1.2.

2 EXPLAIN NATURE AND ROLES OF BOOK OF ORIGINAL ENTRY

This section contains the following related tasks which when addressed fulfill the requirements

of this sub-enabling.

a) Identify books of original entry

b) Explain nature of books of original entry

c) Explain role of the books of primary entry

In the preceeding lessons you have learnt about various business transactions and Book keeping

i.e. recording these transactions in the books of accounts in a systematic manner. Curosity may

arise in your mind that what are these books? Why businessman keeps many books? How does

he enter various transactions in these books? You have learnt about the double entry system of

maintaining accounts i.e. rules of debit and credit in relation to various accounts. A book that is

prepared by every businessman small or big is a book in which business transactions are

recorded datewise and in the order in which these transactions take place is known as journal. In

this lesson you will learn about its meaning, objective and its preparation.

5.1 JOURNAL : MEANING AND FORMAT

Journal is a book of accounts in which all day to day business transactions are recorded in a

chronological order i.e. in the order of their occurence. Transactions when recorded in a Journal

are known as entries. It is the book in which transactions are recorded for the first time. Journal

is also known as ‘Book of Original Record’ or ‘Book of Primary Entry’.

Business transactions of financial nature are classified into various categories of accounts such

as assets, liabilities, capital, revenue and expenses. These are debited or credited according to

the rules of debit and credit, applicable to the specific accounts. Every business transaction

affects two accounts. Applying the principle of double entry one account is debited and the

other account is credited. Every transaction can be recorded in journal. This process of

recording transactions in the journal is’ known as ‘Journalising’.

In small business houses generally, one Journal Book is maintained in which all the

transactions are recorded. But in case of big business houses as the transactions are quite large

in number, therefore journal is divided into various types of books called Special Journals in

which transactions are recorded depending upon the nature of transaction i.e. all credit sales in

Sales Book, all cash transactions in Cash Book and so on.

Format of Journal

Every page of Journal has the following format. It is a columnar book. Each column is given a

name written on its top. Format of journal is given below:

Journal
Column wise details of journal is as :

1. Date

In this column, we record the date of the transactions with its month and accounting year. We

write year only once at the top and need not repeat it with every date.

Example :

Date

2006

April 15

2. Particulars

The accounts affected by a transaction i.e the accounts which have to be debited or credited are

recorded in this column. It is recorded in the following way :

In the first line, the account which has to be debited is written and then the short form of Debit

i.e. Dr. is written against that account’s name in the extreme right of the same column.
In the second line after leaving some space from the left of the entry in the first line, the account

which has to be credited is written starting with preposition ‘To’ Then in the third line,

Narration for that entry which explains the transaction, the affected accounts of which are

entered, is written within Brackets. Narration should be short, complete and clear. After every

journal entry, horizontal line is drawn in the particulars column to separate one entry from the

other.

Example : Rent paid in cash on 1st April, 2006

Date Particulars

2006 Rent A/c .............................. Dr

April 1 To Cash A/c ...............

(Rent paid in cash)

3. Ledger Folio

The transaction entered in a Journal is posted to the various related accounts in the

‘ledger’(which is explained in another lesson). In ledger-folio column we enter the page-number

where the account pertaining to the entry is opened and posting from the Journal is made.

Example:
6. At the end of each page, both the Dr. and Cr. columns are totalled up. The total of both these

columns should be equal as the same amount is entered in the debit as well as in the credit

columns. The totals are carried forward to the next page with the words ‘total carried forward

(c/f) and then at the top of the next page in Particulars column, we write totals brought forward

(b/f) and the amount of totals is written in the respecive amount columns.

QUESTIONS 5.1

• What is journal? Write in your own words.

................................................................................................................

................................................................................................................

• Complete the following sentences with the appropr:ate word/words:

• Journalising is the process of entering transactions in .....................

• Another name for Journal is .....................

• Transactions, when recorded in Journal, are known as .....................

 • The explanation of a Journal entry is known as .....................

• In a Journal entry preposition ..................... is used before the name

of the account to be credited

5.2 PROCESS OF JOURNALISING

Following steps are taken for the preparation of a journal:

Illustration 1

Enter the following transactions in the Journal of Bhagwat and sons. 2006 Amount (Rs)

January 1 Tarun started business with cash 1,00,000

January 2 Goods purchased for cash 20,000

January 4 Machinery Purchased from Vibhu 30,000

January 6 Rent paid in cash 10,000

January 8 Goods purchased on credit from Anil 25,000

January 10 Goods sold for cash 40,000

 January 15 Goods sold on credit to Gurmeet 30,000

January 18 Salaries paid. 12,000

January 20 Cash withdrawn for personal use 5,000

Solution.

