HOW TO RECORD TRANSACTIONS IN JOURNALS?

WHAT IS JOURNAL?

“JOURNAL” Means a daybook or daily record. It is the book wherein all the transaction first recorded in chronological order. (Date wise). It is also known as “the book of prime entry”. The process of recording transactions in the journal is termed as “Journalizing”.

Steps for journalizing

For journalizing a transaction, you will follow these basic steps:

1. First, ascertain the two accounts involved in the transaction.

2. Next, see the nature of the account involved.

3. Then apply the rules for debit and credit. One account is debited and other is credited. Both accounts cannot be debited or credited.

Let us just recall the golden rules for accounting, which we have learned in Introduction to Accounting lesson.

Accounts are classified into three. They are:

1. Personal account – Debit the Receiver

Credit the Giver

2. Real account – Debit what comes in

      Credit what goes out

3. Nominal account – Debit All expenses and losses

Credit All incomes and gains

Points you must remember while passing journal entries:

1. In accounting businessman and business is a separate entity. All transactions must be recorded. If the businessman brings cash, stock etc into the business, then his capital account should be credited. If the businessman withdraws cash or stock from the business for personal use then his drawing account should be debited.

2. Purchase and sale of goods are considered as dual in nature i.e. nominal account as well as a real account. You can take it as nominal account as the purchase of goods are expenses to the firm and sales of goods bring income to the firm. And you can also consider them as Real account as purchase of goods means goods are coming in the business and sales of goods mean goods are going out of the business.

3. Whenever purchase or sale is made on cash then the supplier or purchaser name should be ignored. Whenever purchase or sale is made on credit then the supplier or purchaser account should be credited or debited as the case may be.

4. If it is not clearly stated that it is cash or credit transaction then it should be considered as a cash transaction, if name of supplier or purchaser is not given or else it is a credit transaction.

5. Whenever Asset (like furniture, machinery etc) is purchased or sold then that Asset account should be debited or credited as the case may be, instead of purchase or sales account.

6. Whenever cash is (paid to a person for an expenses/received from the party) then that person or party account should be ignored. Because the amount is already paid or received as the case may be.

7. Whenever amount paid / amount received is made through cheque then bank account is to be credited/debited as the case may be. 

Now let us learn how to record transactions in journals, before beginning I would like to tell you that if you want to solve any problem, first you need to understand the problem, and then only you can solve it. So here as well I will first explain to you about the transaction need to be entered then I will show you how you will record the journal entry! Alright, let’s do it.

1. When businessman commence/start business with cash:

Here you have to understand that business and businessman is separate entity so we cannot treat them as same, the two accounts involved in this transaction are cash account of business and capital account for businessmen. Cash is real account as we can touch it and capital is a personal account of businessmen. When business is started with cash, cash is coming into business so cash account is debited. As the businessman is bringing cash into the business, he is the giver of that cash so his capital account is credited.

Hence the journal entry for this transaction is as follows:

Cash A/c--------------------------Dr

    To Capital A/c

(Being Business started with cash)

2. For purchase (cash):

The two accounts involved in this transaction are purchase and cash. Purchase account comes under nominal account and cash account comes under real account. Purchases of goods are those commodities which are required to run the business, so it is an expense to the firm and debited to purchase account. And in return, the equal amount for goods is paid in cash that means cash is going out of the business so cash account is to be credited.

Hence the journal entry for this transaction is as follows:

Purchase  A/c-------------------Dr

      To Cash A/c

(Being  goods purchased  on cash)

Note: if an asset is a purchase then that particular asset account is to be debited instead of purchase account.

3. For purchase (credit):

The two accounts involved in this transaction are purchase and creditor’s account. Purchase account is nominal account, and creditor means a person who sells on credit so it is a personal account. Goods are purchased on credit means taking goods but not paying cash yet, well goods is purchase so purchase account is debited but you are not paying to the seller/creditor yet but you are liable to pay afterwards so creditors separate personal account is opened, as he is giving the goods his account should be credited.

Hence the journal entry for this transaction is as follows:

Purchase  A/c-------------------Dr

    To Supplier A/c (creditor)

(Being good purchase on credit)

Note: here as well, if an asset is purchased on credit then that particular asset account is to be debited instead of purchase account.

