Journalising a Business Transaction

Accounting System of a Business Firm

Accounting system of a business is maintained to ascertain the profit made by the company at periodic intervals, and to know the details of assets and liabilities. Debtors who have to pay money to the business firms need details of the transactions and payments made by them for making further payments. Similarly creditors, who gave money, goods or services to  business firms also need details to confirm payments made to them. The accounts of debtors are a part of asset accounts and accounts of creditors are a part of liability accounts of a business firm.

Accounts for each of the items of significance like each and every debtor and creditor, cash, bank balances etc. are kept in register called ledger. Every business transaction is first entered into a register called journal in serial order on a day-to-day basis and from journal, entries are posted in the individual accounts maintained in the ledger. From the accounts and account balances in the ledger various accounting reports are prepared by the accountants. Profit and loss account and balance sheet are important accounting statements prepared using the ledger.

 

Journal

Every business transaction that changes a liability account or an asset account is entered into an accounting book called journal.

The entry is based on a document which is documentary proof that the transaction has occurred. In accounting terminology it is called a voucher. But in popular terms, a purchase invoice, a sales invoice, a cash bill, payment made to employees on their expense vouchers and a loan instalment payment receipt from bank ect. are documentary proof for a business transaction that has implication for asset and liability accounts and therefore has accounting implications.

The entries in accounts follow accounting terminology of debit and credit.

 

Accounting in a Business Firm

 

•Account books are kept for a business firm.

•The firm owns assets.

•For example buildings, furniture, machinery etc.

•The firm will have liabilities.

•Liabilities are classified into two categories

 

•Liabilities to the owner.

•Liabilities to others

 

Accounting basis

•Assets = Liabilities at any instant for a business firm

 

Account

•Account is kept for every rupee of revenue, expenditure, asset acquired and liability incurred.

•For this purpose certain account heads are identified which capture the financial transactions made by the firm.

 

Assets – Account Heads

•Land

•Building

•Plant & Machinery

•Furniture

•Office Equipment

•Cash

•Stock of Materials

 

Liabilities – Account Heads

•Capital

•Bank Loans

•Other Loans

•Deposits

•Sundry Creditors

 

Revenues – Account Heads

•Sales

•Interest on investments

•Sale of scrap

•Sale of capital equipment

 

Expenses – Account Heads

•Rent

•Wages

•Electricity

•Telephone expenses

•Traveling expenses

•Interest

•Depreciation

 

Accounting language

•Debiting an account.

•Crediting an account

 

Classification of accounts

•Real accounts – building, material, office equipment

•Personal accounts – suppliers, customers, employees, government, banks

•Nominal accounts – sales, interest, wages

Meaning of debit & credit

Different for different for categories of accounts.

 •   Meaning of debit & credit for real accounts: 

•Debiting an account means there is an increase under the asset head.

•The firm has acquired more of an asset category.

 

•Crediting an account means there is a decrease under the asset head.

•The firm has disposed off some portion of the asset in that category.

 
 

Popular rule for real accounts 

•Debit what comes in

•         Credit what goes out

  

Debit-Credit Meaning – Personal Accounts

•Debiting a personal account means that person has received a benefit from the firm.

•He has to pay the firm in future.

• 

•Crediting a personal account means that the person has given some benefit to the firm.

•The firm has to pay him in the future.

Popular rule for personal accounts

•Debit the receiver

•        Credit the giver

 

Debit-credit meaning for nominal accounts

•Crediting a nominal account means that revenue is earned by the firm under that account head.

•Debiting a nominal account means that an expenditure is incurred by the firm under that account head.

•Normally revenue accounts receive credit.

•Expenditure accounts receive debit

 

Popular rule for nominal accounts

•Debit expenses and losses

•        Credit incomes and profits

Some Important Practices  in Financial Accounting

Purchases of raw materials and components and finished goods for resale are recorded in purchases account. All purchases of goods, cash or credit are debited to the purchases account. In the case of cash purchases cash account is credited and purchases account is debited. In the case of credit purchases, supplier's account is credited and purchases account is debited.

All sales, cash as well as credit sales are credited to the sales account.

In the case of cash sales, cash account is debited and sales account is credited. In the case of credit sale, the customer account is debited and sales account is credited.

Popular Debit and Credit Rules at a Glance

Popular rule for real accounts

•Debit what comes in

•         Credit what goes out

Popular rule for personal accounts

•Debit the receiver

•        Credit the giver 

Popular rule for nominal accounts

•Debit expenses and losses

•        Credit incomes and profits

For Further Study

Exercise

Journal Entry – Exercise Problem

Journal Entry – Exercise Problem  (Simple problem)

http://mbaofindia.blogspot.com/2012/01/journal-entry-exercise-problem-2.html

Articles explaining the basic accounting process in a simple way.

 Financial Accounting - Simplified Explanation for Technical Personnel

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