Journal Entries

A Journal is a book in which all the transactions of a business are recorded for the first time. The process of recording transactions in the journal is called Journalising and recorded transactions are called Journal Entries.

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. 

Steps to be followed to record business transactions in a journal are: 

1. Ascertain the accounts related to a particular transaction. 
2. Find the nature of the related account. 
3. Ascertain the rule of debit and credit, applicable to the related account. 
4. Record the date of the transaction in the ‘Date Column’. 
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. 
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. 
7. Write a brief explanation of the transaction as narration. 
8. Draw a line across the entire particulars column to separate one journal entry from the other.

1. Capital Account

The amount invested in the business whether in the means of cash or kind by the proprietor or owner of the business is called capital. The capital account will be credited, and the cash or assets brought in will be debited. 

Journal Entry:

Capital Account Journal Entry with Examples

2. Drawings Account: 

Withdrawal of any amount in cash or kind from the enterprise for personal use by the proprietor is termed as Drawings. The Drawings account will be debited, and the cash or goods withdrawn will be debited.

Journal Entry: 

Drawings Account Journal Entry with Examples

3. Expenses Paid:

Any amount spent in order to purchase or sell goods or services that generates revenue in the business is called expenses. The Cash Account will be decreased with the amount paid as expenses, so it will be credited and Expenses will be debited.

Journal Entry: 

Expenses Paid Journal Entry with Examples

4. Income Received: 

Any monetary benefit arising from the business can be termed as income. The Cash Account will be increased with the amount received as income, so it will be debited and Income Account will be credited.

Journal Entry: 

Income Received Journal Entry with Examples

5. Goods: 

Goods are those items in which a business deals. In other words, goods are the commodities that are purchased and sold in a business on a daily basis. Goods are denoted as ‘Purchases A/c’ when goods are purchased, and ‘Sales A/c’ when they are sold. 

Goods Account is classified into five different accounts for the purpose of passing journal entries:

A. Purchases Account: When goods are purchased in cash or credit, donated, lost, or withdrawn for personal use, in all these cases, goods are denoted as Purchases A/c.

Journal Entry: 

1. Goods purchased for cash
2. Goods Donated
3. Goods are withdrawn for personal use
4. Goods lost by fire

B. Sales Account: When goods are sold, then it is represented as Sales A/c. 

Journal Entry: 

C. Purchase Return or Return Outwards Account: When purchased goods are returned to the supplier, it is denoted as Purchase Return A/c or Return Outwards A/c.

Journal Entry: 

D. Sales Return or Return Inwards Account: When goods sold are returned by the customers, it is termed as Sales Return or Return Inwards A/c.

Journal Entry: 

E. Stock: The left over unsold goods at the end of a financial year is represented through stock. Closing Stock is the valuation of goods leftover at the end of a financial year, and Opening Stock is the valuation of goods an enterprise has at the beginning of a financial year.

Journal Entry: 

Goods Journal Entry with Examples

6. Transactions: 

Transactions related to the purchase and sale of goods can be of two types, Cash or Credit. 

A. Cash Transactions: Cash transactions are those transactions in which payment is made or received in cash at the time of purchase or sale of goods. Cash transactions can be identified by-

• When the Name of the Party and Cash both are given in the transaction;
• When only Cash is given in the transaction;
• When the Name of the Party and Cash both are not given. 

Journal Entry: 

B. Credit Transactions: Credit transactions are those transactions in which payment is not made or received at the time of purchase or sale of goods. Credit transactions can be identified by:

• When only the Name of the Party is given in the transaction.

Journal Entry: 

Cash & Credit Transactions Journal Entry with Examples

7. Assets: 

Assets (Machinery, Building, Land, etc.) can also be purchased or sold in cash or on credit. It is not represented through Purchases, but with the name of the Asset.

Journal Entry: (When Assets are Purchased)

Journal Entry: (When Assets are Sold)

Assets Journal Entry with Examples

8. Depreciation:

Depreciation is the decrease in the value of assets due to use or normal wear and tear. 