4. For purchase return (credit):

Generally, return facility is available for credit transactions, so when purchase return is given that means credit purchase is being returned not cash purchase. The two accounts involved in this transaction are purchase return and Creditor’s account. Purchase return account is a nominal account, and creditor means a person who sells on credit so it is a personal account. When Goods are purchased on credit and if there are defective goods then they are returned to seller/creditor. Technically purchase account is to be deducted/credited but the firm open a separate purchase return account and is credited, so that the firm can have the track for purchase returns separately. Seller is receiving back the goods so his account should be debited.

Hence the journal entry for this transaction is as follows:

Supplier A/c--------------------Dr

       To purchase return A/c

(being purchase return to supplier)

5. For sales (cash):

The two accounts involved in this transaction are sales and cash. Both accounts are nominal account, as it is an income to the firm because selling business product or goods brings income to the firm, so sales account is credited.  Business will get cash as it is cash transaction so cash account is to be debited.

Hence the journal entry for this transaction is as follows:

Cash A/c ---------------------------Dr

      To sales A/c

(Being goods sold for cash) 

Note: if an asset is sold then that particular asset account is to be credited instead of sales account.

6. For sales (credit):

The two accounts involved in this transaction are Sale and Debtor’s account. Sales account is Nominal account, and debtor means a person who purchases on credit so it is a personal account. Goods are sold on credit means giving goods but not receiving cash yet, well goods are sold that means it is the direct income to the firm so sales account is to be credited but you are not get paid by the purchaser/debtors yet but liable to get paid afterwards. So debtor’s separate personal account is opened, as he is receiving the goods his account should be debited.

Hence the journal entry for this transaction is as follows:

Purchaser A/c (debtor)-------Dr

        To Sales A/c

(Being goods purchased on credit) 

Note: here as well, if an asset is sold on credit then that particular asset account is to be credited instead of sales account.

7. For sales return (credit):

Generally, return facility is available for credit transactions, so when sales return is given that means credit sales is being returned by the customer, not cash sales. The two accounts involved in this transaction are sales return and Debtor’s account. Sales return account is a nominal account, and creditor means a person who purchases on credit so it is a personal account. When Goods are sold on credit and if there are defective goods then they are returned by customer/purchaser, technically sales account is to be added/debited but the firm open separate sales return account and it is debited, so that the firm can have the track for sales returns separately. Purchaser/customer is giving back the goods so his account should be credited.

Hence the journal entry for this transaction is as follows:

Sales return A/c ---------------------Dr

   To purchase A/c

(Being sales return by purchaser/customer)

8. For expenses/losses  payment (cash):

The two accounts involved in this transaction are expenses and cash. Well, expenses and losses come under nominal account and cash is a real account. Expenses are required to run the business activities; it can be direct or indirect such as wages, salaries, rent etc. As per the rules of nominal account all expenses paid by the business is to be debited.  Because it is paid by cash, that means cash is going out of the business so cash account is to be credited.

Hence the journal entry for this transaction is as follows:

Expenses A/c -----------------------Dr

      To cash A/c

(Being expenses paid in cash )

Note: for expenses and incomes we should ignore the name of a person if it is stated in the transaction.

9. For expenses/losses payment (cheque):

The two accounts involved in this transaction are expenses and bank. Well, expenses and losses come under nominal account and the bank comes under personal account. Expenses are required to run the business activities; it can be direct or indirect such as wages, salaries, rent etc. As per the rules of nominal account, all expenses paid by the business is to be debited.  Because it is paid by cheque so there is an involvement of a bank and the cheque can be encashed in banks only, so now the bank is the giver of the payment that’s why bank account is credited. 

Hence the journal entry for this transaction is as follows:

Expenses A/c ------------------------Dr

      To Bank A/c

(Being expenses paid through cheque)

10. For incomes/gains received (cash):

The two accounts involved in this transaction are incomes and cash. Well, incomes and gains come under nominal account and cash is a real account. Incomes and gains are the profits or benefits received by the business. It can also be direct and indirect such as sales, interest received, discount received etc. A per the rules of nominal account all incomes and gains received by business must be credited. Because it is received in cash, cash is coming in so cash account should be debited.

