An Overview of Journal Entry
Journal entries are records of business transactions of a firm. These transactions are recorded in a book called a journal. These entries are the very first step in the accounting cycle. Journal entries follow double-entry bookkeeping, i.e., every transaction is recorded in at least two accounts.
Journal entries help in recording all accounting transactions in chronological order. This helps to prevent any further errors in the process. These entries are also helpful in the preparation of other financial statements.
Features of Journal Entries
Chronological - The journal entries are to be recorded date-wise and in a proper manner to prevent any errors.
Compound Entry Possible - In journal entries, transactions involving more than two accounts or related ones can be combined to form a single entry.
Assistant to Ledger - Journal entries serve as a base for all other books of account. The ledger is prepared from the journal entries.
Brief Explanation - Every journal entry has a brief explanation called narration to clarify in a better way.
Journal Entries Rules
Personal Account - A personal account is that of a person, company or an organisation. In this case, debit the receiver and credit the giver.
Real Account - Real account involves tangible and intangible items such as cash, bank, plant and machinery etc. In this case, debit what comes in and credit what goes out.
Nominal Account - This account is related to expenses, incomes, gains and losses. In this case, debit all expenses and losses and credit all incomes and gains.
Journal Entry Format
Basic Journal Entries
Journal Entry Examples
Pass the journal entries:
ABC traders started a business with a capital of Rs. 1,00,000 on April 10, 2021.
April 19, 2021 - Purchased furniture worth Rs. 75,000.
April 24, 2021 - Purchased goods on credit from XYZ traders worth Rs. 1,00,000.
April 30, 2021 - Rent paid Rs. 50,000.
May 2, 2021 - Goods sold for Rs.20,000 at 10% discount.
May 15, 2021 - Cash deposited Rs. 50,000 into the bank.
Journal Entries Problems
Though journal entries are an essential part of accounting, it has certain limitations.
Expensive - The recording of journal entries requires experienced staff, making it difficult for some business entities.
Bulky Records - When hundreds of transactions occur in the business, it is difficult to record every transaction.
Lacks Prompt Information - It becomes difficult for an accountant to locate a particular transaction immediately.
Repetitive Transactions - Though with different dates, many transactions involve debit and credit of the same accounts, making it a tedious task.
Conclusion
A business records its day-to-day financial transactions in a journal. All the transactions are recorded properly. In case proper rules are not followed in the preparation of a journal, the financial statements prepared will not represent a true and fair view of the business's financial position. Journal entries are useful to management, business entities, government, and tax authorities for making various decisions by timely providing necessary information. These entries can also be handled through specialised software to produce error-free financial statements.
FAQs on Journal Entry
1. What are the types of journal entries?
The following are different types of journal entries:
Transaction Entry - The simple or basic journal entry made in the business to record cash or any transaction is known as transaction entry.
Adjusting Entry - A journal entry is done on an accrual accounting basis to accommodate the balance amount to maintain the organisation's financial position.
Closing Entry - It is the entry made at the end of the financial year to carry forward the retained earnings to the next accounting period.
2. Pass the journal entries for the following transactions.
Jan 1, 2021 - Commenced business with cash Rs.70000
Jan 2, 2021 - Purchased goods from Z and Co. on credit Rs. 60000
Jan 3, 2021 - Accepted bill was drawn by Z and Co. Rs. 55000
Jan 4, 2021 - Sold goods on credit to N and Co. Rs. 50000
Jan 6, 2021 - Paid by cash the bill drawn by Z and Co.
Jan 8, 2021 - Received cheque from N and Co. in full settlement and deposited the same in the bank Rs. 48000
Date | Particulars | L.F | Debit | Credit |
Jan 1, 2021 | Cash A/c Dr. To Capital A/c (Being a business started with cash) | 70,000 | 70,000 | |
Jan 2, 2021 | Purchases A/c Dr. To Z and Co. A/c (Being credit purchases made) | 60,000 | 60,000 | |
Jan 3, 2021 | Z and Co. A/c Dr. To Bills payable A/c (Being bill drawn accepted.) | 55,000 | 55,000 | |
Jan 4, 2021 | Sales A/c Dr. To N and Co. A/c (Being goods sold on credit) | 50,000 | 50,000 | |
Jan 6, 2021 | Bills payable A/c Dr. To Cash A/c (Being bills payable paid) | 55000 | 55,000 | |
Jan 8, 2021 | Bank A/c Dr. Discount A/c Dr. To N and Co. A/c (Being cheque received from N and Co. in full settlement) | 48000 2000 | 50000 |
3. What is the purpose of journal entries?
Journal entries are useful in the following ways:
Ascertain Financial Position - Journal entries help prepare a Balance sheet which determines the financial position of every business.
Reduce Fraudulent Activities - If properly maintained, journal entries help to eliminate fraud.
Determine Profitability - The management can analyse the various operations of the business by analysing books of accounts created in journal entries.
Tax Authorities - The government and tax authorities demand properly maintained accounts, which begins with the preparation of journal entries.