JOURNAL

Chapter 4: Recording Business Transactions

 Learning Outcome:
2
❖ Accounting Cycle

❖ Rules of Debit and Credit

▪ Personal Account
▪ Real Account
▪ Nominal Account

❖ Rules of Journalising or Process of Journalising

❖ Compound Entry

❖ Opening Entry

❖ Trade and Cash Discount

❖ Different Types of Journals

 3 Steps in The Accounting Cycle

Journalize transactions
Analyze in the general journal Post entries to Prepare a trial
source the accounts in balance.
documents. the general
ledger.

. Prepare financial
statements.
An Account is a summary of relevant transactions at one
4 relating to a particular head.
place

Debit and Credit- Tools used for recording transactions

Debit refers to the LEFT side of the T-Account
A number entered on the left side of any account is said to be
debited to an account.
Credit to the RIGHT side of the T-Account
A number entered on the right side of any account is said to be
credited to an account
The symbol Dr. is used to indicate Debit and the
symbol Cr. is used to indicate Credit
ACCOUNTING EQUATION BASED CLASSIFICATION OF ACCOUNTS:

5
Which
6 of the following accounts would normally be
expected to have a debit (or left-side) balance?

a. Accounts Payable BUILDINGS is an asset

account and normally has
b. Buildings a DEBIT balance.
c. Interest Revenue
The other three accounts
d. Capital Stock normally have CREDIT
balances
 Which of the following accounts would
7
normally be expected to have a credit (or
right-side) balance?

a. Accounts Receivable
b. Salary Expense SALARY PAYABLE
is a liability account
c. Salary Payable and normally has a
d. Land CREDIT balance.

The other three

accounts normally
have DEBIT balances.
Classification of assets under traditional and accounting equation approach
8

Title of account Traditional Accounting

Approach Equation
Approach
Building Real Asset
Sales Nominal Revenue
Debtors Personal Asset
Rent Nominal Expense
Prepaid salary Personal Asset
Rent outstanding Personal Liability
Cash Real Asset
Bad Debts Nominal Expense
Capital Personal Capital
Closing Stock Real Asset
Depreciation Nominal Expense
 Classification & Rules of Accounts

Accounts
9

Personal Account Real Account Nominal Account

Tangible Expenses and

Natural Account
Account Losses

Artificial Account Intangible

Account Income and Gains

Representative
Account

Debit all expenses and

Debit the Receiver Debit what comes in losses
Credit the Giver Credit what goes out Credit all income and gains
 10
Every business deal with other “Person”, possesses “Assets”, pay
“Expenses” and receive “Income”.

An account for each person :Accounts in the names of

persons are known as “Personal Accounts”

An account for each asset : Accounts in the names of

assets are known as “Real Accounts”

An account for each expense or income: Accounts in respect of

expenses and incomes are known as “Nominal Accounts”
Personal Account: These accounts are related to individuals,
firms,
11 companies, etc. A few examples of personal accounts
include debtors, creditors, banks, outstanding/prepaid accounts, accounts
of credit customers, accounts of goods suppliers, capital, drawings, etc..

Natural personal accounts: This type of personal accounts is the

simplest to understand out of all and includes all god’s creations who have
the ability to deal, who, in most cases, are people. E.g. Kumar’s A/C,
Adam’s A/C, etc.
Artificial personal accounts: Personal accounts which are created
artificially by law, such as corporate bodies and institutions, are called
Artificial personal accounts. E.g. Pvt Ltd companies, LLCs, LLPs, clubs,
schools, etc.
Representative personal accounts: Accounts which represent a certain
person or a group directly or indirectly. E.g. Let’s say that wages are paid
in advance to an employee – a wage prepaid account will be opened in the
books of accounts. This wages prepaid account is a representative personal
account indirectly linked to the person.
Real Account: All assets of a firm, which are tangible or intangible, fall
12 the category “Real Accounts“.
under

Tangible real accounts are related to things that can be touched and felt
physically. A few examples of tangible real accounts are building, machinery,
stock, land, etc.
Intangible real accounts are related to things that can’t be touched and felt
physically. A few examples of such real accounts are goodwill, patents,
trademarks, etc.