Hence the journal entry for this transaction is as follows:

Cash A/c-------------------------------Dr

      To income A/c

(Being income received)

Note: for expenses and incomes we should ignore the name of a person if it is stated in the transaction.

11. For incomes/gains received (cheque):

The two accounts involved in this transaction are incomes and bank. Well, incomes and gains come under nominal account and cash is a real account. Incomes and gains are the profits or benefits received by the business. It can also be direct and indirect such as sales, interest received, discount received etc. A per the rules of nominal account all incomes and gains received by business must be credited. Because it is received through cheque, so there is an involvement of a bank and the cheque can be encashed in banks only, so now the bank is receiving the benefit that’s why bank account should be debited.

Hence the journal entry for this transaction is as follows:

Bank A/c------------------------------Dr

     To income A/c

(Being income received through cheque)

12. For cash deposit into bank:

The two accounts involved in this transaction are cash and bank. Cash account is a real account and the bank is a personal account. Well for the smooth conduct of business businessman open current account in the bank for business purpose. So when cash is deposited into the bank, cash is going out of the business so cash account is credited and as bank is receiving that cash so bank account is to be debited.

Hence the journal entry for this transaction is as follows:

Bank A/c -------------------------Dr

    To Cash A/c

(Being cash deposited into bank)

13. For cash withdrawals from bank for office use:

The two accounts involved in this transaction are cash and bank. Cash account is a real account and the bank is a personal account. Whenever cash is withdrawn from the bank, cash is coming in business, so cash account is debited and the bank is giving that cash, so bank account is credited.

Hence the journal entry for this transaction is as follows:

Cash A/c -------------------------------Dr

   To Bank A/c

(Being cash withdrawn from bank)

14. For  cash withdrawn for personal use:

The two accounts involved in this transaction are cash and drawing. Cash is a real account and drawing is a personal account of a businessman. You might remember that business and businessman are a separate entity. When a businessman brings something into business then his capital account is credited. Likewise when businessman withdraw anything from the business or receive some benefit from the business for his personal use, then a separate personal account known as drawing account is opened. Here you can see cash is withdrawn from the business that means cash is going out of business so cash account is to be credited and as it is received by the businessman then his drawing account is to be debited.

Hence the journal entry for this transaction is as follows:

Drawing A/c --------------------------Dr

    To cash A/c

(Being cash withdrawn for personal use)

15. For goods withdrawn for personal use:

The two accounts involved in this transaction are drawing and purchase. Purchase is a real account and drawing is a personal account of a businessman. If goods are withdrawn from the business so goods are going out and its purchase account is to be credited and as it is received by the businessman then his drawing account is to be debited.

Hence the journal entry for this transaction is as follows:

Drawing A/c -------------------------Dr

     To Purchase A/c

(Being goods withdrawn for personal use)

16. For  personal expenses paid:

The two accounts involved in this transaction are cash and drawing. Cash is a real account and drawing is a personal account of a businessman. Sometimes the businessman will pay for his personal expenses. For Ex: income tax paid from the business so cash is going out so cash account is credited. As it is the personal expenses of businessman his drawing account should be debited as businessmen receive the benefit.

Hence the journal entry for this transaction is as follows:

Drawing A/c--------------------------Dr

   To Cash A/c

(Being personal expenses of businessmen debited to drawing A/c)

17. For personal income received:

The two accounts involved in this transaction are cash and drawing. Cash is a real account and drawing is a personal account of a businessman. Sometimes businessman will gain income For Ex: income tax return so cash is coming in so cash account is debited. As it is the personal income of businessman his drawing account should be credited as he is giving his personal benefit to business.

Hence the journal entry for this transaction is as follows:

Cash A/c ----------------------------Dr

    To Drawings A/c

(Being personal income of businessmen credited to drawings A/c)

Now let me give you one ☝️(DIY) for your practice ✍let’s see how you will do! Well, practice makes us perfect, hmmm no discrimination right! Well, I have shared my knowledge with you let’s see did you gained that knowledge?😄

 DO IT YOURSELF (DIY):

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