Accounts Journal

8/3/2019 Accounts Journal

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Lesson-3

Journalizing Transactions-I

Learning Objectives

To understand the recording of transactions

To know what are the advantages of journal

To learn about the classification of accounts and its rules

Introduction

Accounting is the art of recording, classifying and summarizing the financial transactions

and interpreting the results thereof. Thus, the accounting cycle involves the following

four major phases:

1. Recording of transactions-- This is done in a book called journal.

2. Classifying the transactions-- This is done in a book called ledger.

3. Summarizing the transactions-- This includes preparation of trial balance, profit

and loss account and balance sheet of the business.

4. Interpreting the results-- This involves computation of various accounting ratios

etc. to know about the liquidity, solvency and profitability of the business.

Journal

A journal records all daily transactions of a business in the order of their occurrence. A journal may, therefore, be defined as a book containing a chronological record of

transactions. It is a book in which transactions are recorded first of all under the double

entry system. Thus, journal is a book of the original records. A journal does not replace

but precedes the ledger. The process of recording transactions on the basis of rules of

double entry system in a journal is termed as journalizing. The record of a business

transaction in journal is called journal entry.

The performa of a journal is as follows:

Date Particulars L.F. Debit

(Rs.)

Credit

(Rs.)(1) (2) (3) (4) (5)

Advantages of Journal

The recording of business transactions in journal book on the basis of double entry

system has following advantages:


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1. Complete Information about the Business

The journal gives complete information about business transactions in a chronological

order. Accounts to be debited and credited are recorded at once in one place.

2. Explanation of the Transaction

An entry in the journal book includes a brief explanation of the transaction called

narration.

3. Minimum Errors

Double entry system used for recording is clearly visible in journal as both debit and

credit aspects are recorded at one place. It also makes posting into ledger accounts easier.

This ultimately reduces possibility of errors.

Rules of Debit and Credit

All transactions in the journal are recorded on the basis of rules of debit and credit. For

this purpose, transactions have been classified into three categories:

i. Transactions relating to persons

ii. Transactions relating to properties and assets

iii. Transactions relating to incomes and expenses

On the basis of above rules, it is necessary to keep the accounts in respect of the

following:

i. Each person with whom it deals (customer, suppliers)

ii. Each property or asset which it owns (building, machinery etc.)

iii. Each item of income and expense (commission, rent, salary etc.)

Classification of Accounts

Accounts can be classified into personal, real and nominal accounts.

Personal Accounts

Personal accounts include the accounts of persons with whom the business deals. These

accounts can be further classified into three categories:

a. Natural Personal Account

Natural personal account means persons who are creations of God. For example, Vijays

a/c, Shubhams a/c etc.

b. Artificial Person Account


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Artificial person account includes accounts of corporate bodies or institutions which are

recognized as persons in business dealings. For example, government, club, limited

company, cooperative society etc.

c. Representative Personal Account

Representative personal account is the account which represents a person or a group of

persons. For example, when the rent is due to landlord, an outstanding rent account

represents the account of a landlord to whom the rent is payable.

Real Accounts

Real accounts may be of the following types:

a. Tangible Real Account

Tangible real accounts are those which relate to such things that can be touched, felt andmeasured. For example, cash a/c, building a/c, furniture a/c etc.

b. Intangible Real Account

These accounts represent such things which cannot be touched but, however, can be

measured in terms of money. For example, patent a/c, goodwill a/c etc.

Nominal Accounts

Nominal accounts are opened in the books of accounts to simply explain the nature of the

transactions. They do not really exist. For example, salary paid to employee, rent paid to

landlord etc. Nominal accounts mainly include accounts of expense, losses, income and

gains.

Rules of Accounting

Type of Account Rules for Accounting

Personal Account Debit the receiver, credit the giver

Real Account Debit what comes in, credit what goes out

Nominal Account Debit all expenses (losses), credit all incomes (gains)

Examples of Journal Entries

1. A commences business with capital of Rs. 1,00,000 on 1.1.2001. In this case, two

accounts are involved, i.e. As a/c who is the proprietor and cash a/c. As a/c is of

personal nature and cash a/c is a tangible asset. Applying the above rules, A is the

giver of cash. Therefore, As capital a/c should be credited and cash is coming in

the business. Cash being the real account, the account will be debited. The journal

entry should be passed as follows:


(Rs.)

Credit

(Rs.)1.1.2001 Cash a/c Dr. 1,00,000


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To Capital a/c

(Being commencement of

business)

1,00,000

The words in the bracket are called narration which describe the nature of

transaction.