Nominal Account: Accounts which are related to expenses, losses, incomes or

gains are called Nominal accounts. The dictionary meaning of the word
“nominal” is “existing in name only” and the meaning remains absolutely true
in accounting sense too, because nominal accounts do not really exist in
physical form, but behind every nominal account money is
involved. E.g. Purchase A/C, Salary A/C, Sales A/C, Commission received A/C,
etc.
 Check your Understanding
13
State whether the following statements are True or False:
1. Both cash and bank accounts are real accounts.(False)

2. For every debit, there is a corresponding credit for the same

amount.(True)

3. Journal is a book of prime entry.(True)

4. Loss results in increase of asset or reduction of liability.(False)

GOLDEN RULES OF ACCOUNTANCY
14
15 Nominal Account becomes Personal Accounts

Nominal Account Personal Account

Interest account (expense) Outstanding interest account,
pre-paid interest account.
Rent account Outstanding rent account, rent
pre-paid account.

Salary account Outstanding salaries account,

pre-paid salaries account

Interest account (income) Accrued income account, interest

received in advance account.

Insurance account Outstanding insurance account,

pre-paid insurance account.
Recording Transactions
16
Your personal diary

The textbook says:“The journal records all parts of a transaction

in one place. The date, the debit, the credit and an explanation for
each transaction are recorded together.”

Initially, all transactions are recorded in the General Journal.

● Each transaction always affects at least two different accounts.
● One account has a debit effect.
● The second account has a credit effect.

● This methodology was named “double entry” accounting by

whom?
Luca Pacioli
ADVANTAGES
• 17The complete transaction is recorded in one place

• Reduces Errors

• Easier to find a mistake in T-Accounts (Debit but no credit,

only one account, etc)

• Transactions are listed in chronological order

• Shows a picture of every day at the business

The Journal
18 Date Particular L. DR CR
s F.
1) DATE

2) ACCOUNTS/
DESCRIPTION OF THE
TRANSACTION

3) LEDGER FOLIO

4) DEBITS

5)CREDITS
 A journal entry:
19

• 1. Record the date

• 2. Record the account
debited and its amount
• 3. Record the account
Has four credited and its amount
• 4. Record the explanation or
steps: details
Steps for finding the debit and credit aspects of a particular
transaction
20

• Find out the two accounts involved in the transaction.

• Check whether it belongs to Personal, Real or Nominal
account.
• Apply the debit and credit rules for the two accounts.
Transaction Analysis Account affected Rule Entry
& nature of
account
21
Introduction of Rs. Cash is received Cash – Real Debit what Debit ‘Cash’
80,000 by the by the business comes in
Capital–Persona Credit ‘Capital
Proprietor
Owner has l Credit what
given cash goes out
Cash Deposited in Bank Receives Bank – Personal Debit the Debit ‘Bank’
bank Cash receiver
Cash – Real Credit ‘Cash’
Rs.10,000
Cash Goes out Credit what
of Business goes out
Loan from Suresh Business gets Cash – Real Debit what Debit cash
Rs.40,000 cash comes in
Suresh’s loan – Credit ‘Suresh’s
Suresh pays Personal Credit the giver Loan
Cash
Salaries paid Rs. Cost of services Salary – Debit all Debit
3,500 and used Rs. 5,000 Nominal expenses ‘salary’(Rs.5,00
outstanding Rs.1500 0)
Cash goes out Cash – Real Credit what
Rs. 3,500 goes out Credit ‘cash’
Salary
(Rs.3,500)
Outstanding for Outstanding – Credit the giver
services Personal Credit salaries
received outstanding (R
Rs.1500 s.1,500)
 Examples of Personal, Real and Nominal Account transactions
22
Personal Account: Paid Unreal Pvt Ltd. 24,000 by cheque

Accounts
Debit/Credit Rule Applied
Involved
Unreal Pvt Ltd. Artificial personal a/c
Debit
A/C Dr. the receiver

Artificial personal a/c

To Bank A/C Credit
Cr the giver
Real Account: Purchased furniture for 10,000 in cash

Accounts Involved Debit/Credit Rule Applied

Furniture is real a/c so
Furniture A/C Debit
Dr. What comes in
Cash is a real a/c so Cr.
To Cash A/C Credit
What goes out
 Purchased good for 15,000 in cash
23