As explained above, before making the journal entries, it is very essential to determine the kind

of accounts to be debited or credited. This is shown in the Table:

Tabular Analysis of Business Transactions

On the basis of the above table, following entries can be made in the Journal

Journal of Tarun
 QUESTIONS 5.2

• Below are given certain transactions. Write the names and kinds of

affected accounts in the given columns of debit and credit :

Dr. Cr

Transaction Name Type Name Type

of A/c of A/c of A/c

of A/c

• Started business with cash Cash A/c Assets Capital

Capital

• Credit purchases of goods

 • Commission paid by cheque

• Cash deposited into Bank

• Interest received in cash

• Furniture purchased from Mukesh

• Goods sold by Ramesh

• Write down the narration for the following Journal entries in the space

provided :

(I) Cash A/c Dr. (ii) Purchases A/c Dr.

To sales A/c To Vinay’s A/c

( ) ( )

• Complete the following journal entries:-

(i) Amit’s A/c Dr. (ii) ..................... Dr.

To ............. A/c To Cash A/c

(Goods sold to Amit) (Commission paid in Cash)

(iii) Cash A/c Dr. (iv) Goods A/c Dr

To ............. A/c To ............. A/c

(Interest received in Cash) (Goods purchased from Rohit for Cash)

COMPOUND AND ADJUSTING ENTRIES

The journal entries that you have learnt so far are simple and affect two accounts only. There can

be entries that affect more than two accounts; such entries are called compound or combined

entries.

A simple journal entry contains only one debit and one credit. But if an entry contains more

than one debit or credit or both, that entry is known as a compound journal entry. Actually, a

compound journal entry is a combination of two or more simple journal entries.

Thus, a compound journal entry can be made in the following three ways:

• By debiting one account and crediting more than one account.

• By debiting more than one account and crediting one account.

• By debiting more than one account and also crediting more than one

account.

Two simple journal entries are as:

Journal
 The above two simple entries have been converted into compound Journal entry as under:

Note : To make the compound entry it is necessary that the transactions must be of the same

date and one account is common.

If you match the first two simple entries with the converted compound entry, you will find that

there is no difference between them so far as the accounting effect is concerned. The compound

entries save time and space. Such compound entries are made in the following cases:

• When two or more transactions occur on the same day.

 • One aspect i.e. either the Debit account or Credit account is common.

A few more examples of compound entries are :

1. Bad debt

When a debtor fails to pay the full amount due to him, the unpaid amount is known as bad debt.

For example, A business concern receives Rs 8000 of Rs10,000 due from Harish. He is unable to

pay the balance amount, thus, the remaining amount becomes a bad debt for the business.

Bank A/c Dr. 8000

Bad Debts A/c Dr. 2000
To Harish’s A/c 10,000

The compound entry for this transaction will be :

(Receipt of Rs8000 from Harish

and remaining due amount of Rs2000

is treated as bad debts)

2. Discount Allowed and Received

To encourage a customer to pay the amount due before due date, discount is allowed. This is

called cash discount. If such discount is received the compound entry will be :

Creditor A/c Dr.

To Bank A/c

To Discount A/c

3. Similarly, when cash discount is allowed, the journal entry will be

Bank A/c Dr.

 Discount A/c Dr.

To customer’s (Debtors) A/c

Note : When the customer buys goods in bulk or in large quantity some discount may be allowed

to him. This is to encourage him to buy more and more. This discount is called Trade Discount.

When the bill is prepared for the purchase of goods, the amount of trade discount is deducted

from the total amount payable. No entry is made for this type of discount in the journal i.e. it is

not recorded in the books of accounts.

Illustration 2

Enter the following transactions in the books of Supriya, the owner of the business.

2006

January 8 Purchased goods worth TZS.5,000 from Sarita on credit.

January 12 Neha Purchased goods worth TZS.4,000 from Supriya on credit.

January 18 Received a Cheque from Neha in full settlement of her account TZS.3,850.

Discount allowed to her TZS.150

January 20 Payment made to Sarita TZS.4,900. Discount allowed by him TZS.100.

January 22 Purchased goods for cash TZS.10,000.

January 24 Goods sold to Kavita for TZS.15,000.Trade discount @ 20% is allowed to her.

January 29 Payment received from Kavita by Cheque.

