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JOURNAL

The journal is a book of original entry in which the transactions are recorded as and when they
occur; in the chronological order from where they are posted to the ledger. A Journal is a
chronological record of financial transactions of a business.

Features of journal:
1. Book of original entry as the transactions are first recorded in journal.
2. Transactions recorded in chronological order i.e. date-wise.
3. Journal precedes ledger; subordinate to ledger.
4. The transactions are supported by narration; summary of actual transaction.
5. The double entry rules are followed while journalizing the transactions.
6. It is also called a day book or daily book.

ADVANTAGES OF JOURNAL LIMITATIONS OF JOURNAL

a) Date-wise and explained transactions a) Time consuming Process
b) Ensures Double entry rules are followed b) Journal is a long and cumbersome book
c) Detection of arithmetical errors c) Difficult to locate transactions
d) Provides source of data for financial d) Not possible to ascertain balance of accounts
purposes
e) Provides evidence of transactions
f) Division of labor

Format of Journal

DATE PARTICULARS L.F DEBIT AMOUNT CREDIT AMOUNT

₹ ₹
--/--/-- A/c 1 Dr. -- XX
To A/c 2 XX
(-------Narration------)

✓ Date column: Under this column, the date on which the transaction is entered is recorded. The
year and month are written once, till they change.
✓ Particular column: Under this column, first the names of the accounts to be debited, then the
names of the accounts to be credited and lastly, the narration (i.e. a brief explanation of the
transaction) are entered.
✓ L.F: Ledger Folio column: Under this column, the ledger page number containing the relevant
account is entered at the time of posting.
✓ Debit amount column: Under this column, the amount to be debited is entered.
✓ Credit amount column: Under this column, the amount to be credited is entered.

Note: Except the L.F. column, all other columns are recorded at the time of journalizing. The L.F.
Column is recorded at the time of posting.

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Journalizing Process:

The process of recording the transaction in journal book is called Journalizing. The form and
manner in which a transaction is recorded in the journal is called journal entry.

DOUBLE ENTRY SYSTEM OF BOOK-KEEPING

Double Entry system of Book-keeping refers to a system of accounting under which both the aspects
(i.e. debit or credit) of every transaction are recorded in the accounts involved.
Account: The individual record of a person or thing or an item of income or an expense is called an
account.
Dual Aspect: Two-fold aspect of a transaction is called dual aspect or duality of a transaction. Every
debit has equal amount of credit. So, the total of all debits must be equal to the total of all credits.
The entry made for each transaction is composed of two parts- one for debit and another for credit.

TYPES OF ACCOUNTS

Personal Accounts Impersonal Accounts

Natural Artificial Representative Real Nominal

Personal Personal Personal Account Account
Account Account Account

Rules for Journalizing (Traditional approach)

TYPE OF ACCOUNT DEBIT CREDIT

PERSONAL THE RECEIVER THE GIVER
REAL WHAT COMES IN WHAT GOES OUT
NOMINAL ALL EXPENSES/LOSSES ALL INCOMES/PROFITS

Rules for Journalizing (Modern approach)

TYPE OF ACCOUNT DEBIT CREDIT

ASSET INCREASE DECREASE
LIABILITY DECREASE INCREASE
CAPITAL DECREASE INCREASE
INCOME/PROFIT DECREASE INCREASE
EXPENSE/LOSS INCREASE DECREASE

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COMPOUND ENTRY

Meaning: When more than two accounts are involved in a transaction and the transaction is
recorded by means of a single journal entry instead of passing several journal entries; such
single journal entry is termed as ‘Compound Journal Entry’.

How to Record: It may be recorded in the following three ways:

(a) By debiting one account and crediting two or more accounts; or
(b) By debiting two or more accounts and crediting one account; or
(c) By debiting several accounts and crediting several accounts.

OPENING ENTRY

Meaning of an ‘Opening Entry’: A journal entry by means of which the balances of various
assets, liabilities and capital appearing in the balance sheet of previous accounting period are
brought forward in the books of the current accounting period, is known as ‘opening Entry’.

Method of Recording: While passing an opening entry, all assets accounts (individually) are
debited and all liabilities accounts (individually) are credited and the net worth (i.e. excess of assets
over liabilities) is credited to Proprietor’s Capital Account (in case of a proprietary concern) or
Partners’ Capital Accounts (in case of a partnership concern).

Opening journal entry is:

All Assets A/c Dr.

