Friday, May 15, 2020

What is journal entry? - With Example and Format


Do you know what is Journal entry? No! ohk let's understand what is Journal entry with many examples therefor your basics will be strong in accounting. Journal entry is the backbone of accounting like blood is for our body. We will also understand what is debit and credit. After reading the coplete article your basics will be strong. I guarantee!

So let’s understand what is meant by journal entry?

Journal entry is a starting point for accounting or bookkeeping. You have to understand that you cannot understand accounting in depth without properly understanding the journal entry. For example, doctors will first check the patient's illness to find out about any disease. In the same way before perceive accounting, you have to understand the journal entries and the concept behind it.

Before starting about journal entry let's understand the flow of accounting:

Journal entry with example
Journal entry

What is Journal Entry?

Before introducing accounting concept small businessmen recorded their day to day transactions in the diary. But over the time working culture and accounting types has changed now. Now it is not possible to record lacs and crores of transaction in the diary or on manually basis. So the culture of working has totally changed now. 

When a transaction occurred then first step is to make a source document. After making source document, next step is to record transaction in the system in the form of journal entry. 

For example, A company has incurred an expenditure which will affect two accounts (1) Expenses Account (2) Cash Account. 

Expenses Account : Because we incurred an expenditure so that one account which will affect is expenditure account. Expenditure may be of any types e.g. Rent paid, Salary Paid, Overhead, Labour Paid etc.

Cash Account/Creditor : we will record as cash paid or expenses incurred on credit.

debit and credit
Debit and credit

Journal Entry would be:

Dr - Expenses A/c Dr.     xxx
Cr - To cash A/c              xxx

In the above entry one account is debited(Expenses A/c) and other account is credited(Cash A/c). This is called double entry system.

What is double entry system?

If any expenditure has occurred then profit and loss account & Balance Sheet will get affected by this transaction. In the above example we are incurring expenditure for which we have to pay cash. It means cash is going. In this case our cash will be reduced from opening balance in balance sheet and expenditure will be recorded in the profit and loss account. Both debit and credit give different effects. This is how the dual entry system actually does work. Both liability and assets side will be equal due to this double-entry system.

double entry system
Double entry system

Now we will do ledger posting of this journal entry:-

 Dr.                                                           Expenditure A/c                                            Cr.

Particular Amount Particular  Amount
To Cash A/c XXX To Balance c/d XXX
Total XXX Total XXX

Dr.                                                                     Cash A/c                                                  Cr.

Particular Amount Particular Amount
To Balance c/d XXX By Expenditure A/c XXX
Total XXX Total XXX

As we can see from the above 2 accounts what is the effect of this transaction. Now the expenditure will be debited to profit and loss A/c and cash will be reduced from the initial balance of Cash A/c(Balance Sheet)

Profit and Loss A/c
Expense Amount Income Amount
Expenditure XXX Sale XXX
Material XXX
Net profit XXX
Total XXX  Total XXX

Net profit or loss would be transfer to the Balance sheet and cash will be reduced from initial cash as stated below:

Balance Sheet
Liability Amount Assets Amount
Share capital xxx Fixed Assets xxx
Profit and loss A/c xxx Cash                                      xxx
Current Liability xxx Expenditure incurred              (xxx) xxx
Total xxx xxx

This is the whole procedure to record any journal entry and treatment after it.

One more thing you must know is that Dr. and Cr. are abbreviated for debit and credit.

Journal Entry Format

Journal entry contains Debit and Credit. One account will be debited and other will be credited. We can understand this by an example:

Example: Suppose rent paid by Mr.Pankaj amounting to Rs.5000 to the owner Mr.shyam in cash.
Date Particular Rs. Rs.
01/01/2020 Rent A/c Dr 5000
    To Shyam A/c Cr. 5000
Narration : Being rent payable to shyam
01/01/2020 Shyam A/c Dr. 5000
     To Cash A/c Cr. 5000
Narration : Being rent paid to shyam

Examples of Journal Entry for student

Example 1 : Material purchased of Rs. 50000 paid in cash

Solution : Since material purchased in cash then cash is to be credited and purchase A/c will  be debited.

Date Particular Rs. Rs.
01/01/2020 Purchase A/c
       To cash A/c
Narration : Being cash paid for the purchase of material

Example 2 : Piya incurred advertisement expenditure on credit from Sanam Amt to Rs.8000 and payment made on 08/01/2020

Soultion : Since expenditure incurred on credit it means we will pay later to the creditor(sanam). Hence We have to credit with the name of creditor(sanam). Entry would be:

Date Particular Rs. Rs.
02/01/2020 Advertisement Exp A/c Dr 8000
       To  Sanam A/c Cr. 8000
Narration : Being Adv. Exp payable to sanam
05/01/2020 Sanam A/c Dr. Dr. 8000
   To Cash A/c Cr. 8000
Narration : Being adv exp paid to Sanam

Example 3 : Rent Received amounting to Rs. 500000 from Raju

Solution: We received cash on account of rent. Hence cash account would be debited and income account or rent account as the case may be would be credited.
Date Particular Rs. Rs.
10/01/2020 Cash A/c Dr 8000
       To  Rent Received A/c Cr. 8000
Narration: Being cash received towards rent
10/01/2020 Rent rec A/c Dr. 8000
    To Income A/c Cr. 8000
Narration: Rent received treated as Income 

Example 4 : Journal Entry of Depreciation

Solution: In this case fixed assets would be reduced hence will be credited and depreciation account would be charged in profit and loss account on the expenditure side. Journal entry of depreciation would be:

Date Particular Rs. Rs.
12/01/2020 Depreciation A/c Dr 10000
       To  Fixed Assets A/c Cr. 10000
Being Depreciation charged

Example 5 : Journal Entry for bad debts

Solution: If we have any doubt over recovery from debtor then we are creating a provision for bad debts account and when it becomes finalize that recovery of that is not possible then provision for bad debts account will be transferred to bad debts account. Bad debts would be adjusted against the debtor. It means debtor would be reduced when entry passed with bad debts. Further you can understand with the below entries:

Date Particular Rs. Rs.
31/03/2020 P & L A/c Dr 25000
      To Provision for doubtful debts A/c Cr. 25000
Being provision for doubtful debts created
10/04/2020 Prov. For doubtful debts A/c Dr. 25000
    To Bad Debts Cr. 25000
Being Bad debts recorded against provision.
30/04/2020 Bad debts A/c Dr. 25000
   To Debtor A/c Cr. 25000
Being Bad debts adjusted with debtor.

Example 6 : Sales of Rs.500000 made during April month

Answer : Sales account will be credited and cash account will be debited.

Date Particular Rs. Rs.
30/04/2020 Cash A/c Dr 500000
      To sales A/c Cr. 500000
Being sales made of Rs. 500000

Hope this article really helped you to understand journal entry. If any doubt still pending then you can ask me through comment or email.

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