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:
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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.
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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.
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Double entry system |
Now
we will do ledger posting of this journal entry:-
Dr. Expenditure A/c Cr.
Dr. Cash A/c Cr.
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 |
Dr
|
50000
|
|
To cash A/c |
Cr.
|
50000
|
||
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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