8 Journal And Other Subsidiary Books 24.10.08

What is a journal entry in Accounting? Journal entry is an entry to the journal. Journal is a record that keeps accounting transactions in chronological order, i.e. as they occur. Ledger is a record that keeps accounting transactions by accounts. Account is a unit to record and summarize accounting transactions. All accounting transactions are recorded through journal entries that show account names, amounts, and whether those accounts are recorded in debit or credit side of accounts. Example: Company A sold its products at Rs. 120 and received the full amount in cash. Step s

Self-Questions

Answers

1

What did Company A receive?

Cash.

2

If Company A received cash, how Receiving cash would this affect the cash balance? increases the cash balance of the company.

3

Which side of cash account Debit side represents the increase in cash? side).

4

What is the account name to record Sales. the sales of products.

5

Which side of sales account Credit side (Right represents the increase in sales? side). Does the sum of debit side amounts Yes.

(Left

equal to the sum of credit side Rs.120 = Rs.120 amounts? In other words, does this journal entry balance?

6

Journal entry: Debit Cash A/c.

Credit

120

To Sales A/c.

120

Example 2: Company A purchased supplies and paid Rs. 50 in cash. Step s

Self-Questions

Answers

1

What did Company A receive?

Supplies.

2

If Company A received supplies, how It increases would this affect the supplies balance? supplies balance.

3

Which side of supplies account Debit side (Left represents the increase in cash? side).

4

What did Company A pay?

5

Which side of cash account represents Credit side the decrease in cash? (Right side).

6

Does the sum of debit side amounts Yes. equal to the sum of credit side Rs.50 = Rs.50

Cash.

amounts? In other words, does this journal entry balance? Journal Entry: Debit Supplies A/c

Credit

50

To Cash a/c

50

By analysing a transaction (i.e. its proof), we identify the two elements affected by the transaction and then the nature of the elements. We then decide which element is to be debited and which is to be credited by applying the rules of debit and credit. In actual practice, accounting starts with writing the journal. This act of writing the Journal is called RECORDING or JOURNALISING. • Journalising ≡ Recording Journalising (or Recording) is writing down the information relating to an accounting transaction that is relevant in accounting into the accounting records (generally in a specific format) based on the principles of debit and credit. • Journal A Journal is a book in which an accounting transaction is written in accounting terms. This is the first (accounting) record for a transaction.

» Meaning 1. A daily written record of (usually personal) experiences and observations 2. A book in which transactions are recorded as they occur • Journal Entry A recording in the Journal relevant to an accounting transaction is what is called a Journal Entry. A single journal entry in most cases pertains to a single transaction, though it may not be so always. It contains a set of information relating to the transaction presented in a specific format

Journal » A book of Prime Entry Since an accounting transaction relating to business is entered in the accounting records (in accounting terms) for the first time in a journal, it is also called a Book of Prime Entry. » Prime (Meaning) 1. First in rank or degree 2. Important • Every Accounting Transaction has to be Journalised Every accounting transaction is brought into the accounting records through the Journal. For every accounting transaction there would be a relevant Journal entry • No Journal » No Accounting

The importance of the Journal can be assessed from the fact that "There would be no accounting without a journal". That is the reason it called a book of prime entry meaning both the "First Book" as well as an "Important Book".

Format of the Journal Conventionally, a Journal is prepared/written in a specific format as below.

In modern accounting using machines (computers), the journal entry is presented in various formats. Whatever may be format used, the information shown above in the conventional format is present in a journal.

Writing & Reading a Journal Entry To understand how a journal entry is constructed, let us consider a transaction. » Bought Furniture for cash Rs. 20,000 The analysis for the transaction forms the basis for recording the journal entry. To record the journal entry, we need to know (a) the two elements effected, (b) which account is to be debited and which account is to be credited and (c) the amount of (or value involved in) the transaction.

Furniture a/c ↓ Tangible aspect/Asset ↓ Real a/c ↓ Coming in ↓ Debit [Debit what comes in]

Cash a/c ↓ Tangible aspect/Asset ↓ Real a/c ↓ Going out ↓ Credit [Credit what goes out]

• Reading the Journal entry The detail relating to each transaction is called a Journal entry. • Normal Order

• Reverse Order

Furniture a/c "Debtor (pronounced detor) To" Cash a/c. [Begin reading with the debited account]

Cash a/c "Credited By" Furniture a/c. [Begin reading with the credited account]

In the initial stages of learning accounting, please concentrate on reading the entry whenever you write one. It would make the process of preparation of the ledger (the next step) easy. • Writing/Recording the Journal entry Once we decide which account is to be debited and which to be credited, writing the journal entry amounts to placing each element in its place within the format and recording the relevant amount. Journal in the books of M/s __ for the period from ____ to _____ Date

V/R Particulars No.

