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Preparation of Journal Entries 1. Learning of Golden Rules of Debit &Credit. 2. Apply the rules for making journal entries. Shri Krishna Education visit us at www. accountsshikshak. com 2

Golden Rules of Debit & Credit British Approach Divide all accounts in three categories American Approach Divide all accounts in five categories Shri Krishna Education visit us at www. accountsshikshak. com 3

British approach of Golden rules of Debit & Credit There are three types accounts in Accountancy Real Accounts: (which we can touch) Purchase, Sale, classified as tangible accounts. Personal Accounts: relates to persons, institutions, human beings. Examples: Debtors, Creditors, Capital a/c of proprietor, Drawings a/c of proprietor, Banks. Shri Krishna Education visit us at www. accountsshikshak. com 4

Nominal Accounts: relates to those things which we can only feel but cannot touch. For example Expenses, Losses, incomes, Gains etc. (Intangible accounts) Shri Krishna Education visit us at www. accountsshikshak. com 5

Rule of Real account Debit What comes in & Credit What goes out Rule of Personal account Debit The Receiver & Credit The Giver Rule of Nominal accounts Debit All Expenses & Losses & Credit All Incomes & Gains Shri Krishna Education visit us at www. accountsshikshak. com 6

Rule of accounts from American Approach Divide all accounts in five categories : Capital a/c Assets a/c Liabilities a/c Expenses a/c Revenue or Incomes a/c Shri Krishna Education visit us at www. accountsshikshak. com 7

Capital a/c Dr. (-) Cr. (-) Liability a/c Assets a/c (+) If Capital account is increasing in a transaction then credit it & vice- aversa Dr. Cr. (+) If Liability account is increasing in a transaction then credit it & vice- aversa Cr. (-) If Asset account is increasing in a transaction then Debit it & vice- aversa Dr. Expenses a/c (+) Cr. (-) If Expense or Loss account is increasing in a transaction then Debit it & vice- a-versa Shri Krishna Education visit us at www. accountsshikshak. com 8

Dr. Revenue or Incomes a/c (-) Cr. (+) If Income or revenue account is increasing in a transaction then credit it & vice- a-versa Note : Always write Journal Entry from Business or Firm’s point of view Shri Krishna Education visit us at www. accountsshikshak. com 9

Lets take some examples of transactions to understand the making of Journal Entry. 1) Richa Started business with a cash of 50, 000 & Goods of Solution : Step 1 : Find out the elements in a transaction Step 2 : Classify those elements into different a/cs Step 3 : Apply the rules of Debit & Credit Shri Krishna Education visit us at www. accountsshikshak. com 10

There are three elements in previous transaction Cash ( Real a/c ) Goods( Real a/c ) Coming into the business, should be Debited Proprietor (Personal a/c) Coming into the business, should be Debited Is a Giver, should be Credited Therefore the Journal Entry will be: Shri Krishna Education visit us at www. accountsshikshak. com 11

Date Particulars L. F Cash a/c Dr Goods a/c Dr. To Capital a/c (Being started business with cash & Goods by Richa) Dr. Cr. 50, 000 1, 000 Narration must be written in a journal entry. some more examples of transactions 2) Richa purchased goods from Kanika for 20, 000 In the above example it is assumed that Richa had bought goods from Kanika on credit. Shri Krishna Education visit us at www. accountsshikshak. com 12

Date Particulars L. F Purchase / Goods a/c Dr To Kanika a/c (Being purchased Goods on credit from Kanika) 3) Richa sold goods to Megha for Dr. Cr. 20, 000 3, 000 (costing 20, 000 2, 500). There are three elements in above transaction Megha (personal a/c) Is a receiver, therefore should be Debited Goods( Real a/c ) Going out, therefore should be Credited Therefore the Journal Entry will be: Profit should be Credited 13

Date Particulars L. F Megha a/c Dr. To Sales /goods a/c To Profit & Loss a/c (Being sold goods to Megha on credit on profit) 4) Paid to Kanika Dr. Cr. 3, 000 2, 500 19, 500 in full & final settlement. There are three elements in previous transaction Cash ( Real a/c ) Kanika (personal a/c) Is a receiver, therefore should be Debited Going out, therefore should be Credited Shri Krishna Education visit us at www. accountsshikshak. com Discount (Nominal a/c) Is a profit, should be Credited 14