Accounts Involved Debit/Credit Rule Applied

Nominal A/C so
Purchase A/C Debit
Dr. all expenses
Real A/C so Cr what
To Cash A/C Credit
goes out
24

On January 15, 2016, Caldwell Company purchases a

truck for $19,500 cash.
Prepare the appropriate journal entry for the above
transaction.
25 Journal Entries
Solution 2
Two accounts are affected:
Trucks is increased by $19,500.
Cash is decreased by $19,500.
 26 Journal Entries
Solution 2
Two accounts are affected:
Trucks is increased by $19,500.
Cash is decreased by $19,500. Typically, accounts are numbered.
numbers are used as references for
the General Ledger. More on acco
GENERAL JOURNAL will come later.
Page: 1
Date Description L Debit Credit
15-Jan Trucks F
150 19,500
Account
To Cash 100 19,500
Account
(being purchase of
truck)
 27

Anil made the following transactions in relation to his business in the month of
July 2016. Journalize the following transaction in the books of Anil.
Date Transaction
July 1st Started business with cash Rs 50000
July 2nd Purchased a Machine on credit Rs. 4000 from M/S Mohan Machines
July 2nd Purchased goods for cash Rs. 10000
July 3rd Purchased furniture for Rs. 12000
July 4th Withdrew for personal use Rs. 700
July 5th Deposited in bank Rs 10000
July 6th Paid rent in advance Rs. 1500
July 7th Received interest Rs. 1000
July 7th Sold goods for Rs 7000 for cash
July 7th Sold goods to Shyam for Rs. 6000
28
July 8th Purchased household goods for Rs.9000 giving Rs3000 in cash
and balance through a loan.

July 9th Paid half the amount owed to Mohan Machines

July 10th Received Rs. 5800 from Shyam in full settlement
July 11th Paid Rs 1900 through cheque to Mohan machines in full
settlement
July 12th Charged depreciation of Rs. 400 on machine and Rs. 2000 on
furniture
July 12th Paid insurance premium Rs. 2000 through cheque
July 13th Received advance payment from customer Mr. Ram
Rs. 5000
29 Simple and Compound Entry
In simple entry, only two accounts are affected. One account is debited
and another account is credited with same amount.
In compound entry:
I. One particular account may be debited and several other accounts
may be credited
II. One particular account may be credited while several other accounts
may be debited
III. Several accounts may be debited and several accounts may also be
credited

Example- Purchased household goods for Rs.9000 giving Rs.3000 in cash

and balance through a loan
30 Opening Entry
❑ At the beginning of each accounting period, the business enterprises will have
to record their transactions in the new books of account.
❑ The accounts with balances in the previous year, will have to be recorded
with the help of an entry which is known as Opening Entry.
❑ In this entry:
All assets are to be debited.
All liabilities are to be credited.
The difference between assets and liabilities will have to be credited as
Capital Account

Journalize the following transaction:

On Jan-1, 2020
Assets are, cash in hand Rs.2200, Bank balance Rs.3800, Plant
& Machinery Rs.5000, Furniture & Fixture Rs.9000 and liability towards Mr.
Amit Rs.2000, Loan from bank Rs. 6000
 Trade Discount and Cash Discount
31

Trade Discount: It is a reduction in payment offered by the supplier

from the list of price of goods or services on business considerations
other than prompt payment. Normally, trade discount is given to
encourage higher quantum of purchases. Suppose, the list price is
Rs.1,000 and a trade discount of 10% is offered, then the Net amount =
List price –Trade discount, Rs.900 would be paid.

