern computerised format, the word ‘To’ is not added at the start of credit ledger accounts. The amount is posted in the respective Debit / Credit columns.
- Voucher Narration : After the Ledger Account entries, explanation of the transaction (called narration) is written. After narration a straight line is drawn to demarcate the next Journal Entry..
- L.F (Ledger Folio): This column is initially left blank. It is later on filled up by the page number of the ledger where the entry is posted in Ledger Book (in a computerized system, instead of Ledger folio, the voucher Ref. i.e. transaction Ref. is shown).
- Debit: This column records the amount to be debited to the respective account debited.
- Credit: This column records the amount to be credited to the respective account credited.
This way, Journal entry are made chronologically one after another. As per Principles of Double Entry, the total of all Debits & Credits must be equal in each Journal Entry.
As per principles of Double Entry, the total of all Debits & Credits must be equal in a Journal Entry.
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Debits & Credits in Journal Entry
For academic understanding of the principles of Debits & Credits, we will normally explain Journal Entries as Single Debit & Single Credit. This clarifies the principles of equality of Debits & Credits, and the relationship of Accounting equation.
However, in practical situation, a transaction, involving several related accounts completely, a Journal entry may be written with multiple debits & credits.
The organisation receives net payment of Rs 900 from Asit, after deduction of TDS Rs 100 from Amount of Rs 1000.
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Debits & Credits in Journal Entry – Example
The ultimate result of the two separate entries and the one combined entry is same. For learning & academic purpose, separate entries may be more helpful, but for practical purpose, the composite entry explains the whole transaction better in one entry.
Normally, in initial chapters, separate single entries would be used for illustration of transactions
For each Journal, the totals of debit & credit must be equal. Postings from Journal entry is made to respective Ledger. In Journal Book, it is not essential to total up the pages of Journal Book periodically (though some people may do to ensure arithmetic accuracy of the figures and to eliminate mistakes).
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Types of Journal Book
Academically, all types of transactions may be entered in one Journal Book.
However, in practice, several types of additional Journal Books are used according to the nature of Transaction.
- Cash Book : Transaction involving Cash Ledger Account
- Bank Book : Transaction involving Bank Ledger Account
Sometimes, a combined Cash Bank Book is used in which transactions involving Cash & Bank ledger are recorded in one book
- Sales Book : Transaction of Credit Sales involving Sales Ledger Account
- Purchase Book : Transaction of Credit Purchase involving Purchase Ledger Account
Some people maintain records of Sales & Sales Returns in Sales Books, while some organisations maintain separate Books for Sales & Sales Returns. Similarly Purchase & Purchase Returns may be entered together in Purchase Book, or separate books may be maintained.
Such additional Journal Books (called subsidiary Books) help the organisation & distribution of work, particularly, when transactions are numerous. Recording in such additional Books would be discussed in respective places. Here, we explain all sorts of transaction entries in Journal Book
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Ledger Account Opening Balance entry in Financial Year beginning
The Assets and Liabilities appearing in the Balance Sheet at the end of the previous year, has to be brought forward by passing a Journal entry on the first day of the current year.
The total of all assets Debited is equal to total of all liabilities Credited, the total of Debits and Credits of such journal entry will be equal. This type of journal entry is said as ‘Opening Entry.’
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It is good practice to write First Journal entry for Opening Balances. However, some organisations post the Opening Balances in Ledger Account from previous year Final Trial Balance, directly into the Ledger Accounts in Ledger Book
Sales Voucher Entry
Sales account is Nominal account, Buyer Account is Personal account. As per Golden Rule, Debit the receiver. Credit the income or Gain.
So, in Sellers Books, for Sales of Trade goods, Buyer Account is Debited, and Sales Account accounts are credited
Sales Return Voucher Entry
Sales Return : For sold goods returned by buyer, the entry would be reverse of Sale entry.
For convenience and maintenance of clearer accounts, separate Sales Return account has been created for sales Returns. In year end, the Balance of Sales Return would be transferred to Sales and the net Sales (Sales – Sales Return) would be carried to P L Account.
Sales and Sales Return Accounting
Often, for better organisation of accounts, detailed analysis and info for better control, separate Ledger Accounts for Sales and sales Return are recommended
However, for Sales Return, Sales Account may alternatively be debited directly, without using any Sales Return Account.
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In practice, Credit Sales and Sales Return are normally entered in Columnar register Format, with columns for details and each Ledger Account for convenience.
Purchase Voucher Entry
For Purchase of Trade Goods, Purchase account is Debited, the net amount Payable is credited to Supplier (Creditor).
Purchase account is Nominal Account. Seller Account is Personal account. As per Golden Rule, Credit the Giver, Debit Expense or Loss Account.
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Purchase Return Voucher Entry
For Purchase Return means Purchased goods returned by Buyer to supplier. In such case, the entry would be reverse of Purchase entry.