Date Particulars L. F Kanika a/c Dr. To Cash a/c To Discount a/c (Being Cash paid to Kanika in full settlement) Dr. Cr. 20, 000 19, 500 Note : In the above transaction, since the amount had been paid in full settlement, therefore there is a discount which allowed by Kanika. 5) Received a cheque from Megha of 1, 500 on account Note : In the above transaction, since the amount had been received on account, therefore there is no discount which allowed to Megha Shri Krishna Education visit us at www. accountsshikshak. com 15

There are two elements in previous transaction Cheque/Bank (personal a/c) Megha ( Personal a/c ) Is a receiver, therefore should be Debited Is a Giver therefore should be Credited The Journal Entry will be: Date Particulars L. F Bank a/c Dr. To Megha a/c (Being Cheque received from Megha on account) Shri Krishna Education visit us at www. accountsshikshak. com Dr. Cr. 1, 500 16

6) Paid rent to Landlord 500 There are two elements in above transaction Cash (Real a/c) Rent (Nominal a/c) Is going out, should be Credited Is an expense, should be Debited The Journal Entry will be: Date Particulars L. F Rent a/c To Cash a/c (Being rent paid to landlord) Dr. Shri Krishna Education visit us at www. accountsshikshak. com Dr. Cr. 500 17

7) Wages due but not paid to workers 500 There are two elements in above transaction Wages Outstanding a/c Wages (Nominal a/c) Is an expense, should be Debited (Liability) Is a Liability, which is increasing (according to American app. ), should be Credited The Journal Entry will be: Date Particulars L. F Wages a/c Dr. To Wages O/S a/c (Being wages due but not paid to workers) Shri Krishna Education visit us at www. accountsshikshak. com Dr. Cr. 500 18

8) Depreciate Plant by 500 There are two elements in above transaction Depreciation a/c (Nominal a/c) Is a loss, should be Debited Plant a/c (Asset) Is an Asset, which is Decreasing (according to American app. ), should be Credited The Journal Entry will be: Date Particulars L. F Deprecation a/c To Plant a/c (Being Depreciate Plant by Dr. Cr. 500 500) Shri Krishna Education visit us at www. accountsshikshak. com 19

9) Megha became insolvent, only 50 paisa in a rupee were able to recover from her. There are three elements in above transaction Megha (personal a/c) Is a Giver, therefore should be Credited Date Cash ( Real a/c ) Bad debt (Nominal a/c) Coming in , therefore should be Debited Particulars L. F Cash a/c Dr. Bad debt a/c Dr. To Megha a/c (Being only 50% of total amount due from Mega were received) Shri Krishna Education visit us at www. accountsshikshak. com Loss, should be Debited Dr. Cr. 7, 50 1, 500 20

10) Received interest on Loan from a Debtor 500 There are two elements in above transaction Interest on loan a/c (Nominal a/c) Cash a/c (Real a/c) Is an Income, should be Credited Is coming in, should be Debited The Journal Entry will be: Date Particulars L. F Cash a/c Dr. To Interest on Loan a/c (Being amount received as interest on loan) Shri Krishna Education visit us at www. accountsshikshak. com Dr. Cr. 500 21

11)Goods of 500 & Cash of 1, 000 given as Charity There are three elements in above transaction Charity (Nominal a/c Cash ( Real a/c ) Goods (Real a/c) Is going out, therefore should be Credited Loss, should be Debited Going out , therefore should be Credited The Journal Entry will be: Date Particulars L. F Charity a/c Dr. To Cash a/c To Purchases a/c (Being goods & Cash given as Charity) Shri Krishna Education visit us at www. accountsshikshak. com Dr. Cr. 1, 500 1, 000 500 22

