FINANCIAL MANAGEMENT & COST ACCOUNTING

Module 2. Accounting procedure

Lesson 6
INTRODUCTION TO JOURNAL

6.1 Some Basic Terminology used in Accounting

1. CREDITORS

The persons to whom the company owes money in return of the benefit (goods, services, cash, etc) provided by them.

2. DEBTORS

They are persons who owe money to the company, in return of, the benefits received by them. The benefits may be in the form of goods, services, cash etc which is provided to him by the company.

3. JOURNAL

Journal is the ‘’book of first entry’’. All the financial transaction of the firm are first recorded in a journal in a date wise (chronological) manner. It also records which account is to be debited and which is to be credited. It is records a brief statement regarding the particular transaction, this statement is called Narration.

4. CAPITAL

The amount with which the trader starts his business i.e. the amount which has been invested in the business, is called capital.

5. DRAWINGS

Drawings represent the withdrawals of money (cash) or money’s worth (goods) by the proprietor from the business from capital for his personal use.

6. COMPOUND JOURNAL ENTRY

If two or more transactions can be combined, and shown in a single journal entry (without changing the meaning of the transaction), it is called a combined journal entry.

One thing to be noted here is, whether it is a single journal entry or a compound journal entry, the total debit should be equal to total credit.

7. SALES

Selling of goods in the normal course of business is called sales. It may be cash sales or credit sales.

8. CURRENT LIABILITIES

Those liabilities which are to be paid within one year are called current liabilities. For example trade creditors, Bills payable etc.

9. CURRENT ASSETS

Those assets which are meant for conversion into cash as soon as possible eg. stock of goods, debtors etc.

10. GOODS

The commodities bought for the purpose of resale are termed as goods. A Cloth merchant deals in cloth, therefore for him cloth – represents goods. Similarly for rice – Merchant “Rice” is “goods”.

Examples of some common Business Transactions (along with their analysis)

Illustration 6.1

Consider the following transactions

Date	Particulars
March 1	Started business with Rs. 1000.
2	Received Rs. 50 From Mr. B.
3	Received Rs. 250 as commission.
4	Paid rent Rs. 50
5	Purchased a machine Rs. 500.
6	Purchased machine worth Rs. 1000 from AB and Co.
7	Proprietor with draws cash Rs. 80 for personal use.
8	Good returned to Mahesh Worth Rs. 200.
9	Goods worth Rs. 100 returned by Shyam.

Analysis

Date Transa- ction Number	Folio no.	Accounts Involved	Type of Account	Rule applied for Dr. and Cr.	Explanation	A/c to be Debited (Dr.)	A/c to be Credited (Cr.)
1		Cash a/c	Real Personal	(Dr) comes in credit the giver	Cash comes in the business and Proprietor is the giver of cash	Cash a/c Rs. 1000	Capital a/c Rs. 1000
		Capital a/c
2		Cash a/c	Real Personal	Comes in (Dr) Giver * (Cr)	Cash in received from Mr. B.	Cash a/c Rs. 50	Mr. B’s a/c Rs. 50
		Mr. B. a/c
3		Cash a/c	Real Nominal	Dr. What comes in Cr. All incomes		Cash a/c Rs. 250	Commission a/c Rs. 250
		Commission a/c

Note:

In cash transaction Always omit personal accounts.

In credit transaction Always omit cash account.

6.2. PREPARATION OF JOURNAL

A typical journal contains five columns -

1. Date : The date of transaction.

2. Particular : Details of transaction along with Narration.

3. L.F. : Ledger folio Number / page number all which the various

accounts appear in the ledger

4. Amount (Dr): Amount to be debited.

5. Amount (Cr): Amount to be Credited.

In addition to the above information, there is also a small narration of the transaction being recorded. Narration always appears in parentheses and always starts by the word “Being”. In journal entries a prefix “To” is applied before the account which is to be credited.

Journal Entries for the Transactions Mentioned in illustration 6.1

Date	Particular	L. F	Amount (Dr)	Amount (Cr)
2005
March 1	Cash a/c Dr To capital A/c (Being the business Started with cash)		1000	1000
2	Cash a/c Dr To Mr. B’s a/c (Being the money received from Mr. B.)		50	50
3	Cash a/c Dr. To commission a/c (Being the Commission – earned)		250	250
4	Rent a/c Dr. To cash A/c. (Being the rent paid)		50	50
5	Machine A/c Dr. To cash a/c (Being the purchase of machine)		500	500
6	Machine A/c Dr. To AB and Co. a/c (Being Machine purchased on credit from AB and Co.)		1000	1000
7	Drawing A/c Dr. To Cash a/c (Being the withdrawal of cash for personal use by proprietor)		80	80
8	Mahesh’s A/c Dr. To Purchase return a/c (Being the goods returned to Mahesh)		200	200
9	Goods A/c Dr. To Sales return a/c (Being the goods returned by Shyam)		100	100

6.3 Compound Journal Entry

Many times it is possible to pass entry a single journal entry for two or more transaction, (of same date) instead of repeating the accounts and passing separate entries. Generally opening and closing entries in a Journal are compound entries. The example of a compound entry is:

Transaction : “Started business with Rs. 10,000/-Cash and stock worth Rs. 10,000/-

The Journal Entry is:

Cash A/c Dr. 10,000/-

Stock A/c Dr. 10,000/-

To capital A/c 20,000/-

Another Example : “Purchased Machinery from K. K. and Co., worth Rs. 25,000 and paid Rs.

10,000 cash.”

The journal Entry is

Machinery a/c Dr. 25,000/-

To cash a/c 10,000/-

To K. K. and co. a/c 15,000/-