Journal Entries

Journal entries are a way to record financial transaction. It simultaneously records a debit and a credit to a particular account balance. All over the world, double-entry system of accounting is used to record financial transactions. The result is that at any point of time, company’s accounting remains in balance. When we make a journal entry, its debit side should equate the credit side.

In traditional accounting system, the accountant has to record both debit and credit accounts to complete the accounting cycle of journal entries. But after the arrival of modern software, ERP systems such as Tally, QuickBooks and Sap, the need to make the double entry has become obsolete. Now, we just to select a bank account from the list and make the related debit or credit to perform the journal entry. So, the time and hassle of recording the journal entries has reduced tremendously.

During this decade, various companies are using real time accounting applications which do the automated entries into the accounting system. This is because of the nature of the business. A good example here is the hotel sector accounting. You must have a automated system installed for the inventory of vegetables, fruits and other items. If you do not update the stock level in real time, your hotel may end up with no stock. Eventually, you will have to send customers with no food to their homes or offices.  

Journal Entry is the first step in the accounting cycle.

Example

Journalize the following financial transactions:

  1. July 3, 2016: Issue of 100,000 shares of 1$ each.
  2. July 5, 2016: Advance rent paid $20,000.
  3. July 9, 2016: Purchased office computers amounting to $15,000.
  4. July 13, 206: Paid electricity bill $4,000.
  5. July 15, 2016: Make a cash sale of $20,000.
  6. July 19, 2016: Credit sale $40,000.
  7. July 21, 2016: Purchased raw materials $25,000 on credit from Michael.
  8. July 25, 2016: Received $20,000 against credit sale from a customer.
  9. July 27,2016: Paid staff salaries to staff amounting to $3,000.

Solution

Date

Account

Debit

Credit

03 July, 2016

Cash

Share Capital

100,000

 

100,000

05 July, 2016

Prepaid Rent

Cash

20,000

 

20,000

09 July,2016

Computers

Cash

15,000

 

15,000

13 July,2016

Electricity Expense

Cash

4,000

 

4,000

July 15, 2016

Cash

Sales

20,000

 

20,000

July 19,2016

Accounts Receivable

Sales

40,000

 

40,000

July 21, 2016

Raw materials

Accounts Payable – Michael

25,000

 

25,000

July 25,2016

Cash

Accounts Receivable

20,000

 

20,000

July 27,2016

Salaries Expense

Cash

3,000

 

3,000

Example
Journalize the following transactions for Alpha Pvt Ltd:
1.    Alpha Pvt Ltd starts its business operations with a cash investment of $100,000.
2.    From this cash, printers, computers and office equipment were purchased for $20,000.
3.    Alpha borrowed $20,000 from a local bank.
4.    During its first phase of its marketing strategies, it sold $12,000 goods on credit.
5.    Later the customer gave only 80 % payment, rest of the payment should be recorded as bad debts.
6.    Depreciation to be charged at the rate of 10 %.
7.    Alpha borrowed raw materials for $7,000 for 30 days credit.
8.    Later, it paid within 30 days and got a discount of $200 from the supplier.
9.    Rent paid for the month is $1,000, while $500 belongs to the current accounting period while remaining belongs to the future accounting period.
10.    Due to non-compliance with current legislation, Alpha has to suffer a penalty of $400 in the current accounting period.
11.    Printing and stationary purchased in the current period is $200.
12.    Annual subscription fee paid for the membership of the trade organization in the industry is $1,000.
13.    Various expenses incurred over amusement and high tea parties for marketing purposes are $1,000.
14.    Audit fee paid to the external auditors of the company is amounting to $500.
15.    Income tax paid to the tax authorities of the country is $500.

Solution


Recording of cash investment by Alpha
Cash            $100,000 (Debit)
Capital            $100,000 (Credit)


Recording of fixed assets
Fixed assets        $20,000 (Debit)
Cash            $20,000 (Credit)


Recording of receiving bank loan
Bank            $20,000(Debit)
Loan            $20,000(Credit)


Recording of credit sales to the customer


Account receivable    $12,000(Debit)
Sales            $12,000(Credit)

Recording of cash collection from customer and bad debt
Cash            $9,600(Debit)
Bad debt expenses    $2,400(Debit)
Account receivable    $12,000(Credit)


Recording of depreciation expense
Depreciation expense    $2,000(Debit)
Allowance for Dep.    $2,000(Credit)


Recording of raw materials purchased
Raw materials        $7,000(Debit)
Accounts payable    $7,000(Credit)


Recording of payment to creditor and availing discount
Accounts payable    $7,000(Debit)
Cash            $6,800(Credit)
Purchase discount    $200(Debit)


Recording of rent expense and advance rent for future period
Rent expense        $500(Debit)
Prepaid rent        $500(Debit)
Cash            $1,000(Credit)


Recording of payment on account of penalty
Fines & penalties    $400(Debit)
Cash            $400(Credit)


Recording of purchasing printing & stationary
Printing & stationary    $200(Debit)
Cash            $200(Credit)


Recording of fees paid to trade association
Fees & subscription    $1,000(Debit)
Cash            $1,000(Credit)


Recording of amusement and hi-tea expenses
Entertainment exp    $1,000(Debit)
Cash            $1,000(Credit)


Recording of audit feepaid
Audit fee        $500(Debit)
Cash            $500(Credit)


Recording of income taxpaid
Income tax expense    $500(Debit)
Cash            $500(Credit)

Contents
Financial Ratios Accounting Cycle Income Summary Accounts Adjusted Trial Balance Adjusting Entries Closing Entries Compound Journal Entry Journal Entries Ledger Accounts and Posting to Ledger Accounts Post Closing Trial Balance Preparation of Unadjusted Trial Balance Reversing Entries Accounting Principles Financial Accounting Basics Financial Statements Reporting Bad Debts Current Assets Long-term Assets Voucher System Partnership Depreciation Work Sheet - 10 Column Work Sheet Difference Between Reserve and Fund Accounting for Leases Capital reduction and reconstruction Absorption of Company Amalgamation Accounting for Installment Sales Basis of Recording Profit and Loss Branch Accounting Construction Contracts Revenue Recognition Accounting for Groups Financial Analysis Events After the Balance Sheet Date Deferred Tax Cost Accounting Activity Based Costing (ABC) Throughput Accounting Relevant Cost Break Even Analysis Standard Costing Inventory Management Payroll Accounting Royalty Accounting Statistics Master Budget Salary Income Microsoft Excel Tutorial Other Topics Share or Stock Valuation Model Financial Management Topics Kinds of Endorsement Letter of Credit, Kinds and Its Advantages/ Utilities Modern Functions of a Commercial Banks Difference Between Secured And Unsecured Loan Excel conditional formatting red if negative green if positive How to Remove Extra Spaces in Excel Result Card or Result Sheet Creation Using Excel Basic Accounting MCQS Multiple Choice Questions