JOURNAL

Chapter 4: Recording Business Transactions

 Learning Outcome:
2
 Accounting Cycle

 Rules of Debit and Credit

 Personal Account
 Real Account
 Nominal Account

 Rules of Journalising or Process of Journalising

 Compound Entry

 Opening Entry

 Trade and Cash Discount

 Different Types of Journals

 3 Steps in The Accounting Cycle

Journalize transactions
Analyze in the general journal Post entries to Prepare a trial
source the accounts in balance.
documents. the general
ledger.

. Prepare financial
statements.
 4

An Account is a summary of relevant transactions at one place

relating to a particular head.

Debit and Credit- Tools used for recording transactions

Debit refers to the LEFT side of the T-Account
A number entered on the left side of any account is said to be debited to an
account.
Credit to the RIGHT side of the T-Account
A number entered on the right side of any account is said to be credited to
an account
The symbol Dr. is used to indicate Debit and the symbol
Cr. is used to indicate Credit
ACCOUNTING EQUATION BASED CLASSIFICATION OF ACCOUNTS:

5
6

Which of the following accounts would normally be

expected to have a debit (or left-side) balance?

a. Accounts Payable BUILDINGS is an asset

b. Buildings account and normally
c. Interest Revenue has a DEBIT balance.

d. Capital Stock The other three accounts

normally have CREDIT
balances
 Which of the following accounts would
7
normally be expected to have a credit (or
right-side) balance?

a. Accounts Receivable
b. Salary Expense SALARY PAYABLE
c. Salary Payable is a liability account
and normally has a
d. Land CREDIT balance.

The other three

accounts normally
have DEBIT
balances.
 Classification & Rules of Accounts

Accounts
8

Personal Account Real Account Nominal Account

Tangible Expenses and

Natural Account
Account Losses

Artificial Account Intangible

Account Income and Gains

Representative
Account

Debit all expenses and

Debit the Receiver Debit what comes in losses
Credit the Giver Credit what goes out Credit all income and gains
9

Every business deal with other “Person”, possesses

“Assets”, pay “Expenses” and receive “Income”.

An account for each person :Accounts in the names of

persons are known as “Personal Accounts”

An account for each asset : Accounts in the names of

assets are known as “Real Accounts”

An account for each expense or income: Accounts in respect

of expenses and incomes are known as “Nominal Accounts”
 Personal Account: These accounts are related to individuals,
10 firms, companies, etc. A few examples of personal accounts
include debtors, creditors, banks, outstanding/prepaid accounts,
accounts of credit customers, accounts of goods suppliers, capital,
drawings, etc..

Natural personal accounts:  all god’s creations E.g. Kumar’s A/C,

Adam’s A/C, etc.

Artificial personal accounts: Personal accounts which are

created artificially by law, such as corporate bodies
and institutions. E.g. Pvt Ltd companies, LLCs, LLPs, clubs,
schools, etc.

Representative personal accounts: Accounts which represent a

certain person or a group directly or indirectly. E.g. wage prepaid
account. This wages prepaid account is a representative personal
account indirectly linked to the person.
 Real Account: All assets of a firm, which are tangible or
11 intangible, fall under the category of “Real Accounts“.

Tangible real accounts are related to things that can be

touched and felt physically. A few examples of tangible real
accounts are building, machinery, stock, land, etc.
Intangible real accounts are related to things that can’t
be touched and felt physically. A few examples of such real
accounts are goodwill, patents, trademarks, etc.

Nominal Account: Accounts which are related to expenses,

losses, incomes or gains are called Nominal accounts. The
dictionary meaning of the word “nominal” is “existing in name
only” and the meaning remains absolutely true in the
accounting sense too, because nominal accounts do not really
exist in physical form, but behind every nominal account money
is involved. E.g. Purchase A/C, Salary A/C, Sales
A/C, Commission received A/C, etc.
 Classification of accounts under traditional and accounting
equation approach
12

Title of account Traditional Accounting

Approach Equation
Approach
Building Real Asset
Sales Nominal Revenue
Debtors Personal Asset
Rent Nominal Expense
Prepaid salary Personal Asset
Rent outstanding Personal Liability
Cash Real Asset
Bad Debts Nominal Expense
Capital Personal Capital
Closing Stock Real Asset
Depreciation Nominal Expense
 GOLDEN RULES OF ACCOUNTANCY
14
Transaction Analysis Account affected & Rule Entry
nature of account
15
Introduction of Rs. Cash is received Cash – Real Debit what comes Debit ‘Cash’
80,000 by the by the business in
Capital–Personal Credit ‘Capital
Proprietor
Owner has given Credit the giver
cash

Cash Deposited in bank Bank Receives Bank – Personal Debit the receiver Debit ‘Bank’
Rs.10,000 Cash
Cash – Real Credit what goes Credit ‘Cash’
Cash Goes out of out
Business
Loan from Suresh Business gets Cash – Real Debit what comes Debit cash
Rs.40,000 cash in
 Suresh’s loan – Credit ‘Suresh’s
Suresh pays Cash Personal  Credit the giver Loan

