UNIT 12: JOURNAL ENTRIES
Learning Objectives
After completing this unit, students will be able to:
- Define a Journal as the book of original/prime entry and explain its objectives and importance.
- Draw the standard 5-column Specimen of a Journal and explain the purpose of each column.
- Master both approaches to the Rules of Debit and Credit:
- Traditional / Golden Rules of Accounting (Personal, Real, and Nominal Accounts)
- Modern / Accounting Equation Rules of Accounting (Assets, Expenses/Losses, Liabilities, Capital, and Revenues/Gains)
- Prepare accurate Simple and Compound Journal Entries across all Grade 9 business transactions: capital commencement, cash/credit purchases and sales, purchase/sales returns, banking transactions, trade and cash discounts, drawings, expenses (paid, outstanding, prepaid), depreciation, and bad debts/bad debts recovered.
12.1 Meaning, Objectives, and Format of a Journal
The word Journal is derived from the French word Jour, meaning “a day.” Therefore, a Journal is a daily record book (Book of Original Entry or Book of Prime Entry) in which financial transactions are first recorded in strict chronological (date-wise) order from source vouchers, showing which account is Debited (Dr.) and which account is Credited (Cr.), along with a brief explanation called Narration.
- Journalizing: The process of analyzing a transaction and recording it in the Journal.
- Narration: A short, clear explanation written in brackets
(Being ...)immediately below each journal entry summarizing the transaction. - Simple vs. Compound Journal Entry: A journal entry involving only one Debit account and one Credit account is a Simple Journal Entry; an entry involving two or more Debit accounts and/or two or more Credit accounts on the same date is a Compound (Combined) Journal Entry.
Specimen Format of a Journal (5 Columns)
Journal Entries in the Books of [Name of Business / Proprietor]
| Date (1) | Particulars (2) | L.F. (3) | Debit Amount (Rs.) (4) | Credit Amount (Rs.) (5) |
|---|---|---|---|---|
| 2082-01-01 | [Name of Account to be Debited] A/c …………………… Dr.To [Name of Account to be Credited] A/c(Being [brief narration explaining the transaction]) | XXX,XXX | XXX,XXX |
- Date: Records the year, month, and day of the transaction (e.g.,
2082-04-01). - Particulars: Records the name of the account debited on the first line with
Dr.at the right end, the name of the account credited on the next line prefixed withTo, and the Narration in parentheses on the third line. - L.F. (Ledger Folio): Records the page number of the Ledger where the entry is subsequently posted, acting as a cross-reference index. (In classroom exercises, this column remains blank).
- Debit Amount (Rs.): Records the monetary amount debited.
- Credit Amount (Rs.): Records the monetary amount credited.
12.2 Rules of Debit and Credit
There are two complementary methods for determining which account to Debit and which account to Credit. Both methods always yield the exact same journal entry!
