A Journal Entry is the first formal record of a business transaction in the books of accounts. It records the financial effect of a transaction by showing which account is debited and which account is credited.
The journal is also known as the Book of Original Entry because business transactions are initially recorded in the journal before they are posted to the respective ledger accounts.
For example, if a business purchases furniture for ₹20,000 in cash, the transaction affects two accounts: Furniture Account and Cash Account. Furniture comes into the business, so Furniture Account is debited, while cash goes out, so Cash Account is credited.
Journal entries are an important part of accounting because they provide a systematic record of every financial transaction.
Journal entries help a business to:
A traditional journal entry contains the following information:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Date | Account to be Debited Dr. | Amount | ||
| To Account to be Credited | Amount |
L.F. means Ledger Folio. It is used to record the page or reference number of the corresponding ledger account.
Before recording a transaction, an accountant should follow a few basic steps.
First, understand what has happened in the business.
For example:
“Purchased goods for cash ₹50,000.”
The transaction affects:
Purchases are treated as an expense or cost related to goods purchased for resale, while Cash is a real account representing an asset.
Purchases → Debit
Cash → Credit
Purchases A/c Dr. ₹50,000
To Cash A/c ₹50,000
When the owner starts the business by investing ₹1,00,000 in cash:
Cash comes into the business → Debit Cash Account
Capital is introduced by the owner → Credit Capital Account
Journal Entry:
Cash A/c Dr. ₹1,00,000
To Capital A/c ₹1,00,000
The business purchases goods worth ₹40,000 for cash.
Purchases → Debit
Cash goes out → Credit
Journal Entry:
Purchases A/c Dr. ₹40,000
To Cash A/c ₹40,000
The business purchases goods worth ₹60,000 from Rahul on credit.
Purchases → Debit
Rahul is the supplier and gives the goods → Credit
Journal Entry:
Purchases A/c Dr. ₹60,000
To Rahul A/c ₹60,000
The business sells goods worth ₹30,000 for cash.
Cash comes into the business → Debit
Sales are revenue → Credit
Journal Entry:
Cash A/c Dr. ₹30,000
To Sales A/c ₹30,000
The business sells goods worth ₹45,000 to Amit on credit.
Amit receives the goods and becomes a debtor → Debit Amit’s Account
Sales are revenue → Credit Sales Account
Journal Entry:
Amit A/c Dr. ₹45,000
To Sales A/c ₹45,000
The business pays office rent of ₹15,000 in cash.
Rent is an expense → Debit Rent Account
Cash goes out → Credit Cash Account
Journal Entry:
Rent A/c Dr. ₹15,000
To Cash A/c ₹15,000
The business pays ₹25,000 as salary.
Salary is an expense → Debit Salary Account
Cash goes out → Credit Cash Account
Journal Entry:
Salary A/c Dr. ₹25,000
To Cash A/c ₹25,000
The business purchases furniture for ₹35,000 in cash.
Furniture comes into the business → Debit Furniture Account
Cash goes out → Credit Cash Account
Journal Entry:
Furniture A/c Dr. ₹35,000
To Cash A/c ₹35,000
The business receives ₹20,000 from Rahul.
Cash comes into the business → Debit Cash Account
Rahul’s liability towards the business decreases → Credit Rahul’s Account
Journal Entry:
Cash A/c Dr. ₹20,000
To Rahul A/c ₹20,000
The business pays ₹18,000 to its supplier Rahul.
Rahul’s account is debited because the amount payable to him decreases.
Cash goes out → Credit Cash Account
Journal Entry:
Rahul A/c Dr. ₹18,000
To Cash A/c ₹18,000
The business receives ₹8,000 as commission.
Cash comes into the business → Debit Cash Account
Commission is an income → Credit Commission Received Account
Journal Entry:
Cash A/c Dr. ₹8,000
To Commission Received A/c ₹8,000
The business pays an electricity bill of ₹6,000.
Electricity is an expense → Debit Electricity Expense Account
Cash goes out → Credit Cash Account
Journal Entry:
Electricity Expense A/c Dr. ₹6,000
To Cash A/c ₹6,000
Sometimes, a single transaction affects more than two accounts. Such an entry is called a Compound Journal Entry.
For example, a business pays ₹20,000 in cash for salary and ₹5,000 for rent.
Both Salary and Rent are expenses, while Cash is paid for both.
Journal Entry:
Salary A/c Dr. ₹20,000
Rent A/c Dr. ₹5,000
To Cash A/c ₹25,000
Here, two accounts are debited and one account is credited.
A Simple Journal Entry involves one debit account and one credit account.
Example:
Rent A/c Dr. ₹10,000
To Cash A/c ₹10,000
A Compound Journal Entry involves more than two accounts.
Example:
Salary A/c Dr. ₹20,000
Rent A/c Dr. ₹10,000
To Cash A/c ₹30,000
A Narration is a short explanation written below a journal entry to describe the transaction.
For example:
Cash A/c Dr. ₹50,000
To Capital A/c ₹50,000
Narration: Being cash introduced into the business as capital.
Narration helps explain the reason or nature of the transaction and provides additional clarity for future reference.
The golden rules learned in the previous lesson are directly applied while preparing journal entries.
Debit the Receiver, Credit the Giver
Debit What Comes In, Credit What Goes Out
Debit All Expenses and Losses, Credit All Incomes and Gains
These rules help determine the correct debit and credit treatment of transactions.
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