Solution

The above transactions will be entered in the journal as follows :

Journal of Supriya
Adjusting Entry
To satisfy the principle of matching cost and revenue, amount of every expense and revenue

should pertain to the period for which accounts are being prepared. Thus, there can be two

situations : (a) Amount has been received or paid which belongs to more than one accounting

year (b) amount of expense or of revenue for the current year stands due and not paid. In the

above two cases adjustments need to be made. Any journal entry made to adjust these amounts

is called adjusting journal entry.

Journal entries made to adjust for outstanding expenses such as rent outstanding, prepaid

expenses such as insurance premium paid in advance, accrued income such as rent (income)

has become due but not received and income received in advance such as commission has

been received though not yet due are examples of adjusting journal entries.

Following are the items for which adjustment is required :

1. Outstanding Expenses

An expense for the current accounting peirod should be debited (as increase in expense is to

be debited). It is immaterial whether it is paid in that accounting period or not. In case the

same expense is not paid during the year, it becomes outstanding for that particular year. It is

the liability of the business for that year and, thus, expense outstanding account will be

credited, because liabilities are credited for increase.

Salaries A/c Dr. 5,000

To Salaries outstanding A/c 5,000
(Salaries remaining unpaid for the
month of December)
For example, if salaries are outstanding for TZS.5,000 for December 2006 then the entry will be

made as follows:

If, for example, Insurance is prepaid for 2007 in 2006 for TZS.3,000 then entry will be made as

follows:

Prepaid Insurance A/c Dr. 3,000

To Insurance Premium A/c 3,000 (insurance paid in advance)

Accrued Income

In case, income has been earned but it has not been recieved till now, it is an accrued income.

Accrued Income is an asset, as there will be an increase in the asset, it will be debited.

For example, Rent (receivable) is outstanding for the month of November

TZS.4,000. The entry in such a case will be:

Accrued Rent A/c Dr. 4,000

To Rent A/c 4,000

(Being Rent due but not yet received for the period)

Note : Here Rent Income A/c has been credited for the increase to be made

in the amount of Rent for the period of November, which has to be included

in the total Rent Income.

Income received in advance

Whenever Income is received in advance during the current year i.e. it is received for the next

year, it should not be included in the current year’s income. As this income pertains to the next

year, it cannot be treated as income in the current year, so it becomes a liability. As there is an

increase in the liability, it should be credited.

For example, if Rent is received in advance for the period January and

February 2007 in December 2006, TZS.9,000. Then the entry will be

Rent A/c Dr. 9,000

To Rent Received in Advance A/c 9,000 (Rent received in

advance for January and February in the month of December 2006)

2. Prepaid Expenses

This is an expense relating to the next year that has been paid in advance during the current

year. Thus, in such a case, this amount should not be treated as an expense for this year. It

should be treated as an asset in the current year as the services will be received only in the next

year (but the payment has been made in this year). As an increase in asset is debited, so prepaid

expense account will also be debited.

Note : Here Rent Income A/c has been debited as it has to be decreased

by TZS.9,000 being Rent in advance for January and February 2007 which should not

be included in the month of December 2006 as the services have not yet been rendered.

Miscellaneous entries

Depreciation
Depreciation means decline in the value of an asset due to its wear and tear. It is an expense for

the business. Increase in expenses and losses are debited, so depreciation is also to be debited.

The value of the asset will also be reduced because of depreciation. As decrease in assets is

credited, so the same asset account will be credited.

For example, Depreciation on furniture TZS.3,000 is charged for the year, Journal entry will

be :

Depreciation A/c Dr. 3,000

To Furniture A/c 3,000

(Depreciation charged on furniture)

Interest on capital

Business may allow interest to its proprietor on his/her capital. It is an expense for the

business. As the expense is debited for the increase, interest on capital will be debited. The

other account involved here is capital account. As Capital is increasing, it will be credited with

the amount of interest on capital.

For exmaple, Interest allowed on capital is TZS.2,500. Thus, the journal entry will be

Interest on Capital A/c Dr. 2,500

To Capital A/c 2,500

(Interest on Capital is allowed)

Drawings
When the proprietor withdraws some money from the business for his personal or domestic use,

it is known as Drawings. Drawings reduce the amount of Capital. As decrease in Capital is

debited, drawings will also be debited. As Cash will be decreased as an asset, it will be credited.

For example, Cash withdrawn by the proprietor for his peronal use is TZS.4,000. So the

journal entry will be :

Drawings A/c Dr. 4000

To Cash A/c 4000

QUESTIONS 5.3

• Fill in the blanks with sutiable word/words:

• A cominbaiton of two or more simple journal entries is known as ...........................