Salaries paid Rs. 3,500 Cost of services Salary – Nominal Debit all expenses Debit
and outstanding used Rs. 5,000 ‘salary’(Rs.5,000)
Cash – Real Credit what goes
Rs.1500
Cash goes out Rs. out Credit ‘cash’
Salary
3,500 (Rs.3,500)
Outstanding – Credit the giver
Outstanding for Personal Credit salaries
services received outstanding  (Rs.
Rs.1500 1,500)
The Journal
19 Date Particulars L.F DR CR
.
1) DATE

2) ACCOUNTS/
DESCRIPTION OF THE
TRANSACTION

3) LEDGER FOLIO

4) DEBITS

5)CREDITS
 A journal entry:
20

• 1. Record the date

• 2. Record the account
debited and its amount
• 3. Record the account
Has four credited and its amount
• 4. Record the explanation or
steps: details
22

On January 15, 2023, Caldwell Company purchases a

truck for $19,500 cash.
Prepare the appropriate journal entry for the above
transaction.
23 Journal Entries
Solution 2

 Two accounts are affected:

 Trucks is increased by $19,500.
 Cash is decreased by $19,500.
24 Journal Entries
Solution 2
 Two accounts are affected:
 Trucks is increased by $19,500.
 Cash is decreased by $19,500.

GENERAL JOURNAL
Page: 1
Date Description LF Debit Credit
15-JanTrucks Account 150 19,500
To Cash Account 100 19,500
(being purchase of truck)
 Examples of Personal, Real and Nominal Account
25 transactions
Personal Account: Paid Unreal Pvt Ltd. 24,000 by cheque

Accounts Involved  Debit/Credit  Rule Applied

Unreal Pvt Ltd. A/C  Debit  Artificial personal a/c Dr. the receiver

 Artificial personal a/c

   To Bank A/C  Credit
Cr the giver

Real Account: Purchased furniture for 10,000 in cash 

Accounts Involved  Debit/Credit  Rule Applied

 Furniture is real a/c so Dr. What

Furniture A/C  Debit
comes in
 Cash is a real a/c so Cr. What goes
   To Cash A/C  Credit
out
 Paid electricity bill 15,000 in cash
26

Accounts Involved  Debit/Credit  Rule Applied

 Nominal A/C so
Electricity bill A/C  Debit 
Dr. all expenses
  Real A/C so Cr what
   To Cash A/C  Credit 
goes out
 Practice Question
27 Anil made the following transactions in relation to his business in the month of
July 2016. Journalize the following transaction in the books of Anil.
Date Transaction
July 1st Started business with cash Rs 50000
July 2nd Purchased a Machine on credit Rs. 4000 from M/S Mohan Machines
July 2nd Purchased goods for cash Rs. 10000
July 3rd Purchased furniture for Rs. 12000
July 4th Withdrew for personal use Rs. 700
July 5th Deposited in bank Rs 10000
July 6th Paid rent in advance Rs. 1500
July 7th Received interest Rs. 1000
July 7th Sold goods for Rs 7000 for cash
July 7th Sold goods to Shyam for Rs. 6000
July 8th Purchased household goods for Rs.9000 giving Rs3000 in cash and
balance through a loan.
July 9th Paid half the amount owed to Mohan Machines
July 10th Received Rs. 5800 from Shyam in full settlement
July 11th Paid Rs 1900 through cheque to Mohan machines in full settlement
July 12th Charged depreciation of Rs. 400 on machine and Rs. 2000 on furniture
July 12th Paid insurance premium Rs. 2000 through cheque
July 13th Received advance payment from customer Mr. Ram Rs. 5000
28 Simple and Compound Entry
In simple entry, only two accounts are affected. One account is debited
and another account is credited with same amount.
In compound entry:
I. One particular account may be debited and several other accounts
may be credited
II. One particular account may be credited while several other accounts
may be debited
III. Several accounts may be debited and several accounts may also be
credited

Example- Purchased household goods for Rs.9000 giving Rs.3000 in cash

and balance through a loan
29 Opening Entry
 At the beginning of each accounting period, the business enterprises will have to record
their transactions in the new books of account.
 The accounts with balances in the previous year, will have to be recorded with the help
of an entry which is known as Opening Entry.
 In this entry:
 All assets are to be debited.
 All liabilities are to be credited.
 The difference between assets and liabilities will have to be credited as Capital
Account

Journalize the following transaction:

On Jan-1, 2020
 Assets are, cash in hand Rs.2200, Bank balance Rs.3800, Plant & Machinery Rs.5000,
Furniture & Fixture Rs.9000 and liability towards Mr. Amit Rs.2000, Loan from bank Rs.
6000
 Trade Discount and Cash Discount
30

Trade Discount: It is a reduction in payment offered by the supplier

from the list of price of goods or services on business considerations
other than prompt payment. Normally, trade discount is given to
encourage higher quantum of purchases. Suppose, the list price is
Rs.1,000 and a trade discount of 10% is offered, then the Net amount =
List price –Trade discount, Rs.900 would be paid.

