According to
double
entry system of bookkeeping, transactions are recorded in the books
of accounts in two stages:
- First stage -
Journal
- Second stage -
Ledger
The flow of accounting
information from the time a transaction takes place
to its recording in the ledger may be illustrated as
follows:
Business
Transaction |
↓ |
Business
Document Prepared |
↓ |
Entry Recorded
in Journal |
↓ |
Entry Posted
to Ledger |
The initial record of
each transaction is evidenced by a business document
such as invoice, cash, voucher etc. Transactions are
first recorded in journal and there after posted to
two or three concerned accounts in the
ledger.
Contents:
The word journal has
been derived from the French word "Jour" Jour means
day. So, journal means daily. Transactions are
recorded daily in journal and hence it has named so.
As soon as a transaction takes place its debit and
credit aspects are analyzed and first of all
recorded chronologically (in the order of their
occurrence) in a book together with its short
description. This book is known as journal. Thus we
see that the most important function of journal is
to show the relationship between the two accounts
connected with a transaction. This facilitates
writing of ledger. Since transactions are first of
all recorded in journal, so it is called
book of
original entry or prime entry or primary entry or
preliminary entry, or first entry.
Recording a
transaction in the appropriate place of the
concerned book of account is called entry. Entry may
be of the following two types:
Journal Entry:
Recording a
transaction in a journal is called journal entry
or journalizing.
Ledger Entry:
Recording a
transaction from journal to the concerned account in
the ledger is called ledger entry. It is also
known as ledger posting.
A short explanation of
each transaction is written under each entry which
is called narration. The subject matter of the
transaction can be ascertained through narration.
Besides this, if there be any mistake in determining
debit or credit aspect of a transaction, it can be
easily detected from narration. "A journal entry is
not complete without narration".
Journal has the
following features:
- Journal is the
first successful step of the double entry
system. A transaction is recorded first of all
in the journal. So, journal is called the
book of
original entry.
- A transaction
is recorded on the same day it takes place. So,
journal is also called a day book.
- Transactions
are recorded chronologically. So, journal is
called chronological book.
- For each
transaction the names of the two concerned
accounts indicating which is debited and which
is credited, are clearly written into
consecutive lines. This makes ledger - posting
easy. That is why journal is called
"assistant to ledger" or "subsidiary
book".
- Narration is
written below each entry.
- The amount is
written in the last two columns - debit amount
in debit column and credit amount in credit
column.
The following are
the advantages of journal:
- Each
transaction is recorded as soon as it takes
place. So there is no possibility of any
transaction being omitted from the books of
account.
- Since the
transactions are kept recorded in journal
chronologically with narration, it can be easily
ascertained when and why a transaction has taken
place.
- For each and
every transaction which of the two concerned
accounts will be debited and which account
credited, are clearly written in journal. So,
there is no possibility of committing any
mistake in writing the ledger.
- Since all the
details of transactions are recorded in journal,
it is not necessary to repeat them in ledger. As
a result ledger is kept tidy and brief.
- Journal shows
the complete story of a transaction in one
entry.
- Any mistake in
ledger can be easily detected with the help of
journal.
Date |
Particulars |
L.F |
Amount |
Amount |
|
Account to be
debited .............................Dr.
Account to be credited
(Narration) |
|
XXX |
XXX |
How a transaction
is recorded in journal, is discussed below:
Suppose the
transaction is:
Purchased furniture
from M. A on 10.01.05 for $16,000.
Here furniture
accounting is debited and M A account is
credited.
Date |
Particulars |
L.F |
Amount |
Amount |
10.01.05 |
Furniture A/C
.............................Dr.
M. A A/C
(Being cost of furniture purchased) |
|
16,000 |
16,000 |
The various columns
of journal are explained in details below:
Date:
This column is used to write the
date of the business transaction. Different date
formats are used in different countries. Different
formats of date are: 15.03.1981, 03.15.1981, 15
March 1981 etc.
