What Is Journal in Accounting?
Journal is the first accounting book in which financial transactions of a business are entered for the first time. Therefore, journal is popularly known as the book of original entry.
In other words, journal is a daily accounting record in which all financial transactions of a business are recorded in a chronological order. It records both debit and credit aspects of financial transactions and provides a brief description of each entry called narration.
Table of Contents
- 1 What Is Journal in Accounting?
- 2 What is Journalising?
- 3 Types of Journal Entry
- 4 Compound Journal Entry
- 5 Open Journal Entry
Organisations prepare journal because there are so many transactions which might result in the omission of any transactions due to negligence or some other reason. Journal helps in recognising the date of a transaction when required; thereby laying a foundation for preparing ledger. The transactions mentioned in the journal are transferred to ledger.
Following are the functions of journal:
- Journal helps in maintaining chronological records of monetary transactions
- Journal uses the double-entry system of book keeping
- Journal enables an organisation to maintain permanent record of each financial transaction at one place.
The format of journal is given as follows:
|Date||Particulars||Ledger Folio (L.F.)||Amount (Debit)||Amount (Credit)|
Let us understand the format in detail
- Date: The date on which the transaction was made
- Particulars: The financial transactions of a business affect two accounts, i.e., Debit (Dr.) account and Credit (Cr.) account. The name of the account to be debited is entered in the first line and Dr is written towards the right side in the Particulars column.
In the next line, the name of other affected account is entered with the word ‘To’. After the details of the debit and credit accounts, a narration or the brief description of the transaction is provided.
- Ledger Folio (L.F.): This column mentions the page number or folio number of the ledger account where debit and credit accounts are posted.
For example, if we make a posting in the machinery account that is prepared at page 30 of the ledger, we shall write 30 in the LF column against the Machinery account in the journal.
- Amount debit (Dr.): The amount of the account being debited is written under this column. In simple words, it records the debit amount.
- Amount credit (Cr.): The amount of the account being credited is written under this column. In simple words, it records the credit amount
What is Journalising?
As mentioned earlier, a journal entry is the basic record of business transactions. It becomes easy to journalise business transactions if one is aware of debit and credit rules. You have already studied debit and credit rules in other post.
According to these rules, when we journalise a transaction, one account receives the benefits and another account gives the benefits. The process of recording a transaction in a journal is known as journalising.
The following are the steps in the journalising process:
- Ascertaining that the accounts are affected by the transaction.
- Ascertaining the nature of the account which is affected.
- Determining the account to be debited and the account to be credited by applying the rules of debit and credit.
- Identifying the amount by which the accounts are to be debited and credited.
- Recording the date and month of the transaction in the date column and the year at the top.
- Recording in the “Particulars” column the name of the account to be debited. Along with the name of the account, the abbreviation “Dr.” also should be written in the same line against the name of the account. Write the amount to be debited in the debit amount column.
- Recording in the “Particulars” column the name of the account to be credited. The name of the account to be credited should be written in the next line preceded by the word “To”. The word “To” is written towards the right after leaving a few spaces. Write the amount to be credited in the credit amount column.
- Recording a brief description of the transaction starting from the next line in the “Particulars” column. This brief description of the transaction is termed as narration.
- Drawing a line across the “Particulars” column to separate one journal entry from the other.
Example 1: A new firm issues 1,000 shares of common stock on January 6, 2019, and receives ₹ 7,50,000 cash. for this transaction, the journal entry steps are as follows:
Step 1: the firm raises capital by issuing shares of its stock on January 6, 2019
Assets – cash is increased.
share capital common stock is increased
Step 2: The journal entry would be as follows:
common stock ₹7,50,000
Journal (No. 1)
|Date||Particulars||Ledger Folio (L.F.)||Amount (Debit)||Amount (Credit)|
|Jan 6, 2019||Cash a/c …………….. Dr.||7, 50,000|
|Jan 6, 2019||to common stock|
(Being 1000 shares issued)
Example 2: The firm pays salaries of ₹ 1,00,000 to its employees on January 31, 2019. the journal entry steps are as follows:
Step 1: salaries represent an expense of the accounting period. the matching concept requires expenses to be recorded in the period they are incurred to generate revenue.
salary Expenses a/c Expense is increased
assets cash is decreased
Step 2: the journal entry would be as follows:
salaries Expense ₹ 1,00,000
cash ₹ 1,00,000
Journal (No. 2)
|Salary A/C…………….. Dr.||1, 00,000|
|to cash a/c|
(being salary paid)
Therefore, each journal entry follows a two-step process of balancing every transaction for its debit and credit effect on the financial position of an organisation.