Purchase and Purchase Return Accounting
For convenience and maintenance of clearer accounts, Purchase Return account has been credited for returned goods. In year end, the amount of Purchase Return would be transferred to Purchase and the net Purchase (Purchase – Purchase Return) would be carried to P L Account. However, for Purchase Return, Purchase Account may alternatively be credited directly, without using any Purchase Return Account.
However, for Purchase Return, Purchase Account may alternatively be credited directly, without using any Purchase Return Account.
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In practice, Credit Purchase and Purchase Return are normally entered in Columnar Register Format, with columns for details and each Ledger Account for convenience.
Money received from Debtors Journal Entry
Money is received from Debtors against Dues Receivable. At the time of receipt of money from Debtor, Cash / Bank Account is debited by the amount received and Debtors Account from whom the money is received is credited.
Asit Pays a Cheque# 987654 dt 1.5.21 for Rs 2000 drawn on Bank of India to Pankaj. Pankaj deposits the cheque on 2.5.21 into his State bank of India Current Account.
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Cheque received from Debtors Dishonoured Journal Entry
If the cheque is Returned unpaid (Dishonoured), the entry would be reverse of the earlier entry of receipt of money.
So, Party Account would be debited and Bank Account would be credited.
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In case of Cheque Return unpaid by Bank, for any reason, the Issuer of Cheque and the organisation Receiving the Cheque will make entry in their books, which would be opposite to the original entry of Cheque issue / receipt in their respective books.
In practice, such entries are normally made in Cash Book.
Money paid to Creditors Journal Entry
Money is paid to Creditors against Dues Payable. The Creditor account whom the money is being paid is Debited and Cash / Bank Account is credited by the amount paid.
Asit pays cheque No 456123 dt 4.5.21 for Rs 2,500 drawn on State Bank of India a/c, to Pankaj
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Cheque paid to Creditor Dishonoured Journal Entry
If the cheque paid is Dishonoured, the entry would be reverse of the earlier entry of payment.
So, Bank Account would be debited and the Party Account would be credited.
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In case of Cheque Return unpaid by Bank, for any reason, the Receiver of Cheque and the organisation Issuing the Cheque will make entry in their books, which would be opposite to the original entry of Cheque issue / receipt in their respective books.
In practice, such entries are normally made in Cash Book.
Contra Entry Voucher
Often Cash is withdrawn from Bank and Cash is deposited to Bank. Such transactions are often called as Contra Entries. Where multiple Bank Accounts are maintained, money may be transferred from one bank account into another bank account.
These are just transfer of money within the organisation. There is no real inflow or outflow of money.
The account receiving the money (where the money is going into, or the inflow account) is debited and the account giving the money (where the money is going from, or the outflow account) is Credited.
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Cash Deposited to Bank Journal Entry
In case of Cash Deposit to Bank, the Bank Account where the Cash is being deposited into is Debited and the Cash Account (where from the money is taken) is credited.
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When Cash is deposited into Bank, Bank Account is Debited because it receives Money (Debit the Receiver) and Cash Account is Credited because it gives the money (Credit the Giver)
Cash Withdrawn from Bank Journal Entry
In case of Cash Withdrawal from Bank, The Cash Account (where from the money is deposited into) is Debited and Bank Account where the money is taken from is Credited
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When Cash is deposited into Bank, Bank Account is Debited because it receives Money (Debit the Receiver) and Cash Account is Credited because it gives the money (Credit the Giver)
In Practice Contra Entries are made in cash Book. In case of Multiple Column Cash Book, the entries are made in respective column. In Cash of single Cash / bank Account, the entry would be made in respective Cash Books
When Cash is deposited into Bank, Bank Account is Debited because it receives Money (Debit the Receiver) and Cash Account is Credited because it gives the money (Credit the Giver)
In Practice, Contra Entries are made in cash Book. In case of Multiple Column Cash Book, the entries are made in respective column. In Cash of single Cash / bank Account, the entry would be made in respective Cash Books
Trade Discount Allowed and Received Journal Entry
Trade Discount is a concession allowed by the seller to the buyer at the time of sale.
Trade Discount is shown as deduction in the Invoice. The amount which remains after deduction of trade discount is recorded in books of account. So, Trade discount allowed at the time of sale is normally deducted from the amount of sale or purchase. It is not reflected in book of accounts.
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Example:
The journal entry will be :
Trade Discount Journal Entry not created
If Trade Discount account is not maintained, the Net sale Amount is recorded in the books. In such case, Trade Discount Account kis not created in the Books
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Trade Discount Journal Entry created
However, you may also record Trade Discount in books as follows, showing the effect of trade discount in Books :
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In normal practice, Trade Discount allowed at the time of sale is reduced from the Value of goods. So, both the Buyer and Seller, enters the Net Value of the goods. The entry of Trade Discount is not recorded in Books.
