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.... Financial Accounting 3

The document discusses key aspects of journal entries in accounting. It defines a journal as the book of original entry where transactions are recorded in chronological order. Journal entries record both debit and credit amounts according to double-entry principles. Each journal entry includes a narration explaining the transaction. The document also discusses features of double-entry accounting such as every transaction affecting at least two accounts, advantages like the ability to prepare trial balances and financial statements, and classifications of different types of accounts.

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Apeksha Jaiswal
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114 views21 pages

.... Financial Accounting 3

The document discusses key aspects of journal entries in accounting. It defines a journal as the book of original entry where transactions are recorded in chronological order. Journal entries record both debit and credit amounts according to double-entry principles. Each journal entry includes a narration explaining the transaction. The document also discusses features of double-entry accounting such as every transaction affecting at least two accounts, advantages like the ability to prepare trial balances and financial statements, and classifications of different types of accounts.

Uploaded by

Apeksha Jaiswal
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Double Entry Accounting Chapter 3

Journal
JOURNAL Journal is a book of original entry in which the transactions are recorded first of all as and when they take place. The chief features of Journal may be stated as under: Journal is a book in which the transactions are recorded first of all, as and when they take place. For this reason it is called a book of original entry. A journal is only a book of primary (original) entry. All the transactions recorded in the journal are subsequently transferred to ledger which is the principal book of accounts. A journal is a daily accounting record, i.e., each day's transactions are recorded in the journal on the same day.

Features of Journal
Journal, transactions are recorded in a chronological order, i.e., in a date-wise order. It maintains the identity of each transaction and provides a complete picture of the same in one entry. A journal records both debit and credit aspects of a transaction according to the double entry system of book-keeping. Each entry in the journal is followed by a brief explanation of the transaction which is called' narration'. A single journal entry is capable of recording more than one transaction involving more than two accounts. Such an entry is called compound entry.

Format of Journal

Date

Particular Ledger Folio

Amount Dr

Amount Cr

Double Entry Accounting


According to this system every business transaction affects at least two accounts in opposite directions. For example, if the furniture is purchased in the business, furniture is increased whereas the cash is decreased. There can be no transaction in the business which affects only one account or which has only one aspect. As such, both the aspects of every transaction are recorded under this system. It may, however, be noted that the double entry does not mean that a transaction is recorded twice.

Double Entry Accounting


But it means that at least two accounts are affected by a transaction one account receiving a benefit and the other account yielding a benefit. The person or the account receiving a benefit is debited and the person or the account who gives something to the business is credited. The amount of every transaction is written twice, once as a debit and again as a credit.

Double Entry Accounting


For example, we received Rs. 5,000 from Mohan. This transaction affects two accounts Cash Account and the Mohan's Account. Cash account is receiving a benefit (as cash is coming in) and hence Cash account will be debited, whereas Mohan is yielding a benefit and hence his account will be credited.

Advantages of Double Entry System or Causes of its Popularity


Scientific System :Under this system, the transactions are recorded according to certain specified rules and as such, the system is more scientific as compared to any other systems of Book-Keeping. Complete record of every transaction : In double entry, all the accounts are divided in three parts, i.e., personal accounts, real accounts and nominal accounts and both the debit and credit aspects of a transaction are recorded in these. Hence, the complete record of every transaction is maintained in this system, so that if the need arises full details of every transaction can be easily made available at any time in future.

Advantages of Double Entry System


Preparation of Trial Balance ;- In double entry system, the amount recorded to the debit sides of various accounts will always be equal to the amounts recorded on the credit sides of various accounts. As such, a trial balance can be prepared to check the arithmetical accuracy of the accounts. Preparation of Trading and Profit & Loss Account:- With the help of the trial balance, a Trader can prepare a Trading Account to find out the amount of gross profit or gross loss. Similarly, a profit and loss account can be prepared to find out the net profit earned or loss suffered during a particular period.

Advantages of Double Entry System


Knowledge of financial position of the business :- At the end of each accounting period every businessman wants to know the financial position of his business, i.e., value of the assets, liabilities and capital of the business. In double entry system, separate accounts are opened for each and every asset and liability of the firm and as such, a Balance Sheet can be prepared which is a screen picture of the financial position of a business at a certain moment. Knowledge of various information's :- In double entry system the accounts are maintained in such a way that the information regarding the following is readily available at any point of time :-

Advantages of Double Entry System


What is the amount of sales, purchase and closing stock? What amount is due to be received from customers or in other words, the total number of debtors and the amount in each case'? What amount is due to be paid to suppliers or in other, words, the total number of creditors and the amount in each case'? How much amount has been paid on account of each head of expenses separately? How much amount has been earned on account of each head of income separately?