Suppose, goods are sold on credit to Kadim for Rs.10, 000 with a trade
discount of 10%, sale is recorded with the net price, in the books of the
seller:
Kadim’s Account …………..Dr 9,000
To Sales Account 9,000
(Being goods sold to Kadim, on credit, after allowing a trade discount
of 10% as per the invoice no. … dated …)
 Trade Discount and Cash Discount
32
Cash Discount: It is a reduction offered by the supplier from the invoice
price in consideration of immediate payment or payment within a
stipulated period. To the person who allows the discount, it is
expenditure. Discount is an income to the person getting it.
Rajaram has to pay Rs.10,000 to Dhanraj. The amount is pending for a
long period. To encourage Rajaram to make the full payment in one go,
Dhanraj offers her Rs.500 as cash discount and Rajaram makes the
payment by cheque to take advantage of the discount. In the books of
Rajaram, the journal entry will be shown as under:
Dhanraj Account …………….. Dr. 10,000
To Discount received account 500
To Bank 9,500
(Being cheque issued to Dhanraj , after deducting cash discount)
33

Basis of Trade Discount Cash Discount

Distinction
Reduction It is reduction from the list It is a reduction from
price of goods and services the invoice price
Main Objective Its main objective is to Its main objective is to
promote sale encourage prompt
payment.
Time Limit It is granted on the date of It is granted on
purchase immediate payment or
within a stipulated
period.
Ledger Posting Trade account finds no place Cash discount is shown
in the ledger accounts. So no in the ledger and its
posting in ledger arises posting in the ledger
accounts also essential.
34

Practice question-
Sold goods to Sunil of the list price of Rs 1,25,000 less: 20% trade discount
and received a current dated cheque under a cash discount of 2%.

XYZ Ltd. Sold goods of MRP of Rs 20000 to Nitish at 20% trade

discount. The terms of credit sales were ‘2/14 net 30’. Nitish makes the
payment within 10 days. Show the journal entry in books of XYZ Ltd.
 Goods given away
35
Charity/Donation/Free sample a/c Dr.
To Purchase a/c

Example- Business gave away goods costing Rs 5000 as free

sample.

Free Sample a/c Dr. 5000

To Purchase a/c 5000

Loss by Fire
Loss by Fire Account Dr.
To Purchases Account
 Loss on Account of Bad Debts
36
Example- Sold goods of Rs 25000 on credit to
Mahesh. Subsequently, Mahesh became
insolvent and only Rs 18000 could be recovered
from him.

Bad Debts Recovered

Example-Received Rs 42500 from Kumar whose
account was written off as bad previously

Dishonour of Cheque deposited in bank

Non-clearance of cheque due to certain reason.

Also called bouncing of cheque
37 Classification of Goods Accounts

Purchase account
Sales account
Purchases Returns account
Sales Returns account
Different types of journals
38
Some widely used journals in a trading business are:
Purchase Day Book- only credit purchases are recorded in this
journal
Sales Day Book- only credit sales are recorded in this journal
Purchases Return Book- Purchase returns are recorded in this
journal (also called Returns outward)
Sales Return Book- Sales returns are recorded in this journal
(also called Returns inward)
Cash Book- All cash, bank and cash discount transactions are
recorded in this journal.
Journal Proper- All other transactions are recorded in this
journal.
 [Link] discount allowed by the supplier is to be debited to
(a) Purchase account
39
(b) No entry for trade discount, net purchase is debited
(c) Supplier account
(d) Discount is added to purchase amount.

2. Cash discount received from a customer should be credited to

(a) Discount account
(b) Customer account
(c) Cash account
(d) No entry.

3. Which of the following accounts will be credited if Machinery is

purchased for Cash Rs. 5, 00,000?
a) Capital A/c
b) Machinery A/c
b) Fixed Assets A/c
d) Cash A/c
 4. In which of the following order, data is entered into the journal?
a) Numeric order
40
b) chronological order
b) Bullets order
d) alphabetical order

5. Which of the following highlights the correct order of the stages

in the accounting cycle?
(A) Journalizing, final accounts, posting to the ledger and trial
balance
(B) Journalizing, posting to the ledger, trial balance and final
accounts
(C)Posting to the ledger, trial balance, final accounts and
journalizing
(D)Posting to the ledger, journalizing, final accounts and trial
balance
 References:
41
1. Maheshwari, S.N., Maheshwari, S.K., Financial Accounting, 10th
ed, Vikas Publishing House.

2. Tulsian, P.C. , Financial Accounting, S. Chand &Co Ltd , India.

3. Gopal,C,R., Accounting for Managers,1st ed, New Age International

Publishers

4. Rajasekaran,V.,Lalitha,R., Financial Accounting, Pearson

Publication, India