Method A: Traditional Classification of Accounts (The Three Golden Rules)
Under the traditional British approach, all accounts are classified into Personal Accounts, Real Accounts, and Nominal Accounts:
| Type of Account | Meaning & Sub-Types | Examples of Accounts | Golden Rule of Debit and Credit |
|---|---|---|---|
| 1. Personal Account | Accounts of Natural Persons (individuals), Artificial/Legal Persons (companies, banks, schools, clubs, government offices), and Representative Personal Accounts (representing a person/group) | Ram’s A/c, Sita’s A/c, Nepal Bank Ltd. A/c, Pashupati Traders A/c, Capital A/c, Drawing A/c, Outstanding Salary A/c, Prepaid Rent A/c | Debit the Receiver Credit the Giver |
| 2. Real Account | Accounts of all tangible and intangible properties, goods, and assets of the business (except personal debtors/bank) | Cash A/c, Purchases/Goods A/c, Sales A/c, Furniture A/c, Machinery A/c, Land & Building A/c, Computer A/c, Goodwill A/c, Patent A/c | Debit What Comes In Credit What Goes Out |
| 3. Nominal Account | Temporary accounts of all expenses, losses, incomes, and gains that exist in name only and close into the Trading/P&L Account at year-end | Salary A/c, Rent A/c, Wages A/c, Interest Paid/Received A/c, Commission A/c, Discount Allowed/Received A/c, Depreciation A/c, Bad Debts A/c | Debit All Expenses and Losses Credit All Incomes and Gains |
Method B: Modern / Accounting Equation Approach (5 Categories of Accounts)
Under the modern American approach based on the Accounting Equation (Assets + Expenses = Liabilities + Capital + Revenue), accounts are divided into five categories:
| Category of Account | Normal Balance | When It Increases (↑) | When It Decreases (↓) | Examples |
|---|---|---|---|---|
| 1. Assets | Debit (Dr.) | DEBIT (Dr.) | CREDIT (Cr.) | Cash, Bank, Furniture, Machinery, Building, Stock/Goods, Debtors |
| 2. Expenses & Losses | Debit (Dr.) | DEBIT (Dr.) | CREDIT (Cr.) | Purchases, Salary, Wages, Rent, Stationery, Discount Allowed, Depreciation, Bad Debts |
| 3. Liabilities | Credit (Cr.) | CREDIT (Cr.) | DEBIT (Dr.) | Creditors, Bank Loan, Bills Payable, Outstanding Expenses |
| 4. Capital / Owner’s Equity | Credit (Cr.) | CREDIT (Cr.) | DEBIT (Dr.) (Drawings) | Capital A/c (Drawings reduces Capital, so Drawings is Debited) |
| 5. Revenues / Incomes & Gains | Credit (Cr.) | CREDIT (Cr.) | DEBIT (Dr.) | Sales, Interest Received, Commission Received, Discount Received, Bad Debts Recovered |
Memory Shortcut (DEALER Rule):
- D-E-A (Drawings, Expenses, Assets) → Increase is Debit (Dr.), Decrease is Credit (Cr.).
- L-E-R (Liabilities, Owner’s Equity/Capital, Revenue) → Increase is Credit (Cr.), Decrease is Debit (Dr.).
12.3 Master Guide to Standard Journal Entries (All Syllabus Scenarios)
| S.N. | Nature of Transaction | Journal Entry (Particulars) | Rule / Logic Applied |
|---|---|---|---|
| 1. | Commenced business with Cash, Bank Balance, Goods (Stock), and Furniture | Cash A/c ........................ Dr.Bank A/c ........................ Dr.Purchase / Stock of Goods A/c ... Dr.Furniture A/c ................... Dr. To Capital A/c(Being business started with cash, bank, goods, and furniture) | Assets come in (Dr.); Proprietor is the giver / Capital increases (Cr.) |
| 2. | Cash deposited into the Bank (or opened a Bank Account) | Bank A/c ........................ Dr. To Cash A/c(Being cash deposited into the bank) | Bank is the receiver / Bank asset increases (Dr.); Cash goes out (Cr.) |