Cash Discount Voucher Entry
Cash Discount is sometimes allowed by the seller at the time of receiving payment within due date
Cash discount is a gain (or reduction of expenses) in the hands of a customer and a loss (increase in expenses) to the seller.
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Example: The supplier allows Rs 1000 as cash discount at the time of receiving payment of a due bill of Rs 10,000. So, the buyer pays Rs 9000, in full payment of Bill.
Cash Discount Received Journal Entry in Buyer Books
Entry In the books of Buyer, while making payment to supplier of the credit purchase bill.
Cash Discount received is earning for the Buyer.
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Cash Discount Allowed Journal Entry Seller Books
Entry In the books of Seller, while receiving money from Buyer of the credit sales bill.
Cash Discount Allowed is earning for the Buyer.
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In practice, the Buyer getting the benefit of Cash Discount and the seller allowing the Cash Discount, makes entry of Cash Discount in the Cash Book, squaring up the full Bill Amount due.
Goods taken by owner for personal use Journal Entry
When the proprietor / partner of the business withdraws some goods from the business for his personal use, then “Drawing Account” is debited and “purchase Account” is credited because the proprietor / partner draws purchased goods.
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Free Samples given – Journal Entry
To increase sales, the organization may distribute goods as ‘sample’ free of cost. In this case, the journal entry may be
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Loss of Goods – Journal Entry
Goods destroyed or lost due to theft, fire or any other reason is treated as a trading loss. In this case, “Loss on Theft / Fire Account” will be debited and ‘Purchase Account’ will be credited by cost price of the goods lost.
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Writing Off of Bad Debts – Journal Entry
In business, some dues turns out to be unrecoverable. Such dues are called Bad Debts and are ultimately written off.
Bad Debts written off Journal Entry
If the due amount is not fully realised (or partially realized) from a debtor, then the unrealized amount is treated as Bad Debt. In such case, Bad Debt account will be debited and personal account of the Debtor will be credited. This is called writing off of Bad Debt
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Bad Debts Recovered Journal Entry
When Bad Debt written off earlier is subsequently recovered, then this is treated as business profit (like Income). So, ’Cash /Bank account’ will be debited and ‘Bad Debts Recovered Account’ (this is Income Account) will be credited, Debtors account is not effected, as it was earlier closed while treating it as Bad debts.
In case of Recovery of Bad Debts, which was earlier written off, the personal account of The payer is not credited, because Bad Debt was written off and Part account was squared off in earlier accounting years. So, for the current year, it is treated as Income.
So, Bad Debts recovered would be credited (not the payer’s personal account)
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Bad Debt is recorded as expense in the year in which written off. On the other hand, it is earning for the year in which it previously written off Bad Debt is recovered.
Capitalisation of Expenses – Journal Entry
Direct Expenses related to acquiring or enhancing the capacity of Assets, for example, carriage, cartage on buying / installation of Assets, respective assets account is debited (not expenses A/c), to enhancing the Asset value.
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General Expenses – Journal Entry
All sorts of small common expenses, may be debited to common account (e.g General Expenses). However Major expenses are debited to respective expenses account.
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Outstanding Expenses – Journal Entry
If the expenses payable remain outstanding (unpaid) till the end of Financial Year, the Expense Account will be debited by the amount of outstanding expenses and Outstanding Expenses Account will be credited. The Outstanding Liability Account will appear in the Liability side of Balance Sheet
Example:
In FY 20-21
In next financial year, at the time of payment, outstanding expenses is Debited and the Cash/ Bank Account is credited.
On payment in the next year, the of the Outstanding Ledger account will get squared up.
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FY 21-22
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Prepaid Expense – Journal Entry
Prepaid Expenses means money paid in advance, before it is spent (i.e benefits received / enjoyed / consumed). So, at the time of payment, the benefit is not consumed (so the amount is not treated as expense), but the benefit would accrue in future (so it is an Asset).
Sometimes, expenses relating to next period, may be prepaid in advance. During the Financial Year, when the payment is made, at the time for payment, Pre paid expenses account is debited by amount for subsequent Financial Year paid in advance. Pre paid expenses is shown in the Asset side of Balance Sheet.
In subsequent Financial year, to which the advance payment relates, the respective account would be debited and prepaid expenses would be credited.
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Example: Insurance premium for Jan. to Dec. 2021 paid Rs. 12,000 in Jan, 2021, while the Financial Year is April to March. So, 9 months Insurance premium related to April 21 to December 21 (related to FY 21-22) is paid in advance in Jan 21 (i.e during FY 20-21).
So, in books for the period FY 20-21, at the time for payment, proportionate amount of advance payment for subsequent Financial Year would be debited to Pre Paid account and the amount related to the current Financial Year would be debited to the relevant expenses account.