L/F Debit Amount

Credit Amount

(in Rs) June 15th

–

Furniture a/c To Cash a/c [ Being the amount paid towards Furniture purchased from M/s ____ vide bill no:___ dated:__ ]

Dr

– –

(in Rs)

12,000 12,000

» Recording The process of writing a transaction in the journal is called recording. "Recording" in accounting is a term relevant to the Journal.

Information in the Journal

• Heading The heading gives the following information: 

The organisation whose accounting transactions are being recorded

 The period relating to which the journal entries are recorded. • Date Date of recording the transaction. To ensure that the accounting system is functional and useful, transactions are recorded as and when they happen (at least on the date on which they occur). Therefore assume that the date here is the date of the transaction and not the date of recording the transaction. • V/R No » Voucher/Receipt Number

 A Voucher is a document which is made when a payment is made  A Receipt is a document which is made when an amount is received. Vouchers and receipts form proof of transactions. [There may be other forms of documents like sales invoices, debit notes, credit notes etc., which also form proof of transactions. Please ignore them for now.] They are generally numbered and have identifications like voucher number, receipt number etc., on them. These numbers are entered in this column to have a cross reference to the proof of the transaction based on which that journal entry is being recorded. Note that we do not find statements like "Paid cash to Mr. Shyam" etc. in the accounting records. The documents which form proofs of transactions are the ones which enable to interpret the transactions in such a way. • ParticularsThis is the column where the actual account heads (the one to be credited and the one to be debited) are written. » Debit Account : The account to be debited is shown on the first line and is aligned to the left of the column. The element name i.e Account Head starts with a Capital Letter and is succeeded by the letters "a/c". The word "Dr" (read as detor {debtor - b silent}) is written on the same line, aligned to the right. » Credit Account : The account to be credited is shown on the second line preceded by the word "To" and is succeeded by the letters "a/c". The line starting with "To" is indented (i.e. the first letter of the

name of the Account that is Debited and the letter "T" do not fall in the same vertical line). "T" always lies to the right of the first letter of the account head that is debited. We do not find the use of the letters "Cr" on this line or anywhere in the entry. • Narration [ Being the amount ....] The sentence that appears below the lines containing the Account Heads that are Debited and Credited is called the narration for the journal entry. The narration is a brief explanation for the entry. It includes certain details in relation to the transaction. The purpose of the narration is to enable anyone who reads it to get a preliminary idea of why the entry is being recorded. If the information in the narration does not provide the required detail, one can always refer the Voucher/Receipt (which is the actual proof for the transaction journalised through that entry) using the relevant voucher/receipt number recorded relating to that entry. • L/F » Ledger Folio The Ledger is a record that follows the journal. Each element (Account Head) has its own distinct page (folio) in the ledger. "Ledger Folio" is the page number in the ledger record, where the information shown in the journal entry has been carried to. This information is distinct for each account head. The Ledger Folio information will enable tracking of flow of information from the journal to the ledger. • Debit amount This is the amount relating to the element (account head) that is being debited. This generally is the transaction value. The amount is written in the same line as Debit entry i.e. in vertical alignment

with it. The currency related to the amounts is written in the column header itself. • Credit amount This is the amount relating to the element (account head) that is being credited. This generally is the transaction value. The amount is written in the same line as Credit entry i.e. in vertical alignment with it. The currency related to the amounts is written in the column header itself.

Other Subsidiary Books: Subsidiary books or sub-journals or special journals are the various names used to describe practical system of book keeping. As the size of business grew the volume of transactions of all the business houses rose alarmingly and it was realized that journal was inadequate as the only book of original entry. It was found to be convenient and advantageous to have different books of original entries for different activities of the business like purchases, sales, purchases returns and sales returns etc. Special journals These are the journals in which special classes of transactions are recorded such as ; Purchases book records purchases of goods on credit; Sales book records sales of godson credit; Purchases returns book records the return of goods purchased (returns outwards) ;Sales returns book records the return of goods sold (return inwards) ; Bills receivable book records the bills accepted by the debtors and Bills payable book records the bills drawn by the creditors. General Journal Records those transactions which do not fall within the scope of special journals. Such transactions usually relate to

(1) (2) (3) (4) (5) (6) (7)

Opening entries Closing entries Transfer entries Rectification entries Adjusting entries Credit purchase of assets Credit sale of discarded or obsolete fixed assets etc.

Difference between General Journal and Special Journal General Journal 1. 2. 3. 4.