2. A pays rent of Rs. 5,000 of premises to landlord L on 01.01.2001.


(Rs.)

Credit

(Rs.)

1.1.2001 Real a/c Dr.

To Cash a/c

(Being rent paid for January 2001)

5,000

5,000

In this case, real account is nominal account and being an expense for the business

it is debited as per the above-mentioned rule. Since the rent is paid by way of cash,

the cash balance will go down and hence the cash account is credited.

3. Goods purchased worth Rs. 20,000 on credit from S on 01.01.2001.


(Rs.)

Credit

(Rs.)

1.1.2001 Goods A/c Dr.

To S A/c

(Being purchase of goods on

credit)

20,000

20,000

Goods account is real account, being an asset. Since goods are coming in, goods

account is debited. Account of S, who is the supplier and giver of goods, is

credited, being personal account.

Example

Show the classification of the following accounts according to the traditional approach:

a. Building account

b. Purchases accountc. Sales account

d. Bank deposits account

e. Rent account

f. Rent outstanding account

g. Cash account

h. Adjusted purchases account

i. Closing stock account

j. Investments account

k. Debtors account

l. Sales tax payable account

m. Discount allowed accountn. Bad debts account


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o. Capital account

p. Drawings account

q. Provision for depreciation account

r. Interest receivable account

s. Rent received in advance account

t. Prepaid salary accountu. Provision for bad and doubtful debts account

v. Bad debts recovered account

w. Depreciation account.

x. Personal income tax account

y. Stock reserve account

z. Provision for discount on creditors account

Also classify the above-mentioned accounts according to accounting equation approach.

Solution

Nature of Account

S.

No.

Title of Account Traditional Approach Accounting Equation Approach

(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)

(k)

(l)

(m)

(n)

(o)

(p)

(q)

(r)

(s)

(t)

(u)

(v)

(w)

(x)

Building

Purchases

Sales

Bank Deposits

Rent

Rent Outstanding

Cash

Adjusted Purchases

Closing Stock

Investments

Debtors

Sales Tax Payable

Discount Allowed

Bad Debts

Capital

Drawings

Provision forDepreciation

Interest Receivable

Rent Received in

Advance

Prepaid Salary

Provision for Bad

and Doubtful debts

Bad Debts

Recovered

Depreciation

Personal IncomeTax

Real

Real

Nominal (Revenue)

Personal

Nominal (Expense)

Personal

Real

Nominal (Expense)

Real

Real

Personal

Personal

Nominal (Expense)

Nominal (Expense)

Personal

Personal

Valuation (Real)

Personal

Personal

Personal

Valuation (Personal)

Nominal (Gain)

Nominal (Expense)

Personal (Drawing)

Asset

Asset

Temporary Capital (Revenue)

Asset

Temporary Capital (Expense)

Liability

Asset


Asset

Asset

Asset

Liability



Capital

Temporary Capital (Drawings)

Asset

Asset

Liability

Valuation (Asset)

Valuation (Asset)

Temporary Capital (Gain)


Temporary Capital (Drawings)


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(y)

(z)

Stock Reserve

Provision for

Discount on

Creditors

Valuation (Real)

Valuation (Personal)

Valuation (Asset)

Valuation (Liability)

Summary

1. Primary book is the book of accounts where transactions and events are recorded

in the first instance.

2. Primary books are called journals.

3. There are eight types of primary books.

4. It is necessary to follow a ground rule to record entries in journals.

5. A cash book is journal as well as ledger.

6. A journal proper is a book of residual entries.

Questions

1. Give an example of business transaction affecting only the following:

Assets

Liabilities

Capital

2. Differentiate between the following:

Temporary capital accounts and nominal accounts Trade discount and cash discount

3. Do you agree with the following statements:

a. Sales day book is a part of ledger.

b. Opening stock account is a nominal account.

c. Purchase day book records all credit purchases of goods.

d. Drawings account is a temporary capital account.

e. A transaction can increase an asset and decrease a liability.

f. Discount account records trade discount.

g. Patent rights made for prompt payment is called trade discount.h. The allowance made for prompt payment is called trade discount.

i. Capital + Long Term Liabilities = Fixed Assets + Current Assets + Cash

Current Liabilities.

4. What are the rules of debit and credit for the following:

Assets

Liabilities

Capital

Revenue Expenses


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Valuation accounts

Documents

Accounts Journal