Types of Journal Entry
As mentioned earlier, a journal entry is a record of business transactions in the books of accounts of a business. A properly documented journal entry consists of the correct date, amounts to be debited and credited, description of the transaction and a unique reference number.
There are seven types of journal entries that are used to record financial transactions of business. The journal entries are as follows:
- Simple Entries
- Compound Entries
- Opening Entries
- Transfer Entries
- Closing Entries
- Adjustment Entries
- Rectifying Entries
Financial transactions or entries that affect two accounts are called simple entries. In these entries, one account is debited and the other is credited. Let us understand a simple entry with the help of an example.
Example: ABC enterprise sold goods worth ₹1,00,000 for cash. The entries will be:
|Cash A/c||Dr. 1,00,000|
|To Sales A/c|
(Being goods sold for cash)
Financial transactions that affect more than two accounts at the same time are called compound entries. In these entries, more than two accounts are debited or credited.
Example: Sukhami Traders paid salaries of ₹60,000 and rent of ₹15,000, the entries will be
|Salary A/c||Dr. 60,000|
|Rent A/c||Dr. 15,000|
|To Cash A/c|
(Being salary and rent paid)
These are the journal entries that record the balances (assets and liabilities) appeared in the previous accounting period.
Example: A business has been operating since past two years. It used to maintain its accounting records using the single-entry system. The opening assets and opening liabilities of the business are as follows:
- Cash ₹700
- Inventory ₹1,900
- Accounts receivable ₹4,500
- Property ₹1,00,000
- Plant and equipment ₹20,000
- Accounts payable ₹3,000
- Loan ₹60,000
Here, the equity of the business can be determined using the accounting equation as:
Assets = Liabilities + Equity
₹700 + 1,900 + ₹4,500+ ₹1,00,000 + ₹20,000 = ₹3,000 + ₹60,000 + Equity
Equity = ₹1,27,100 – ₹63,000 = ₹64,100
For this business, the opening entry will be passed as:
|Accounts Receivable||Dr. 4500|
|Plant and Equipment||Dr. 20,000|
|To Accounts payable A/c||3,000|
|To Loan A/c||60,000|
|To Equity A/c||64,100|
These are those journal entries that help in transferring the amount of the account to another account when wrong booking has been made in respect of any account. Transfer entries can also be done in certain other circumstances.
For example, when goods purchased for resale are used by the proprietor for office purpose. X Furniture mart used furniture of 2,00,000 for furnishing his office.
Example: Furniture purchased by Suhani for ₹30,000 and machinery for ₹20,000. The accountant recorded the total amount of ₹50,000 to the furniture account. Pass the journal entry for transferring the amount of the machinery to machinery A/c.
|Machinery A/c||Dr. 20,000|
|To Furniture A/c|
(Transferred the overwritten amount to machinery account)
These entries help in transferring the closed balances of revenues and expenses to the Statement of Profit & Loss.
Example 7: Pass the journal entry for the balance of Sales Account ₹60,000.
|Salary A/c||Dr. 60,000|
|To Trading A/c|
(Sales amount transferred to Trading account)
These are journal entries which help in recording the true value of assets and liabilities and help in matching the revenues with the expenses.
Example 8: Pass the journal entry in the book of Sahnaz Traders for closing stocks worth ₹50,600 for the year ending 31st March 2020.
|Stock A/c||Dr. 50,600|
|To Statement of Profit & Loss A/c|
(Closing stock incorporated in P&L account)
these are the journal entries which are passed for making rectification in the books of original entries or in ledger.
Example 9: the amount of ₹600 paid to Deepak was recorded in the account of sachin. Pass the rectification entry.
(Rectified the amount that was paid to Deepak but debited in the account of sachin)
Compound Journal Entry
compound entries are those entries which affect more than two ac- counts on the same date. thus, an accountant passes one entry instead of passing separate entries for all such transactions. such journal entries can be passed in the following manner:
- By crediting two or more accounts and debiting one account
- By crediting one account and debiting two or more than two accounts
- By crediting and debiting two or more accounts like in case of opening entry let us understand with compound journal entries with the help of an example.
Open Journal Entry
Every organisation begins its new books in the starting of each financial year. Since the closing balances of the previous year have to be carried forward to the next year; the first journal entry in each year’s journal will be to record the last year’s closing balances of all the assets and liabilities. It is known as the opening entry because it is the first entry.
In the opening entry, all assets accounts are debited and the liabilities and capital account are credited. If the balance of the capital account is not mentioned or given, it can be calculated by subtracting total liabilities from the total of assets.
In case, the total of liabilities exceeds the total of assets, the difference will be considered as the goodwill amount and the same will be debited in the opening entry.