Advantages of Double Entry System


Lesser possibility of Fraud :- This system of book-keeping records each transaction in two accounts, as such there is hardly any scope of forgery and manipulation as compared to other systems. If at all some manipulation takes place, it can be easily detected.

Legal Approval :- Complete record of each transaction is maintained under this system according to certain specified rules. As such, the system meets legal requirements and books of accounts maintained under this system are accepted as true and reliable by the Companies Act and various other Acts.

Advantages of Double Entry System


Comparative Study :- Under this system, separate recording is made for each item of expenditure and income. As such, the management can compare' the expenditure of the current year with those of the previous years and can know on what head of expenditure the money spent is unreasonable and can take steps to check the unnecessary expenditure. Helps management in Decision Making :- Under the system, the management can obtain all the requisite information quickly and also the information provided by the system is most reliable. Hence, the management can use the information for making decisions. Suitable for all Types of Businessmen :- The system is so flexible that it can be conveniently introduced in small as well as big types of business.

Classification of Accounts
Personal Accounts :- The accounts which relate to an individual, firm, any or an institution are called personal accounts. Account of Mohan, Account of Ram Chander Krishan Chander, Debtors, Creditors, Account of Delhi University, Bank Account, Bank Overdraft Account, Capital Account of the proprietor, etc. are examples of Personal Accounts. Rule :- Rule for recording a transaction in personal accounts in simple words is 'Debit the receiver and credit the giver'. In other words, "Debit that person's account who receives something from the business and credit that person's account who gives something to the business".

Personal Accounts
Example 1 :-Paid Rs. 1,000 to Hari: In this case, two accounts affected are Hari's A/c and Cash Alc. According to the rule of "Debit the receiver", Hari's Account will be debited in the entry as he is the receiver of Cash. Simultaneously, the account of cash will be credited, as cash has gone out. The entry will be Hari (Debit the receiver) Dr. 1,000 To Cash A/C 1,000 Example 2 :- Received Rs. 500 from Mohan : In this case, cash account will be debited as cash has been received, and Mohan's account will be credited according to the rule of "Credit the Giver". The entry will be : Cash A/C Dr. 500 To Mohan (Credit the Giver) 500

Real Account
Real Accounts - The accounts of all those things whose value can be measured in terms of money and which are the properties of the business are termed as Real Accounts. Such as, Cash Account, Stock Account, Furniture Account, Machinery Account, Building Account, Goodwill Account, Patents Account, Trade Marks Account etc. Rule - Rule for recording a transaction in real account is 'Debit what comes in and credit what goes out'. According to this rule, whenever any property comes into the business, it is debited and when it goes outside the business, it is credited.

Real Account
For example, if furniture for Rs. 5,000 has been purchased for cash, furniture account should be debited according to the rule of' 'Debit what comes in", while cash account should be credited according to the rule of' 'Credit what goes out". Entry will be Furniture A/C (Debit what comes in) Dr. 5,000 To Cash Alc (Credit what goes out) 5,000 Objects ;- These accounts represent the value of various properties owned by a business in terms of money and indicate the financial position of the business.

Nominal Account
Nominal Accounts - These accounts include the accounts of all expenses and incomes. The examples of nominal accounts relating to expenses are Purchases, Bad Debts, Salaries paid, Rent Paid, Discount allowed, etc. Rule - Rule for recording in nominal accounts is "Debit the expenses and losses and credit incomes and gains.

Nominal Account
Example : Paid Rs. 5,000 for Salaries. In this case the two accounts being affected are Salaries Alc and Cash Alc. Salaries represent expenses and as such Salaries Account will be debited, Cash Account will be credited according to the rule : Entry will be: Salary Alc (Debit the Expenses) Dr. 5,000 To Cash Alc (Credit what goes out) 5,000

Nominal Account
Example: Received Rs. 1,000 for Commission. In this case the two accounts being affected are Commission Alc 'and Cash Alc. Commission Alc is a nominal . Entry will be: . Cash Alc (Debit what comes in) Dr, 1,000 Commission Alc (Credit the incomes) 1 000

ILLUSTRATION

Examples

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