12) Goods of 500 used by proprietor for his personal use. There are two elements in above transaction Drawings (Capital a/c) Goods (Real a/c) Are going out of business, should be Credited The Journal Entry will be: Date Is a Capital a/c, which is decreasing (according to American app. ), should be Debited Particulars L. F Drawings a/c Dr. To Purchases a/c Being Goods used by prop. for his personal use) Shri Krishna Education visit us at www. accountsshikshak. com Dr. Cr. 500 23

13) Sold goods to Hari at a list price of 10, 000 at a trade discount of 10% There are two elements in above transaction Goods (Real a/c) Are going out of business, should be Credited The Journal Entry will be: Date Particulars Hari a/c Dr. To Sales/goods a/c Being Goods sold to Hari at a trade discount of 10%) Hari (personal a/c) Is a receiver, therefore should be Debited L. F Dr. Cr. 9, 000 Note : Amount of trade discount should not been shown in journal entry 9, 000 24

14) Received 500 from a debtor, which was written off as bad debt previous year There are two elements in above transaction Bad debt recovered a/c (Nominal a/c) Is an Income, should be Credited Cash a/c (Real a/c) Is coming in, should be Debited The Journal Entry will be: Date Particulars L. F Cash a/c Dr. To Bad debt recovered a/c (Being amount received from a debtor written off as bad debt previous year. ) Shri Krishna Education visit us at www. accountsshikshak. com Dr. Cr. 500 25

Making of Opening Entry Opening Journal Entry is passed when a firm has some balances of Assets & liabilities carried forward from previous year For Example : Cash in hand 300, Cash at Bank 7, 000, Bills Payable 1, 000, Ram (Dr. ) 800, Stock 4, 000, Shyam (Cr. ) 2, 000, Gobind (Dr. ) 1, 500, Vijay (Cr. ) 900, Capital 9, 700 In the above transaction there are some assets & liabilities which are carried forward from previous year, therefore the Opening Journal Entry of the transaction will be: Shri Krishna Education visit us at www. accountsshikshak. com 26

Date Particulars Cash a/c Bank a/c Ram a/c Stock a/c Gobind a/c To Bills Payable a/c To Shyam a/c To Vijay a/c To Capital a/c (Being opening entry passed) L. F Dr. Dr. Dr. Cr. 300 7, 000 800 4, 000 1, 500 1, 000 2, 000 9, 700 Assets = Liabilities + Capital Note : All Assets & Liabilities must be equal on the basis of Double Entry System Shri Krishna Education visit us at www. accountsshikshak. com 27

LEDGER Meaning of Ledger: Earlier, we discussed the term Account. In an account, transactions of one nature are posted or summarized. All the accounts put together constitute a ‘Ledger’. A Ledger may be defined as a “book or register which contains, in a summarized and classified form, a permanent record of all transactions. ” it is the most important book of accounts, since the trial balance is drawn from it and from the trail balance, financial statements are prepared. Hence, the Ledger is called the Principal Book Shri Krishna Education visit us at www. accountsshikshak. com 28

Form of a Ledger Account The Form of this account was explained in an earlier chapter. For convenience, the form of account is repeated here. Dr. Date of transaction Name of the Account, e. g. , Wages Account Particulars Name of other account L/F Amount of transaction Date of transaction Particulars Name of other account Shri Krishna Education visit us at www. accountsshikshak. com L/F Cr. Amount of transaction 29

Example Started Business with Cash of 30, 000 Journal Entry Date Particulars Cash a/c To Capital a/c L. F Dr. Shri Krishna Education visit us at www. accountsshikshak. com Dr. Cr. 30, 000 30

Ledger posting Cash A/c Dr. Date Jan 1. Particulars To Capital L/F Amt Date 30, 000 Particulars L/F Capital A/c Dr. Date Cr. Particulars L/F Amt Date Jan 1 Amt Cr. Particulars By Cash Shri Krishna Education visit us at www. accountsshikshak. com L/F Amt 30, 000 31

2) Cash Deposited into Bank Date Particulars L. F Bank a/c To Cash Dr. Date Jan 3. Dr. Cr. 10, 000 Bank A/c Particulars To Cash L/F Amt Date 10, 000 Cr. Particulars L/F Cash A/c Dr. Date Jan 1. 10, 000 Particulars To Capital L/F Amt Date 30, 000 Jan 3 Amt Cr. Particulars By Bank Shri Krishna Education visit us at www. accountsshikshak. com L/F Amt 10, 000 32