| 3. | Goods purchased for Cash | Purchase A/c .................... Dr. To Cash A/c(Being goods purchased for cash) | Goods come in / Expense increases (Dr.); Cash goes out (Cr.) |
| 4. | Goods purchased on Credit from a supplier (e.g., Sita Traders) (Note: Whenever a person/firm’s name is given without the word “for cash”, it is a Credit transaction) | Purchase A/c .................... Dr. To Sita Traders A/c(Being goods purchased on credit from Sita Traders) | Goods come in (Dr.); Sita Traders is the giver / Creditor increases (Cr.) |
| 5. | Goods purchased partly for cash and partly on credit (e.g., Bought goods from Hari for Rs. 20,000 and paid Rs. 8,000 in cash) | Purchase A/c .................... Dr. 20,000 To Cash A/c ......................... 8,000 To Hari's A/c ....................... 12,000(Being goods purchased from Hari with partial cash payment) | Total goods come in Rs. 20,000 (Dr.); Cash goes out Rs. 8,000 (Cr.) and Creditor Hari is giver for balance Rs. 12,000 (Cr.) |
| 6. | Purchase of a Fixed Asset (e.g., Machinery, Computer, or Furniture) for office use (Never debit Purchase A/c for fixed assets!) | Machinery / Furniture A/c ....... Dr. To Cash / Bank / Supplier A/c(Being machinery/furniture purchased) | Specific Fixed Asset comes in (Dr.); Cash/Bank/Supplier goes out (Cr.) |
| 7. | Goods returned to a Credit Supplier (Purchase Return / Return Outward) | Supplier (Creditor) A/c ......... Dr. To Purchase Return A/c(Being defective goods returned to supplier) | Supplier is the receiver (Dr.); Goods go out (Cr.) |
| 8. | Goods sold for Cash | Cash A/c ........................ Dr. To Sales A/c(Being goods sold for cash) | Cash comes in (Dr.); Goods go out / Revenue increases (Cr.) |
| 9. | Goods sold on Credit to a customer (e.g., Kiran) | Kiran's A/c ..................... Dr. To Sales A/c(Being goods sold on credit to Kiran) | Kiran is the receiver / Debtor increases (Dr.); Sales revenue increases (Cr.) |
| 10. | Goods returned by a Credit Customer (Sales Return / Return Inward) | Sales Return A/c ................ Dr. To Customer (Debtor) A/c(Being goods returned by customer) | Goods come back in / Revenue reduces (Dr.); Customer is the giver (Cr.) |
| 11. | Cash or Cheque withdrawn from Bank for Office Use | Cash A/c ........................ Dr. To Bank A/c(Being cash withdrawn from bank for office use) | Cash comes into office (Dr.); Bank is the giver (Cr.) |
| 12. | Cash, Cheque, or Goods withdrawn by Proprietor for Personal / Domestic Use (or paying owner’s personal bills) | Drawing A/c ..................... Dr. To Cash / Bank / Purchase A/c(Being cash/goods withdrawn by owner for personal use) | Owner is receiver (Drawing A/c Dr.); Cash, Bank, or Goods at cost (Purchase A/c Cr.) goes out |
| 13. | Cash paid to a Creditor in “Full Settlement” receiving Cash Discount (e.g., Paid Rs. 9,500 to Sita in full settlement of her account of Rs. 10,000) | Sita's A/c ...................... Dr. 10,000 To Cash A/c ......................... 9,500 To Discount Received A/c ............ 500(Being cash paid to Sita in full settlement and discount received) | Creditor Sita is settled in full Rs. 10,000 (Dr.); Cash goes out Rs. 9,500 (Cr.); Discount Received Rs. 500 is an income (Cr.) |