Particulars or Details Column:
In this column the
names of the two connected accounts are written in
two consecutive lines - in the first line the name
of account debited and in the second line the name
of account credited. While the name of account
debited always placed close the the left hand margin
line, the name of account credited is commenced a
short distance away from the margin line. This
arrangement will show clearly which account is
debited and which credited. This also shows that
credit amount is placed on the right side of debit
amount. The world "Dr" is used at the end of the
name of account debited. It is not necessary to
place the word "Cr." after the name of the credited
account, because if one account is Dr. it follows
that the other account must be Cr. Below the names
of the two accounts, i.e. in the third line
narration is written usually within a bracket.
According to tradition, narration is written starting
with a word "being". But modern practice is not to
use this word. In most of countries even in Great
Britain using the word "To" at the beginning of the
name of account credited has become out-dated. So,
here it has not been used too. But it is optional
for the students.
Ledger Folio (L.F):
The page numbers of
the ledger where the two concerned accounts have
been posted, are written in this column against the
name of each account. This will help locating easily
the two concerned accounts from the ledger. On the
other hand, when a transaction is posted to ledger,
the concerned folio number of the ledger is written
in this column. Thus if a folio number stands
written in this column, it will mean that the
transaction has already been posted to ledger.
Amount:
The debit amount is
written in the first "amount" column against the
name of account debited and the credit amount in the
second "amount" column against the name of account
credited.
Note:
Although the above form of journal is used in
examination answer book. It is not fully correct.
Because in large concerns journal is divided into
eight subdivisions for the sake of convenience. Out
of them only in one subdivision (i.e. journal
proper) the above form is used. In the remaining
seven subdivisions the form of journal is different.
Every transaction
effects two accounts - one is debited and another is
account is credited. Thus in recording a transaction
in a journal one account is debited and another
account is credited. This type of entry is called
simple entry.
The entry in which
more than one account is debited or more than one
account is credited, is known as compound entry.
Three or more accounts are connected with a
compound entry.
Example of Simple Entry:
For example, on
10.04.05 we bought furniture from S. The
entry is:
Date |
Particulars |
L.F |
Amount |
Amount |
10.04.05 |
Furniture A/C
.............................Dr.
S A/C
(Being furniture purchased on credit) |
|
10,000 |
10,000 |
Example Compound Entry:
For example on
16.05.05 we paid $ 1,000 on account of salaries and $600
on account of rent. For this the entry will be:
Date |
Particulars |
L.F |
Amount |
Amount |
16.05.05 |
Salary A/C
.............................Dr.
Rent A/C
Cash A/C
(Being salaries and rent) |
|
1,000
600 |
10,000 |
Here tow accounts
have been debited and the entry involves three
accounts. Hence, it is a compound entry.
It should be noted
here that no private transactions of the proprietor
can be recorded in the books of business. On the
other hand, no transactions of the business can be
recorded in the books of its proprietor. But the
transactions in between proprietor and business must
be recorded in the books of both the proprietor and
business. If these rules are not strictly followed,
the books of account will fail to disclose the true
result of business.
We are concerned
with the books of business, not with the private
books of proprietor. Transactions between the
business and its proprietor are recorded in the
following two accounts:
- Capital
Account: The money with which proprietor
starts his business is called capital. When
proprietor brings capital in the business, it is
recorded in capital A/C. Capital account is in
fact the personal account of the proprietor. So,
it is a personal account. The proprietor has
given the benefit to the business through
introduction of capital. So proprietor's account
A/C, i.e. capital account will be credited. From
the view point of bookkeeping the introduction
of capital to the business by proprietor means
that the proprietor lends the money to his
business and the business becomes indebted to
him. The proprietor is regarded as a special or
internal creditor to the business.
Example: Mr. R started a
business with $20,000
Date |
Particulars |
L.F |
Amount |
Amount |
16.05.05 |
Cash A/C
.............................Dr.