To All Liabilities A/c
To Capital A/c

Procedure of Posting:

The procedure of posting an opening entry is:

✓ In case of an asset- To balance b/d is recorded in the Particulars column on the debit side
✓ In case of liability/capital- By balance b/d is recorded in the Particulars column on the credit
side.

Discussion on Journalizing

1. CASH AND CREDIT TRANSACTIONS:

When cash or credit nothing is specified in a particular transaction but the name of the person is
given, it is treated as a credit transaction.
When nothing is given i.e. name of the person as well, it is treated as a cash transaction.

2. TRANSACTIONS WITH BUSINESSMAN:

There are a number of transactions taking place involving business and businessman. Most
common transactions are stated below:

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a) Introduction of Capital into business:

Cash/Bank A/c Dr.

Assets A/c Dr.
To Capital A/c

b) Withdrawal of Capital from business:

Capital A/c Dr.

To Cash/Bank A/c

c) Recurring withdrawals for day to day purposes, personal expenses:

Drawings A/c Dr.

To Cash/Bank A/c
To Purchases A/c

NOTE: Whenever goods are withdrawn by the businessman, purchases A/c is credited and not
Sales A/c as the goods are withdrawn at cost and not at sales price.

d) Interest on capital:

Interest on Capital A/c Dr.

To Capital A/c

e) Interest on Drawings:

Drawings A/c Dr.

To Interest on Drawings

3. TRANSACTIONS WITH BANK:

A lot of transactions take place b/w business and banker. A few of them are:

a) Deposit of money:

Bank A/c Dr.

To Cash A/c

b) Withdrawal of money:

Cash A/c Dr.

To bank A/c

c) Interest on money deposited:

Bank A/c Dr.

To Bank Interest

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d) Bank Charges deducted by bank;

Bank Charges A/c Dr.

To Bank A/c

4. TRANSACTIONS INVOLVING GOODS:

The main purpose of the business is the dealing in goods involving purchase and sales or
rendering of services, charity or donations etc. The accounting treatment is as follows:
a) Purchase of goods:

Purchases A/c Dr.

To Cash/Bank/Supplier A/c

b) Sale of goods:

Cash/Bank/Customer A/c Dr.

To Sales A/c

c) Charity/Donations/Sample sale in goods:

Charity/Donation/Adv A/c Dr.

To Purchases A/c

NOTE: Sales A/c is not credited as it is not a sale. Here purchases are reduced at cost.

d) Expenses on Sale/Purchase-

These expenses include carriage, freight, octroi, custom duty, commission, etc. these
expenses are debited/ booked separately and not included or adjusted within sale/purchase
A/c. Expenses at the time of purchase are recorded as inward expenses and expenses on
sales are recorded as outward expenses.

Expense inward A/c Dr.

Expense outward A/c Dr.
To Cash/bank A/c
To Creditor A/c

e) Purchase Returns:

Supplier A/c Dr.

To Purchase Return A/c

f) Sale Returns:

Sale Return A/c Dr.

To Customer A/c

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5. TREATMENT OF LOSS OF GOODS IN FIRE/ACCIDENT:

In certain cases, business may suffer loss of goods due to fire or accident or pilferage/theft. The
goods may be insured against such peril or insured. The accounting treatment depends upon the
status of the goods being insured/ uninsured:

a) Goods uninsured:

Loss by theft/fire/accident A/c Dr.

To Purchases A/c

b) Goods fully insured:

Insurance Claim/Bank A/c Dr.

To Purchases A/c

c) Good partly insured:

Insurance Claim/Bank A/c Dr.

Loss by theft/fire/accident A/c Dr.
To Purchases A/c

6. TRANSACTIONS INVOLVING FIXED ASSETS:

Fixed assets are the assets that are used by the business for considerably long period of time and
are not meant to be sold.

a) Purchase of Fixed Asset:

Fixed Asset A/c Dr.

To Cash/Bank/Creditor A/c

b) Exchange of old Asset with new Asset: the asset A/c is to be debited with only the actual
amount paid for the new Asset.

Fixed Asset A/c Dr.

To Cash/Bank A/c

c) Charging Depreciation on fixed Asset:

Depreciation A/c Dr.

To Fixed Asset A/c

d) Sale of Fixed Asset:

Cash/Bank/Debtor A/c Dr.