• Bad debts are ........................... in the journal, as they are loss to the Business.

• In journal, only ........................... discount is recorded.

• No entry is made for ........................... discount in the Journal.

• Prepaid Expenses are ........................... in the journal.

• Accrued Income is ........................... on the journal.

• Depreciation reduces the value of an ...........................

• When the proprietor- withdraws money from the business for his personal use, then

........................... A/c is debited and........................... A/c is credited.

 Complete the following journal entries:

(i) Drawings A/c ................... Dr.

To ................... A/c

(Money withdrawn from Bank for Personal use)

(ii) Cash A/c ................... Dr.

. ..................................... Dr.

To Rohit’s A/c

(Payment received form Rohit in full and final settlement of his A/c)

(iii) ................... A/c Dr.

To Rent A/c

(Rent paid in advance)

(iv) Interest on Capital A/c Dr.

To ................... A/c

(Interest allowed on capital)

(v) ................... A/c Dr.

To Commission outstanding A/c

(Commission outstanding for December)

 (vi) Cash A/c ................... Dr.

................... A/c Dr.

To Satish’s A/c

(Part payment of a debt received due to insolvency of Satish)

5.4 CLASSIFICATION OF JOURNAL

Journal is a book in which transactions are recorded in chronological order/ date wise, therefore

it will be practically difficult to record if the number of transactions is large. To take the benefit

of division of labour, journal should be divided into number of journals.

Journal can be classified into various special journals and Journal proper. Special journals are

also known as special purpose books.

Classification of Journal can be explained with the help of the following chart:
These journals are explained below:

I. Special Journal

Special journals are those journals which are meant for recording all the transactions of a

repetitive nature of a particular type. For example, all cash related transactions may be recorded

in one book, all credit purchases in another book and so on. These are :

• Cash Journal/Cash Book

Cash Journal or Cash Book is meant for recording all cash transactions i.e., all cash-receipts and

all cash payments of the ‘business. This book he1ps us to know the balance of Cash in hand at

any point of time. It is of two types :

• Simple Cash Book: It records only receipts and paymetns of cash. It is like an

ordinary Cash Acocunt.

• Bank Column Cash Book : This type of Cash Book contains one more column on

each side for the Bank transactions. This Book provides addtiional information

about the Bank transactions.

You will learn more details about the Cash Book in the lesson on Cash Book.

• Purchases Journal/Purhcases Book

This journal is meant for recording all credit purchases of goods only as Cash purhcases of

goods are recorded in the Cash Book. In this journal, purchases of other things like machinery,
typewriter, stationery, etc. are not recorded. Goods means articles meant for trading or the

articles in which the business deals.

• Sales Journal/Sales Book

This journal is meant for recording all credit sales of goods made by the firm. Cash Sales are

recorded in the Cash Book and not in the Sales Book. Credit Sale of items other than the goods

dealt in like sale of old furniture, machinery, etc. are not entered in the Sales Journal.

• Purchase Returns or Returns Outward Journal

Whenever, the goods are not as per the specifications, the buyer may return these goods to the

supplier. These returns are entered in a book known as Purhcase Returns Book. It is also known

as Returns Outward Journal Book.

- Sale Returns or Returns Inward Journal

Sometimes, when the goods are sold to the customer and they are not satisfied with the goods,

they may return these goods to the businessman. Such returns are known as Sales Returns. Just

like Purchase Returns, they are also recorded in a separate Book which is known as Sales

Returns or Returns Inward Journal/Book.

Note : You will learn more details about these Special journals in the subsequent lessons.

• Bill Receivables Journal/Book

When goods are sold on credit and the date and period of payment is agreed upon between the

seller and the buyer, this is duly signed by both the parties. This written document is called a
 Bill of exchange. For the seller it is a bill receivable and for the buyer it is a bill payable. Bills

Receivable Journal/ Book and Bills Payable journal Book are two journals prepared by

a businessman. For example : Pranaya sells goods to Gunakshi on credit for Rs 5000 payable

after three months. A document is prepared containing these facts and is duly signed by

Pranaya and Gunakshi. For Pranaya it is a Bills Receivable and she will record this transaction

in Bill Receivable Book. For Gunakshi it is a Bill Payable and she will record the transaction

in her Bill Payable Book.

• Bill Payable Journal

This is a journal in which record of those bills is kept on which the firm has given its

acceptance for making payments on later dates.