Suppose, goods are sold on credit to Kadim for Rs.10, 000 with a trade
discount of 10%, sale is recorded with the net price, in the books of the
seller:
Kadim’s Account …………..Dr 9,000
To Sales Account 9,000
(Being goods sold to Kadim, on credit, after allowing a trade discount
of 10% as per the invoice no. … dated …)
 Trade Discount and Cash Discount
31
Cash Discount: It is a reduction offered by the supplier from the invoice
price in consideration of immediate payment or payment within a
stipulated period. To the person who allows the discount, it is
expenditure. Discount is an income to the person getting it.

Rajaram has to pay Rs.10,000 to Dhanraj. The amount is pending for a

long period. To encourage Rajaram to make the full payment in one go,
Dhanraj offers him Rs.500 as cash discount and Rajaram makes the
payment by cheque to take advantage of the discount. In the books of
Rajaram, the journal entry will be shown as under:
Dhanraj Account …………….. Dr. 10,000
To Discount received account 500
To Bank 9,500
(Being cheque issued to Dhanraj , after deducting cash discount)
32

Basis of Trade Discount Cash Discount

Distinction
Reduction It is reduction from the list It is a reduction from
price of goods and services the invoice price
Main Objective Its main objective is to Its main objective is to
promote sale encourage prompt
payment.
Time Limit It is granted on the date of It is granted on
purchase immediate payment or
within a stipulated
period.
Ledger Posting Trade account finds no place Cash discount is shown
in the ledger accounts. So no in the ledger and its
posting in ledger arises posting in the ledger
accounts also essential.
33

Practice question-
Sold goods to Sunil of the list price of Rs 1,25,000 less: 20% trade discount
and received a current dated cheque under a cash discount of 2%.

XYZ Ltd. Sold goods of MRP of Rs 20000 to Nitish at 20% trade

discount. The terms of credit sales were ‘2/14 net 30’. Nitish makes the
payment within 10 days. Show the journal entry in books of XYZ Ltd.
 Goods given away
34
Charity/Donation/Free sample a/c Dr.
To Purchase a/c

Example- Business gave away goods costing Rs 5000 as free

sample.

Free Sample a/c Dr. 5000

To Purchase a/c 5000

Loss by Fire
Loss by Fire Account Dr.
To Purchases Account
 Loss on Account of Bad Debts
Example- Sold goods of Rs 25000 on credit to Mahesh.
35 Subsequently, Mahesh became insolvent and only Rs 18000 could be
recovered from him.
Bad debts a/c Dr. 7000
Cash a/c Dr. 18000
To Mahesh a/c 25000

Bad Debts Recovered

Example-Received Rs 42500 from Kumar whose account was
written off as bad previously
Cash a/c Dr. 42500
To Recovery of bad debts a/c 42500

Dishonour of Cheque deposited in bank

Non-clearance of cheque due to certain reason. Also called
bouncing of cheque

Debtors a/c Dr.

To Bank a/c
36 Classification of Goods Accounts

 Purchase account
 Sales account
 Purchases Returns account
 Sales Returns account
Different types of journals
37
Some widely used journals in a trading business are:
 Purchase Day Book- only credit purchases are recorded in
this journal
 Sales Day Book- only credit sales are recorded in this journal
 Purchases Return Book- Purchase returns are recorded in this
journal (also called Returns outward)
 Sales Return Book- Sales returns are recorded in this journal
(also called Returns inward)
 Cash Book- All cash, bank and cash discount transactions are
recorded in this journal.
 Journal Proper- All other transactions are recorded in this
journal.
 Test your understanding
38
1.Trade discount allowed by the supplier is to be debited to
(a) Purchase account
(b) No entry for trade discount, net purchase is debited
(c) Supplier account
(d) Discount is added to purchase amount.

2. Cash discount received from a customer should be credited to

(e) Discount account
(f) Customer account
(c) Cash account
(d) No entry.

3. Which of the following accounts will be credited if Machinery is

purchased for Cash Rs. 5, 00,000?
a) Capital A/c
b) Machinery A/c
b) Fixed Assets A/c
d) Cash A/c
39 4. In which of the following order, data is entered into the journal?
a) Numeric order
b) chronological order
b) Bullets order
d) alphabetical order

5. Which of the following highlights the correct order of the stages

in the accounting cycle?
(A) Journalizing, final accounts, posting to the ledger and trial
balance
(B) Journalizing, posting to the ledger, trial balance and final
accounts
(C)Posting to the ledger, trial balance, final accounts and
journalizing
(D)Posting to the ledger, journalizing, final accounts and trial
balance
 References:
40
1. Maheshwari, S.N., Maheshwari, S.K., Financial Accounting, 10th
ed, Vikas Publishing House.

2. Tulsian, P.C. , Financial Accounting, S. Chand &Co Ltd , India.

3. Gopal,C,R., Accounting for Managers,1st ed, New Age International

Publishers

4. Rajasekaran,V.,Lalitha,R., Financial Accounting, Pearson

Publication, India