Loss on sale of Asset A/c Dr.
To Fixed Asset A/c
To Profit on sale of asset A/c

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NOTE: The profit/loss on sale of fixed asset is separately recorded whereas profit/loss on ordinary
goods is not booked separately. However, expense on sale/purchase of ordinary goods is shown
separately but the expenses on sale/purchase of fixed assets is adjusted within the fixed asset A/c.

e) Self-Made Fixed Asset: The business may by employing labor and using its own material
make fixed asset required for its own use.

Fixed Asset A/c Dr.

To Cash A/c
To Purchases A/c

7. TREATMENT OF DISCOUNTS:

The discount may be given/ received by the business in the form of Trade discount- discount on
quantity of goods bought or sold or Cash discount- discount on payment or receipt of amount
due.

a) Trade Discount- It is not shown in books of account although it is to be adjusted while

passing the journal entry. Only the net amount after trade discount is recorded.

Cash/Customer A/c Dr. (Gross SP- TD)

To Sales A/c

Purchases A/c Dr. (Gross PP- TD)

To Cash/Supplier

b) Cash Discount- It is allowed at the time of prompt payment on the net amount due. The
word full and final settlement is indicative of involvement of cash discount.

Cash/Bank A/c Dr.

Cash Discount allowed A/c Dr.
To Customer A/c

Supplier A/c Dr.

To Cash/Bank A/c Dr.
To Cash Discount Received A/c

c) Trade Discount and Cash Discount Simultaneously:

Where both the Discounts are simultaneously allowed or received then the cash discount
is to be arrived at after adjusting trade discount. Cash discount is only on that portion of
amount due that is paid in cash/bank.

NOTE: Trade Discount and Cash Discount is always calculated on the value before charging of
GST.

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8. TREATMENT OF INSOLVENCY:

When the person is unable to settle his debts/ liabilities as and when they fall due for payment or
when the liabilities exceed assets, the person is said to be insolvent.

a) Bad Debts:

Bad Debts A/c Dr.

To Customer A/c

b) Part Payment and Bad Debt:

Cash/Bank A/c Dr.

Bad Debt A/c Dr.
To Customer A/c

c) Bad Debts Recovered subsequently:

Cash A/c Dr.

Too Bad Debts Recovered A/c

9. TREATMENT OF EXPENSES:

a) Expenses paid:

Expense A/c Dr.

To Cash/Bank A/c

b) Expense Outstanding:

Expense A/c Dr.

To Expense Outstanding A/c

c) Expense Paid in Advance:

Prepaid Expense A/c Dr.

To Cash/Bank A/c

d) Expense paid by Third Party:

Expense A/c Dr.

To Third Party A/c

e) Expense of Third Party paid by business:

Third Party A/c Dr.

To Cash/Bank A/c

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10. TREATMENT OF INCOMES:

a) Income Received:

Cash/Bank A/c Dr.

To Income A/c

b) Income Accrued:

Income Accrued A/c Dr.

To Income A/c

c) Income Received in Advance:

Cash/Bank A/c Dr.

To Income Received in Advance A/c

d) Income Received by Third Party:

Third Party A/c Dr.

To Income A/c

e) Income of Third Party Received by business:

Cash/Bank A/c Dr.

To Third Party A/c

11. TREATMENT OF LOANS AND ADVANCES:

a) Loan Taken from Bank:

Bank A/c Dr.

To Bank Loan A/c

b) Loan Taken from Anyone else:

Cash/Bank A/c Dr.

To Loan from --- A/c

c) Advance/Loan Given to others:

Advance/Loan to --- A/c Dr.

To Cash/Bank A/c

12. TREATMENT OF ADVANCE FOR SUPPLY OF GOODS:

a) Advance for goods given:

Advance for supply of goods A/c Dr.

To Cash/Bank A/c

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b) Receipt of goods:

Purchases A/c Dr.

To Advance for supply of goods A/c

13. TREATMENT OF INCOME TAX:

a) Income Tax paid:

Drawings A/c Dr.

To Cash/Bank A/c

b) Refund of excess Tax deposited:

Cash/Bank A/c Dr.

To Capital A/c

NOTE: All the incomes and losses belong to the owner therefore Income tax is also to be borne by
him.

14. TREATMENT OF GOODS & SERVICES TAX (GST):

Central Goods and Services Tax (CGST) & State Goods and Services Tax (SGST)
CGST and SGST are levied on intra-state (within the state) supply of goods and/or services or
both. CGST and SGST is levied at half the prescribed rate of GST each. For example, if
prescribed rate is 12%, CGST and SGST will be levied @ 6% each.