Note : Bill books are not now in practice.

II. Journal Proper

This journal is meant for recording all such transactions for which no special journal has been

maintained in the business. Therefore, in this journal, all such transactions are recorded which

do not occur frequently and for these transactions no special journal is required. For example,

if Machinery is purchased on credit, it will be recorded in the journal proper, because in the

Cash Book, we will record only cash purchases of machinery. Similarly, many other

transactions, which do not find their place in the special journals will be recorded in the

General Journal such as

• Outstanding expenses – Salaries outstanding, Rent outstanding, etc.

 • Prepaid expenses – Prepaid Rent, Salaries paid in advance

• Income received in advance – Rent received in advance, interest

received in advance, etc.

• Accrued Incomes – Commission yet to be received,interest yet to be

received.

• Interest on Capital

• Depreciation

• Credit Purchase and Credit Sale of fixed Assets –

Machinery, Furniture.

• Bad debts.

• Goods taken by the proprietor for personal use.

QUESTIONS 5.4

Fill in the blanks with suitable word/words:

• Return of goods purchased by the businessman to the suppliers will be entered in

..................... Journal.

• In ..................... Journal, credit purhcases of assets is not recorded.

• When the payment is to be made by the debtor, under a written agreement it is

..................... for him.

• An order made by the creditor to his debtor to make the payment on a specified date is

known as .....................

• In ..................... all such transactions are recorded for which no special journals are

maintained.

• Assets sold on credit are entered in .....................

TERMINAL QUESTIONS

1. Write the meaning of the following in one sentence each:

• Narration

• Ledger folio

• Bad debts

• Cash Discount

• The following journal entries have been made by a learner. You are required to make

correct entries wherever you think them to be wrong :

• Proprietor brought capital into Business Capital

A/c ................... Dr.

To Cash A/c

• Goods Sold for Cash

Cash A/c ................... Dr.

To Goods A/c
 • Machinery Purchased in Cash

Purchases A/c ................... Dr.

To Cash A/c

• Goods sold to Ram for cash

Ram A/c ................... Dr.

To Sales A/c

• Salary paid to the Accountant

Accountant’s personal A/c ................... Dr

To Salary A/c

- Rent paid in advance

Prepaid Rent A/c ................... Dr

To Cash A/c

• Distinguish between Special Journals and Journal Proper.

• Journalise the following transactions :

• Started business with cash TZS.3,00,000.

• Bought Goods on credit for TZS.5,000.

• Sold Goods for cash TZS.12,000 and on credit TZS. 8,000.

• Explain the process of journalising the transactions with suitable

examples.

• What are compound entries? Explain with suitable examples.

• What are adjusting entries? Give examples of any two such entries.
• Enter the follwoing transactions in Journal

2006

January 1 Sushil & Co. started business with cash 1,00,000

” 2 Paid into Bank 60000

” 4 Purhcased Machinery and paid by cheque 30,000

” 6 Bought goods from Naresh 20,000

” 14 Paid salaries 5,000

” 15 Sold goods to Rajesh Kuamr 15,000

” 17 Paid for Sundry Expenses 8,500

” 18 Cash deposited into Bank 20,000

” 19 Received Rent 6,000

22 Paid Naresh by cheque in full settlement of his 19,750

A/c

24 Withdrawn cash for personal use 8,000

26 Salary paid in advance to Surjeet 2,500

28 Rajesh made the payment on A/c 10,000

30 Cash Sales for the month 16,500

9. The following are the transactions of Kumar Swami for the month of January. Journalise

these transactions.
2006

January l Capital paid into Bank 3,00,000

” 1 Bought Stationery for cash 400

” 2 Bought Goods for cash 25,000

” 3 Bought Postage Stamps

” 5 Sold Goods for Cash 10,000

” 6 Bought Office Furniture from Mahendra Bros. 40,000

” 11 Sold goods to Jacob 12,000

” 12 Received cheque from Jacob 12,000

” 14 Paid Mahendra Bros. by cheque 40,000

” 16 Sold goods to Ramesh & Co 5,000

” 20 Bought from S. Seth & Bros 15,000

” 23 Bought Goods for cash from S.Narain & Co 22,000

” 24 Sold Good to P.Prakash 17,000

” 26 Ramesh & Co. Paid on account 2,500

” 28 Paid S.Seth & Bros. by cheque in full14,800

settlement

” 31 Paid Salaries 2,800

” 31 Rent is due to S. Sharma but not yet paid 2,000