Journal Entry: 

Depreciation Account Journal Entry with Examples

9. Discount:

A discount is a concession in the selling price of a product offered by a seller to its customers. According to nature, there are two types of discount:

A. Discount Allowed

B. Discount Received

A. Discount Allowed: When at the time of sales or receiving cash, any concession is given to the customers, it is called discount allowed. 

Journal Entry: 

B. Discount Received: When at the time of purchase or paying cash, any concession is received from the seller, it is called discount received.

Journal Entry: 

According to the business point of view, there are two types of Discount:

A. Trade Discount

B. Cash Discount

A. Trade Discount: The discount provided by the seller to its customers at a fixed percentage on the listed price mostly on bulk purchases is called a trade discount. Trade discount is not shown separately in the journal entry.

Journal Entry: 

B. Cash Discount: A Cash discount is offered to those customers who make quick payments or payment is made by them within a fixed period. 

Journal Entry: 

Discount Journal Entry with Examples

10. Amount Paid or Received in Full/Final Settlement:

A business may allow or receive a discount at the time of full and final settlement of the accounts of debtors or creditors. 

Journal Entry: 

Amount Paid or Received in Full/Final Settlement Journal Entry with Examples

11. Compound or Composite Journal Entry:

When certain transactions of the same nature happen on the same date, it is preferred to pass a single journal entry instead of passing two or more entries. 

Journal Entry:

Compound or Composite Journal Entry with Examples

12. Opening Journal Entry:

After closing all the books at the end of a financial year, every business starts its new books at the beginning of each year. Closing balances of all the accounts are carried forward to the new year as opening balances. As it is the first entry in the new financial year, it is called Opening Journal Entry.

Journal Entry:

 Opening Journal Entry with Examples

13. Bad Debts:

When the goods are sold to customers on credit, there can be a situation where a few of them fail to pay the amount due to them because of insolvency or any other reason, the amount that remains unrecovered is called Bad Debts.

Journal Entry:

Bad Debts Journal Entry with Examples

14. Banking Transactions:

All businesses make many transactions with the bank in their day-to-day activity. Journal Entries related to banking transactions are as follows:

1. When cash is deposited in the bank:

Journal Entry: 

2. When cash is withdrawn from the bank:

Journal Entry: 

3. When cash is withdrawn from the bank for personal use:

Journal Entry: 

4. When the cheque, drafts, etc. received from the customers are not sent to the bank for collection on the same date and deposited at the bank on any other day or endorsed to any other party.

A. When any cheque is received and not sent to the bank for collection:

Journal Entry: 

B. When the above cheque was sent to the bank for collection: 

Journal Entry: 

Or

C. If the above cheque was endorsed in favour of any other party:

Journal Entry: 

5. When the cheque, drafts, etc., received from the customers are sent to the bank for collection on the same date:

Journal Entry: 

6. When a customer directly deposits any amount in the firm’s bank account:

Journal Entry: 

7. When a cheque previously deposited into the bank gets dishonoured:

Journal Entry: 

Banking Transactions Journal Entry with Examples

8. Payment is received through cheque and a discount is allowed.

A. When a cheque is received from a customer and a discount is allowed to him (Cheque is deposited into the bank on the same day):

Journal Entry: 

B. If the above cheque gets dishonoured:

Journal Entry: 

9. When payment is made through cheque:

Journal Entry: 

10. When expenses are paid through cheque:

Journal Entry: 

11. When interest is charged by the bank:

Journal Entry: 

12. When interest is allowed by the bank:

Journal Entry: 

13. When a bank charges any amount for the services rendered:

Journal Entry: 

Banking Transactions Journal Entry with Examples

15. Bad Debts Recovered:

When the amount that is earlier written as bad debts is now recovered, it is called bad debts recovered.

Journal Entry:

 Bad Debts Recovered Journal Entry with Examples

16. Loss of Insured Goods/Assets: 

Sometimes insured goods are lost by fire, theft, or any other reason. There can be three cases related to the loss of insured goods or assets.