| 14. | Cash received from a Debtor in “Full Settlement” allowing Cash Discount (e.g., Received Rs. 4,800 from Kiran in full settlement of Rs. 5,000) | Cash A/c ........................ Dr. 4,800Discount Allowed A/c ............ Dr. 200 To Kiran's A/c ...................... 5,000(Being cash received from Kiran in full settlement and discount allowed) | Cash comes in Rs. 4,800 (Dr.); Discount Allowed Rs. 200 is an expense (Dr.); Debtor Kiran gives/settles Rs. 5,000 (Cr.) |
| 15. | Payment of Operating Expenses (Salary, Rent, Wages, Stationery, Telephone, Electricity) in Cash or by Cheque (Note: Even if the landlord or employee’s name is mentioned—e.g., “Paid salary to Ram”—never debit Ram’s A/c; always debit the Expense A/c!) | Salary / Rent / Wages A/c ....... Dr. To Cash / Bank A/c(Being salary/rent paid) | Nominal Account: Expense is debited (Dr.); Cash or Bank goes out (Cr.) |
| 16. | Receipt of Incomes (Commission, Interest, Rent, Dividend) in Cash or by Cheque | Cash / Bank A/c ................. Dr. To Commission / Interest A/c(Being commission/interest received) | Cash/Bank comes in (Dr.); Nominal Account: Income is credited (Cr.) |
| 17. | Depreciation charged on Fixed Assets (e.g., 10% Depreciation on Furniture costing Rs. 50,000) | Depreciation A/c ................ Dr. 5,000 To Furniture A/c .................... 5,000(Being depreciation charged on furniture) | Depreciation is a non-cash expense (Dr.); Value of Furniture asset decreases (Cr.) |
| 18. | Debtor becomes insolvent and amount is irrecoverable (Bad Debts written off) | Bad Debts A/c ................... Dr. To Debtor's A/c(Being amount due from debtor written off as bad debt) | Bad Debts is a loss (Dr.); Debtor asset decreases (Cr.) |
| 19. | Recovery of Bad Debts previously written off (Never credit the old Debtor’s name; credit Bad Debts Recovered A/c!) | Cash A/c ........................ Dr. To Bad Debts Recovered A/c(Being bad debts previously written off now recovered) | Cash comes in (Dr.); Bad Debts Recovered is a gain (Cr.) |
| 20. | Goods distributed as Free Samples (Advertisement), lost by fire/theft, or given as Charity | Advertisement / Loss by Fire / Charity A/c ... Dr. To Purchase A/c(Being goods distributed as free samples / lost by fire) | Expense or Loss is debited (Dr.); Goods go out at cost price (To Purchase A/c Cr.) |
12.4 Comprehensive Worked Numerical Illustrations
Illustration 1: Complete Monthly Transactions of a Trading Concern
Question: Journalize the following transactions in the books of Gokarna Enterprises, Kathmandu for the month of Baisakh 2082:
- Baisakh 1: Commenced business with cash Rs. 2,50,000, bank balance Rs. 1,50,000, and furniture Rs. 50,000.
- Baisakh 3: Purchased goods for Rs. 60,000 at a 10% trade discount from Bagmati Suppliers.
- Baisakh 6: Sold goods costing Rs. 20,000 to Anish for Rs. 25,000 on credit.
- Baisakh 9: Returned defective goods worth Rs. 4,000 (net) to Bagmati Suppliers.
- Baisakh 12: Paid Rs. 48,500 by cheque to Bagmati Suppliers in full settlement of their account.
- Baisakh 15: Received Rs. 24,200 in cash from Anish in full settlement of his account.
- Baisakh 18: Withdrew cash Rs. 6,000 from bank for office use and Rs. 4,000 for the proprietor’s personal use.
- Baisakh 22: Goods costing Rs. 3,000 were distributed as free samples for sales promotion.
- Baisakh 26: Arun, a debtor who owed Rs. 5,000, was declared insolvent and only 60% of the amount due was recovered in cash from his estate.
- Baisakh 30: Paid staff salary Rs. 18,000 by cheque and office rent Rs. 10,000 in cash.