3) Cash Paid to Shyam 3, 950 in full & final settlement of 4, 000. Journal Entry Date Particulars Jan 5 Shyam a/c Dr. To Cash To discount received a/c L. F Dr. Shri Krishna Education visit us at www. accountsshikshak. com Cr. 4, 000 3, 950 50 33

Date Cr. Shyam A/c Dr. Particulars L/F Amt Jan 5. To Cash To discount Received Dr. Date Particulars Dr. Date Particulars L/F Amt 3, 950 50 Discount Received A/c L/F Amt Date Jan 5 Cr. Particulars By Shyam Cash a/c L/F Amt Date Jan 5 Particulars By Shyam Shri Krishna Education visit us at www. accountsshikshak. com L/F Amt 50 Cr. L/F Amt 3, 950 34

How to close each account Its important to know the balance left in each account at the end of period. Therefore the accountant close every account. Lets take an example to know the process of closing the account. Cash A/c Dr. Date Particulars Jan 1 Jan 5 Jan 6 Jan 10 To Capital To Sales To Ramesh To Zohra 30, 000 10, 000 5, 000 6, 000 To Balance b/d 51, 000 28, 000 Feb 1 L/F Amt Cr. Date Particulars Jan 3 Jan 7 Jan 9 Jan 31 By Bank By Purchases By Rent By salary By balance c/d Shri Krishna Education visit us at www. accountsshikshak. com L/F Amt 10, 000 6, 000 2, 000 5, 000 28, 000 51, 000 35

Capital A/c Dr. Date Jan 31 Particulars To Balance c/d L/F Amt Date 80, 000 Jan 15 80, 000 Feb 1 Cr. Particulars By Cash By Balance b/d Shri Krishna Education visit us at www. accountsshikshak. com L/F Amt 30, 000 50, 000 80, 000 36

Purschase A/c Dr. Date Particulars Jan 5 Jan 6 Jan 10 To Cash a/c To Ram To Mohan L/F Amt Date 30, 000 Jan 31 10, 000 5, 000 45, 000 Cr. Particulars By Trading a/c L/F Amt 45, 000 Sales A/c Dr. Date Particulars L/F Jan 31 To Trading a/c Amt Cr. Date 80, 000 Jan 3 Jan 8 Jan 25 80, 000 Particulars By Cash a/c By Zohra By Karan Shri Krishna Education visit us at www. accountsshikshak. com L/F Amt 35, 000 20, 000 80, 000 37

Journal Entry For VAT (i) When VAT is paid at the time of purchase: Date Particulars L. F Dr. Cr. Purchases a/c Dr. VAT Paid A/c Dr. To Cash A/c / Bank A/c / Creditor (ii) When VAT is collected at the time of sale: Date Particulars Cash A/c / Bank A/c / Debtor To Sales A/c To VAT Collected A/c Dr. Shri Krishna Education visit us at www. accountsshikshak. com 38

(iii) When VAT is paid to the Government: (a) For adjustment of VAT paid against VAT Collected: Date Particulars VAT Collected A/c To VAT Paid A/c L. F Dr. Cr. Dr. (b) For depositing the balance amount into Government Account: Date Particulars L. F Dr. Cr. VAT Collected A/c Dr. (VAT Collected – VAT Paid) To Cash A/c / Bank A/c Shri Krishna Education visit us at www. accountsshikshak. com 39

The ledger accounts are to be closed by : S. No Name of Account Closed with Will have 1 All Assets By balance c/d Debit balance 2 All Liabilities To Balance c/d Credit balance 3 Expenses By trading/profit & loss a/c Debit balance 4 Sales To trading a/c Credit balance 5 Purchases By trading a/c Debit balance 6. Incomes To profit & loss a/c Credit balance Shri Krishna Education visit us at www. accountsshikshak. com 40

Prepared by: Ashwini Sharma Phone No. 9999383078 Under guidance of Mr. Ajay Chopra Phone No. 9810123857 Shri Krishna Education visit us at www. accountsshikshak. com 41