A. Claim does not get accepted by the Insurance Company: 

Journal Entry: 

B. Insurance Company partly accepted the claim: 

Journal Entry: 

C. Insurance Company fully accepted the claim: 

Journal Entry: 

For receiving the claim money:

Journal Entry: 

Loss of Insured Goods/Assets Journal Entry with Examples

17. Loan Taken: 

A business can take an amount of money as a loan from a bank or any outsider. In return, the business has to pay interest. 

A. Loan is taken from a bank or person:

Journal Entry: 

B. Interest charged by the bank or person and then paid: 

There can be a situation where the interest is charged first and then paid. There will be two Journal Entries in this case.

i. Journal Entry: (On charging of interest)

ii. Journal Entry: (On payment of interest)

Or

C. Interest paid to bank/person on the loan: 

In this case, only a single entry is passed because interest is directly paid.

Journal Entry: 

 Loan Taken Journal Entry with Examples

18. Loan Given:

Businesses can also provide loans to any person or entity.

A. Loan is given to a person:

Journal Entry: 

B. Interest charged and then received on loan given:

There can be a situation where the interest is charged first and then received. There will be two Journal Entries in this case.

i. Journal Entry: (On charging of interest)

ii. Journal Entry: (On receiving of interest)

Or

C. Interest received on loan given:

In this case, only a single entry is passed because interest is directly received.

Journal Entry: 

Loan Given Journal Entry with Examples

19. Outstanding Expenses: 

Outstanding expenses are those expenses that are related to the same accounting period in which accounts are being made but are not yet paid.

Journal Entry: 

Outstanding Expenses Journal Entry with Examples

20. Prepaid or Unexpired or Advance Expenses:

Such expenses which are concerned with the next financial year, but have been paid in the current year are called prepaid expenses.

Journal Entry: 

Prepaid Expenses Journal Entry with Examples

21. Income Due or Accrued Income:

An income that has been earned, but not yet received in the current financial year is called Accrued Income.

Journal Entry: 

Accrued Income Journal Entry with Examples

22. Income Received in Advance or Unearned Income:

An income that has not been earned yet, but has been received in advance is called Unearned Income.

Journal Entry: 

Next year, unearned commission will be adjusted as:

Journal Entry: 

Income Received in Advance Journal Entry with Examples

23. Income Tax:

Income Tax is paid by the business on the profit earned during the year. Income Tax is a personal liability of the proprietor. The journal entry will be:

A. Payment of Income Tax:

Journal Entry: 

B. Refund of Income Tax:

Journal Entry: 

Income Tax Journal Entry with Examples

24. Life Insurance Premium:

Sometimes, Life Insurance Premium is paid by the business on the behalf of the proprietor.

Journal Entry: 

Life Insurance Premium Journal Entry with Examples

25. Employee’s Life Insurance Premium:

Businesses purchase life insurance for their employees too. 

Journal Entry: 

Employee’s Life Insurance Premium Journal Entry with Examples

26. Interest on Capital:

The proprietor can charge interest on the amount invested by him/her in the business as capital, which is shown as Interest on Capital.

Journal Entry:

Interest on Capital Journal Entry with Examples

27. Interest on Drawings:

The amount withdrawn from the capital by the proprietor for personal use is called drawings. Businesses can charge interest on the amount of drawings.

Journal Entry: 

Interest on Drawings Journal Entry with Examples

28. Use of Goods in Business:

Sometimes goods of a business are used in the business itself. If this happens, those goods are considered assets by the business.

Journal Entry: 

Use of Goods in Business Journal Entry with Examples

29. Expenditure on Assets (Erection or Installation):

Any expenditure incurred in the erection or installation of any building or machinery or any type of asset is considered to be capital expenditure and debited under the name of the particular asset.

Journal Entry:

Expenditure on Assets Journal Entry with Examples

30. Expenses on Purchase of Goods:

Purchasing process involves a number of steps starting from placing an order and ending with the delivery of goods. Apart from the cost incurred in purchasing the goods, any additional expenses like Carriage, Import Duty, etc is also paid. Any expenses incurred during the purchase of goods will be shown separately unlike an expenditure on assets.