Transactions for which no special journal exists are recorded. Each transaction is posted to ledger separately. Ruling of journal is identical. Essential part of accounting process.

Special Journal 1. Specific types of transactions are recorded in each special journal. 2. Only the periodical totals are posted in group a. counts like purchases or sales account. 3. Ruling is modified as the requirements of the business e.g., additional columns for excise duty or sales tax may be provided. 4. Optional as per the desire of the business. Purchases Book Purchases Book is also known as 'Invoice Journal' or 'Bought Journal' or Purchases Journal, issued for recording credit purchases of goods meant for resale. Cash purchases will not be entered in Purchases Book (to be entered in cash book) and credit purchases of goods not meant for resale viz., assets shall be entered in journal proper and not in the purchases book. Form of the Purchases Book Usual Purchase book should have columns for date, invoice number, particulars, ledger folio, details and amount. Invoice

When we purchase goods on credit we receive a statement from the supplier giving the particulars of the goods supplied by him. This statement is called an invoice. The invoice states the quantity, price and value of goods supplied. It also states the discounts allowable (trade and cash) and the conditions under which payment is expected. Trade Discount It is an allowance made by the supplier to the retailers off the catalogue or invoice or list price. (The object of allowing 'trade discount' is to enable the retailer to sell the goods to the consumer at list price and still leaving margin for meeting business expenses and his profit.) Trade discount is offered without reference to the time factor within which supplier expects to receive the payment. Entries in the books of both supplier as well as retailer are made on the basis of net amount i.e. invoice price less trade discount. It may be distinguished from cash discount as follows: Trade discount 1. It is a concession "off the catalogue price" and allowed on purchases. 2. It is not recorded in ledger accounts. 3. It is deducted from the invoice. Cash discount 1. It is a concession allowed on payment being made "within certain period" 2. Ledger account is maintained for discount allowed and availed. 3. It is not deducted from the invoice. Posting The net amount of invoices will be posted to the ledger as follows: Credit the personal accounts of the suppliers with the individual amount, and Debit the purchases account with the periodical total.

Sales Book

In this book are recorded all goods sold on credit. The ruling is similar to that of purchases book. If there are cash sales they are recorded in cash book and sale of assets (distinguish between goods and assets) are recorded in the journal proper. The entries in the sales book are made from the copies of the invoices which have been sent to the customers along with the .goods. Such copies of the invoices may be termed as 'Outward invoice' Each such outward invoice should be numbered consecutively and the reference be given in the sales book along with the entry. .Posting. The net amounts of the invoices are posted to the ledger as follows: Debit the personal accounts of the customers with the value of sales to them. Credit Sales account with the periodical total. Purchases Returns Book This book is also known as "Returns Outwards Book". It records all returns of goods bought. Goods purchased may have to be returned to the supplier for various reasons such as not up to sample or not ordered or damaged during the transit etc. The ruling of the return books is identical with the ruling of purchases book. Debit Note. While returning the goods to the suppliers a letter is sent to them for their information and stating therein that we have debited your account by this amount on account of goods being returned herewith for the reasons stated. Generally such "information letters' are printed with counterfoil. Debit notes are sent to the parties concerned the counterfoils providing the base for writing up the purchases returns book. Credit Note When a debit note is received along with the goods returned from the customer, itis a claim on us. If claim is accepted then Credit Note, usually printed in red ink, with full details is sent to the customer signifying our acceptance of the goods and customer's account being given the required credit. Counterfoils provide the base for writing up the Sales Returns Book. Sales Returns Book

This book is also known as "Returns inwards book" . It records all returns of goods sold. Goods sold may be returned. by our customers for various reasons such as goods sent being of wrong description or inferior quality or damaged. Ruling is identical with the ruling of sales book. Credit Note: When a debit note is received along with the goods returned from the customer, it is a claim on us. If claim is accepted then Credit Note, usually printed in red ink, with full details is sent to the customer signifying our acceptance of the goods and customer's account being given the required credit. Counterfoils provide the base for writing up the Sales Returns Book. Bills Receivable Book All receipts of bills are entered in a book called bills receivable book. Whenever a bill of exchange is received its particulars are entered in the appropriate columns of the Bills Receivable Book. Posting from bills receivable book-The periodical total of the bills receivable book is posted to the debit of the bills receivable account in the ledger. Each entry in the book is posted to the credit of the individual account from whom the bill is received. Bills Payable Book The details of the bills accepted by a trader are recorded in the book known as Bills Payable Book. Posting of the bills payable book-The periodical total of the bills payable book is posted to the credit of the bills payable account in the ledger. Each entry in the book is posted to the debit of the individual account to whom the bill is granted.