Capital A/C
(Being capital brought in) |
|
20,000 |
20,000 |
- Drawings:
If the proprietor draws any money or takes goods from his
business for his personal use, it will be
recorded in drawings A/C. Drawings A/C is the
personal account of the proprietor, so it is
classified as the personal account. Proprietor
receives benefit, when he withdraws money or
goods from business. So the proprietor's account
i.e. drawing is debited.
Example:
Date |
Particulars |
L.F |
Amount |
Amount |
16.05.05 |
Drawings A/C
.............................Dr.
Cash A/C
(Being amount withdrawn by proprietor) |
|
2,000 |
2,000 |
The manufacturers
and whole sellers frequently grant cash discount to
their debtors who will pay their debts before due
date for goods purchased by them on credit. The
seller regards it a "cash discount" or "sale
discount" or "discount allowed". The buyer calls the
discount as "purchase discount" or "discount
received". The use of sales discount not only
stimulate prompt collection but also tend to the
possibilities of losses resulting from "bad debts
Journalise the
following transactions:
2005 |
|
Feb. 3 |
X commenced
business with a capital of $15,000 |
05 |
Purchased good
$6,000 |
07 |
Purchased
goods on credit from S & Co. $3,000 |
10 |
Purchased
furniture $2,400 |
11 |
Sold goods
$3,900 |
15 |
Sold goods on
credit to D $2,250 |
20 |
Paid salaries
$960 |
25 |
Received
commission $75 |
26 |
Returned goods
to S & Co. $600. |
27 |
Returned goods by D $450 |
28 |
Received from
D $1,500 |
|
Paid to S
& Co. $1,800
X withdrew from business $900
Charged depreciation on $240
Borrowed from K $1,500 |
Solution:
Journal
Date |
Particular |
L.F |
Amount |
Amount |
2005 |
|
|
|
|
Feb. 3 |
Cash A/C
......................................................Dr.
Capital
(Being capital brought in) |
|
15,000 |
15,000 |
5 |
Purchases
A/C...............................................Dr.
Cash A/C
(Being goods purchased for cash) |
|
6,000 |
6,000 |
7 |
Purchases
A/C...............................................Dr.
S & Co. A/C
(Being goods purchased form S & Co on
credit) |
|
3,000 |
3,000 |
10 |
Furniture
A/C.................................................Dr.
Cash A/C
(Being furniture purchased for cash) |
|
2,400 |
2,400 |
11 |
Cash
A/C......................................................Dr.
Sales A/C
(Being goods sold for cash) |
|
3,900 |
3,900 |
15 |
D Bros.
A/C..................................................Dr.
Sales A/C
(Being goods sold on credit to D) |
|
2,250 |
2,250 |
20 |
Salaries
A/C.................................................Dr.
Cash A/C
(Being salaries paid) |
|
960 |
960 |
25 |
Cash
A/C......................................................Dr.
Commission A/C
(Being commission received) |
|
75 |
75 |
26 |
S & Co.
A/C..................................................Dr.
Purchases A/C Return
(Being goods returned to S & co.) |
|
600 |
600 |
27 |
Sales Returns
A/C........................................Dr.
D Bros. A/C
(Being goods returned by D Bros.) |
|
450 |
450 |
28 |
Cash
A/C......................................................Dr.
D Bros. A/C
(Being amount received from D Bros.) |
|
1,500 |
1,500 |
" |
S & Co.
A/C..................................................Dr.
Cash A/C
(Being amount paid to S & Co.) |
|
1,800 |
1,800 |
" |
Drawings
A/C................................................Dr.
Cash A/C
(Being amount paid to S & Co.) |
|
900 |
900 |
" |
Depreciation
A/C...........................................Dr.
Furniture A/C
(Being depreciation charged on furniture) |
|
240 |
240 |
" |
Cash
A/C......................................................Dr.
K A/C
(Being amount borrowed from K) |
|
1,500 |
1,500 |
|