Rules of Journal Entry

What is a Journal?

A Journal is a book in which all the transactions of a business are recorded for the first time. We know that every transaction affects two accounts, one is debited and the other one is credited. ‘Debit’ (Dr.) and ‘Credit’ (Cr,) are the two terms or signs used to denote the financial effect of any transaction. The word ‘journal’ has been derived from the French word ‘JOUR’ meaning daily records. Journal Book is maintained to have prime records for small firms. After preparing the journal book, the transactions are then posted to Ledger.

Format of Journal

Format of Journal Entry

We will discuss the items of the format one by one:

1. Date: In this column, the date on which the transaction was recorded is mentioned. The year is written at the top, following the month and then the day.

2. Particulars: Every transaction affects at least two accounts. One is debited and the other one is credited. The item that is debited is mentioned first and the word ‘Dr.’ is also written after that. In the next line, the item which is credited is written, a few spaces away from the margin, starting with ‘To’.

Narration- After every journal entry, a brief explanation of the transaction with necessary details is given.

3. Ledger Folio or LF: Ledger Folio shows the number of the page on which the ledger account of that particular item is made.

4. Amount (Dr.): The amount that is debited is mentioned here.

5. Amount (Cr.): The amount that is credited is mentioned here.

Steps in Journalizing:

The process of recording transactions in the journal is called journalizing. The steps to be followed to record business transactions in a journal are:

Step 1: Ascertain the accounts related to a particular transaction.

Step 2: Find the nature of the related account.

Step 3: Ascertain the rule of debit and credit, applicable for the related account.

Step 4: Record the date of the transaction in the ‘Date Column’.

Step 5: Write the name of the account to be debited in the particulars column along with the abbreviation ‘Dr.’ and the amount to be debited in the debit amount column.

Step 6: Write the name of the account to be credited in the next line starting with ‘To’ and the amount to be credited in the credit amount column.

Step 7: Write a brief explanation of the transaction as narration.

Step 8: Draw a line across the entire particulars column to separate one journal entry from the other.

Rule of Debit and Credit in Journalizing (Golden Rules of Accounting)

All the accounts are classified into three types under the traditional approach. They are:

1. Personal Account
2. Real Account
3. Nominal Account

1. Personal Account

The accounts which relate to an individual, group of individuals, firm, company, or institute are considered to be personal accounts. There are three types of personal accounts:

• Natural Personal Account: Accounts of natural persons i.e. accounts of particular human beings are considered in this. Eg. Ram A/c, Mohan A/c, Creditors A/c, Debtors A/c, Drawings A/c Etc.
• Artificial Personal Account: These accounts do not have the physical existence of a human being but a group of human beings working together is considered to be an Artificial Personal Account. Eg. Company A/c, Partnership Firm A/c, Bank A/c, Club A/c Etc.
• Representative Personal Account: When an account represents a particular person or group of persons then it is called a Representative Personal Account.

Rule:

Debit the Receiver, Credit the Giver

It implies that ‘Debit the person’s account who receives something from the business out of a transaction and Credit the person’s account who gives something to the business’.

2. Real Account

All the accounts whose value can be measured in monetary terms whether tangible or intangible which belong to the business are called Real Accounts. There are two types of real accounts:

• Tangible Real Accounts: The real accounts which can be touched, felt, measured, purchased, sold, etc. Eg. Cash A/c, Stock A/c, Furniture A/c, Machinery A/c, Etc.
• Intangible Real Accounts: The real accounts which can not be touched but their value can be measured in terms of money. Eg. Goodwill A/c, Patent A/c, Copyright A/c, Trademark A/c Etc.

Rule:

Debit What Comes in, Credit What Goes out

The rule specifies that any real account which comes into business is debited and any real account which goes outside the business is credited.

3. Nominal Account

All the expenses and losses as well as all the incomes and gains come under Nominal Account. Expenses include Salaries Paid, Rent Paid, Discount Allowed Etc. and Incomes include Commission Received, Interest Received, Discount Received Etc.

Rule:

Debit all the Expenses and Losses, Credit all the Incomes and Gains

It implies that all the expenses and losses incurred in business are debited and all the income and losses should be credited.