Solution:
Journal Entries in the Books of Gokarna Enterprises, Kathmandu
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 2082-01-01 | Cash A/c ……………………………………………….. Dr. Bank A/c ……………………………………………….. Dr. Furniture A/c …………………………………………… Dr. To Capital A/c (Being business commenced with cash, bank balance, and furniture) | 2,50,000 1,50,000 50,000 | 4,50,000 | |
| 2082-01-03 | Purchase A/c ……………………………………………. Dr. To Bagmati Suppliers A/c (Being goods of Rs. 60,000 purchased on credit at 10% trade discount: 60,000 - 6,000 = 54,000) | 54,000 | 54,000 | |
| 2082-01-06 | Anish’s A/c …………………………………………….. Dr. To Sales A/c (Being goods sold on credit to Anish at selling price Rs. 25,000) | 25,000 | 25,000 | |
| 2082-01-09 | Bagmati Suppliers A/c ……………………………………. Dr. To Purchase Return A/c (Being defective goods returned to Bagmati Suppliers) | 4,000 | 4,000 | |
| 2082-01-12 | Bagmati Suppliers A/c ……………………………………. Dr. To Bank A/c To Discount Received A/c (Being cheque paid to Bagmati Suppliers in full settlement of net balance Rs. 50,000 [ 54,000 - 4,000]) | 50,000 | 48,500 1,500 | |
| 2082-01-15 | Cash A/c ……………………………………………….. Dr. Discount Allowed A/c …………………………………….. Dr. To Anish’s A/c (Being cash received from Anish in full settlement and discount allowed) | 24,200 800 | 25,000 | |
| 2082-01-18 | Cash A/c ……………………………………………….. Dr. Drawing A/c …………………………………………….. Dr. To Bank A/c (Being cash withdrawn from bank for office use and personal use) | 6,000 4,000 | 10,000 | |
| 2082-01-22 | Advertisement (Free Sample) A/c …………………………… Dr. To Purchase A/c (Being goods distributed as free samples) | 3,000 | 3,000 | |
| 2082-01-26 | Cash A/c (60% of 5,000) ……………………… Dr.Bad Debts A/c ( 40% of 5,000) …………………. Dr.To Arun’s A/c (Being 60% recovered from insolvent debtor Arun and 40% written off as bad debt) | 3,000 2,000 | 5,000 | |
| 2082-01-30 | Salary A/c ……………………………………………… Dr. Rent A/c ……………………………………………….. Dr. To Bank A/c To Cash A/c (Being salary paid by cheque and office rent paid in cash) | 18,000 10,000 | 18,000 10,000 | |
| Grand Total | 6,21,000 | 6,21,000 |
Things to Remember (Unit 12 Summary)
- A Journal is the Book of Original Entry recording transactions chronologically with 5 columns: Date, Particulars, L.F., Debit (Rs.), and Credit (Rs.).
- Golden Rules: Personal: Dr. the Receiver, Cr. the Giver; Real: Dr. What comes in, Cr. What goes out; Nominal: Dr. All expenses & losses, Cr. All incomes & gains.
- When goods are sold for Rs. 25,000 (costing Rs. 20,000), the journal entry in periodic inventory accounting records the selling price (Rs. 25,000) in
Sales A/c.
Exercises (Unit 12)
A. Very Short Answer Questions (1 Mark Each)
- Why is the Journal called the Book of Original Entry?
- What is meant by Journalizing and Narration?
- State the Golden Rules of Debit and Credit for Personal, Real, and Nominal accounts.
- Why is
Purchase A/ccredited when the proprietor withdraws goods for personal use?
B. Numerical Problems for Practice (6 to 8 Marks Each)
Problem 12.1: Journalize the following transactions in the books of Siddhartha Traders, Butwal for Jestha 2082:
- Jestha 1: Started business with cash Rs. 3,00,000 and goods worth Rs. 80,000.
- Jestha 4: Deposited cash into Everest Bank Ltd. Rs. 1,80,000.
- Jestha 8: Purchased goods from Nima for Rs. 40,000 and paid Rs. 15,000 immediately by cheque.
- Jestha 12: Purchased a computer for office use for Rs. 45,000 and paid by cheque.
- Jestha 16: Sold goods to Bhuwan for Rs. 30,000 at a 10% trade discount.
- Jestha 20: Settled Nima’s account by paying cash Rs. 24,000 in full settlement.
- Jestha 25: Received Rs. 26,000 from Bhuwan in full settlement of his account.
- Jestha 28: Charged 10% depreciation on the computer costing Rs. 45,000.
- Jestha 30: Received Rs. 2,500 cash from Ram, whose debt had been written off as a bad debt last year. (Check Answer: Grand Total of Journal = Rs. 7,31,000)
Worked answers to these exercises are in Unit 12 Solutions.