Journal Entry:

Expenses on Purchase of Goods Journal Entry with Examples

31. Outstanding Salary:

Outstanding Salary is a liability for the firm. Outstanding salary journal entry is passed to record the salary that is due concerning the employees but not yet paid. When salary is not paid on time, it is shown under the Liabilities side of the balance as an ‘Outstanding Salary’ which means it has now become the liability of the firm to pay salaries.

Journal Entry:

Outstanding Salary Journal Entry with Examples

32. Prepaid Insurance:

Prepaid Insurance is the amount of insurance premium that the company pays in one financial year, and avails its benefit in some other financial year, generally in the upcoming financial year. Prepaid Insurance journal entry is passed to record the amount paid as advance for the insurance. Prepaid insurance is treated as the asset of the firm and is recorded under the Asset side of the balance sheet. Insurance premium is generally paid by the company on behalf of its employees.

Journal Entry:

Prepaid Insurance Journal Entry with Examples

33. Commission Received:

Commission received is the amount that an individual receives in exchange for the services offered by him/her. It is a kind of monetary remuneration that is said to be the asset of the individual/company. Commission received journal entry is passed in order to show the amount that an individual/a company received in exchange for their services as commission.

Journal Entry:

Commission Received Journal Entry with Examples

34. Cash Sales:

When goods/services are sold for cash, the transactions are known as Cash Sales, i.e., when the customer pays in terms of cash in exchange for goods and services, cash sales occur. Cash sales journal entry is passed to show the sales transactions that have been settled in cash. There are mainly two types of cash sales:

• Sale of goods in cash
• Sale of an asset for cash

Journal Entry:

1. For the Sale of Goods in Cash: Sale of goods (in cash) is an income, so the balance of the cash account (debit balance) increases, and the balance of the sales account (credit balance) decreases.

2. For the Sale of an Asset for Cash – For the sale of an asset in cash, the balance of the cash account (debit balance) increases due to the inflow of cash, and the balance of the asset account will decrease due to the outflow of the asset.

Cash Sales Journal Entry with Examples

35. Provisions:

A Provision in accounting is generally some set aside profits to be used under specific contingencies. They are the reserves that are being made for specific situations and are to be compulsorily used in those conditions only. A provision is seen as an upcoming liability and should not be treated as savings. Provisions journal entry is passed to show the amount set aside by the firm to meet contingencies.

Journal Entry:

Provision Journal Entry with Examples

36. Rent Paid:

Sometimes a business does not own any specific type of property, plant, and/or machinery. They take the required asset on rent and pay the pre-specified installment for the asset in terms of cash or cheques. Rent paid journal entry is passed in order to record the necessary rent payments against rented assets. Rent is an expense for business and thus has a debit balance.

Rent is generally:

• Paid every month
• Has fixed installment
• Recurring in nature
• Shown under the head of ‘Office Rent’ or ‘Factory Rent’

Journal Entry:

Rent Paid Journal Entry with Examples

37. Salaries Paid:

Salaries are the monetary remunerations the business gives to its employees in exchange for their services. Salaries Paid journal entry is passed to record the salary payments to employees by the business. Salaries are treated as an expense in the books of business, so when the salary is paid, the Salary account gets debited and the cash/bank A/c gets credited.

Journal Entry:

1. When Salary is Due:

2. When Salary is Paid:

Salaries Paid Journal Entry with Examples

38. Deferred Revenue:

Deferred Revenue is the income received in exchange for goods that are yet to be delivered. Deferred Revenue is also known as Unearned Income or Unearned Revenue. Deferred revenue journal entry is passed to record the advance payments received for goods and services. In this case, the balance for cash/bank (debit balance) increases due to the inflow of income, and the balance for deferred revenue (credit balance) i.e. liability increases.

Journal Entry:

Deferred Revenue Journal Entry with Examples

For more journal entries on GST, kindly refer to:

GST (Goods and Services Tax)