FY 20-21
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FY 21-22
In next Financial year, the amount carried as Prepaid would be debited to the relevant account, squaring off the Pre Paid account
So, Outstanding Expenses and Prepaid Expenses my be considered as opposite to each other. In case of Outstanding Expenses, the amount remains unpaid during current FY, and paid in Next FY, while in Prepaid Expenses, the expenses related to next FY is paid in advance in current FY. So, Outstanding Expenses appear as Liability and Prepaid appear as Asset in the accounts of current FY.
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Payment portion related to current year is charged expense for the current year. Payment portion related to period beyond the current financial year, is treated as Prepaid expenses. Though the name is Expense, it is shown as Asset in Balance sheet.
Income Accrued – Journal Entry
Income Accrued means earned but not received, as it is not yet due. For example, the Bank pays Interest on savings Account Half Yearly (e. In June & December). So, the Interest upto end of Financial Year (i.e upto March) is earned (so it is an Income) but not yet received (so the accrued amount is Asset).
In the same way, Bank pays Interest on Fixed Deposit and the time of maturity. So, the Interest on Fixed deposits which are not matured till the end of financial year is earned (so the Interest till Mach is earned, so it is Income) but yet not received (so the accrued amount is Asset).
Sometimes, Income Receivable may remain accrued (not received) till the end of period.
Accrued Income shows the amount earned but not yet received in the current period. In the next period, when the amount is received, the Accrued Income account will be credited and the cash account will be debited
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Example, Accrued Interest of Rs.700 on Fixed Deposit account upto 31st March, 2021.
In next FY 21-22, when the amount is actually received (e.g 5th April 2021), the entry will be as follows:
Accrued Income is Income earned during the year but not received. So, for the current year, the earning is treated as Income and the accrued amount is treated as Asset.
Outstanding Expenses relate to Expenses, Income accrued relates to Income. The concept is similar. Outstanding Expense means Expenses related to Current Financial year paid in next Financial year, and Accrued Income means Income related to Current Financial Year received in next Financial year.
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Advance Received – Journal Entry
Sometimes, money may be received in advance, for which the goods or services has yet not delivered to the customer during the current Financial year. So,the money received is not actual earning for the Current Financial Year. On receipt of such Advance,Cash / Bank A/c will be debited and Advance Received A/c will be credited.
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FY 20-21
So, in FY 20-21, Cash / Bank Account would be debited for amount received and Advance received A/c (Liability A/c) would be credited. This would be shown as Liability in Balance Sheet (not as Income in PL A/c) in current Financial Year and carried to next Financial Year.
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FY 21-22
In next Financial Year, after service rendered, Advance Received A/c will be debited and the particular income account will be credited.
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Accrued Income is Income earned during the year but not received. So, for the current year, the earning is treated as Income and the accrued amount is treated as Asset.
Income Received – Journal Entry
On receipt of Income related to Current Financial Year , Cash / Bank Account is debited and Income earned account is credited
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Expenses Paid – Journal Entry
On payment of Expense related to Current Financial Year, respective Expense account is debited and the Cash / Bank Account is credited.
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Closing Stock Value Entry
At the end of Year, Closing Stock A/c is Debited and Profit & Loss Account is Credited, by the value of Closing Stock.
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Books Closing Entries
At the end of financial year, Balances of nominal accounts are transferred to Profit and Loss account. Profit & Loss Account is debited and Expenses Account are credited.
Books Closing Entries for Revenue Accounts Debit Balances
Profit & Loss Account is debited and all expenses accounts are credited. These entries are called Financial Year End Closing entry
| Date | Heads of Account | Dr. | Cr. |
| 31.3.21 | P & L A/c | 48,000 | |
| Purchases | 30,000 | ||
| Wages | 4,000 | ||
| Discount | 1,000 | ||
| Salaries | 7,000 | ||
| Office Expenses | 2,000 | ||
| Depreciation | 3,000 | ||
| Carriage Outward | 600 | ||
| Carriage Inward | 400 | ||
| 48,000 |
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Books Closing Entries for Revenue Accounts Credit Balances
All Income accounts are debited and Profit & Loss Account is credited
These entries are called Financial Year End Closing entry
| Date | Heads of Account | Dr. | Cr. |
| 31.3.21 | Sales | 53,000 | |
| Commission Received | 1,500 | ||
| Interest Received | 14,500 | ||
| P & L A/c | 69,000 |
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Book Closing entry is to transfer the balances of all revenue accounts to Profit & Loss Account, which reflects the earning and loss for the current Financial Year. This entry is passed only after all entries related to Revenue Expenses and Earning for the current Financial year are complete.
Appropriation Entries
At the Year end, the Net Profit is transferred to Capital Account (in Proprietorship Organisation), Partner’s Capital Account (in Partnership Organisation), Reserve Accounts (in Companies),
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