Integrated Goods and Services Tax (IGST)

IGST is levied on inter-state (outside the state or from one state to another) supply of goods
and/or services or both. It is levied at the prescribed rate of GST. For example, if prescribed
rate is 12%, IGST will be levied @ 12%.

It is to be noted that GST is a Value added tax i.e. the tax paid at the time of purchase of
goods/services are allowed to be set off or utilized as input tax against the payment of output
tax on sale of goods/services. Therefore, the input and output GST are recorded under separate
accounts as Input GST and Output GST. The Excess of output GST over the input GST is
required to be deposited by the business to the government account as per prescribed rules and
regulations.

Following are some examples of transactions based on GST mechanism:

a) Purchase of Goods (Within Same State/UT):

Purchases A/c Dr.

CGST Input A/c Dr.
SGST/UTGST Input A/c Dr.
To Cash/Bank/Supplier A/c

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b) Purchase of Goods (From Another State/UT):

Purchases A/c Dr.

IGST Input A/c Dr.
To Cash/Bank/Supplier A/c

c) Sale of Goods (Within Same State/UT):

Cash/Bank/Customer A/c Dr.

To Sales A/c
To CGST Output A/c
To SGST/UTGST Output A/c

d) Sale of Goods (To Another State/UT):

Cash/Bank/Customer A/c Dr.

To Sales A/c
To IGST Output A/c

e) Adjustment of credit available against liability of GST:

IGST Output A/c Dr.

To IGST Input A/c
To CGST Input A/c
To SGST/UTGST Input A/c

CGST Output A/c Dr.

To IGST Input A/c
To CGST Input A/c

SGST/UTGST Output A/c Dr.

To IGST Input A/c
To SGST/UTGST Input A/c

NOTE: The IGST credit available on purchase of goods/services is allowed as a set off against the
output IGST/CGST/SGST/UTGST liability FIRST in the same order. Only after IGST Credit has
been fully availed, the CGST and SGST/UTGST credit is to be utilized. However, the
SGST/UTGST credit available on purchase of goods/services is allowed as a set off against
SGST/UTGST liability only. Likewise, CGST credit available on purchase of goods/services is
allowed as a set off against CGST liability only.

f) Deposit of liability of GST:

IGST Output A/c Dr.

CGST Output A/c Dr.
SGST/UTGST Output A/c Dr.
To Cash/Bank A/c

NOTE: Same entries will be passed in case of provision of output services and availment of input
services by a business entity.

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Reversal of Input GST credit:

It must be noted that GST input credit is allowed only where goods and services are used for
furtherance of business or in the ordinary course of business transactions. In any other case the right
to avail input GST credit shall be lost.

Therefore, in following cases the Input GST credit shall lapse and not allowed to be set off against
Output GST liability:

1. Return of goods to seller or issuance of debit note

2. Goods withdrawn by proprietor
3. Goods distributed as free samples, charity or donation
4. Goods lost in fire, theft or goods becoming unfit for resale

In all the above cases – Input IGS/CGST/SGST/UTGST account shall also be credited along with
normal entry which is passed for all such cases.

15. TREATMENT OF MISCELLANEOUS ITEMS:

a) Miscellaneous Incomes/Receipts:

Cash A/c Dr.

To Misc. Income/Receipt A/c

b) Miscellaneous Expenses/Payments:

Misc. Expense/Payment A/c Dr.

To Cash/Bank A/c

Some important concepts to be understood for recording of transactions in journal

Source documents are the evidences of business transactions which provide information about the
nature of the transaction, the date, the amount and the parties involved in it. Transactions are
recorded in the books of accounts when they actually take place and are duly supported by source
documents. Each transaction recorded in the books of accounts should have adequate proof to
support it. These supporting documents are the written and authentic proof of the correctness of
the recorded transactions. These documents are required for audit and tax assessment. They also
serve as the legal evidence in case of a dispute. The following are the most common source
documents.

1. Cash Memo
When a trader sells goods for cash, he gives a cash memo and when he purchases goods for
cash, he receives a cash memo. Details regarding the items, quantity, rate and the price are
mentioned in the cash memo.

2. Invoice or Bill
When a trader sells goods on credit, he prepares a sale invoice. It contains full details relating
to the amount, the terms of payment and the name and address of the seller and buyer. The
original copy of the sale invoice is sent to the purchaser and its duplicate copy is kept for

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making records in the books of accounts. Similarly, when a trader purchases goods on credit,
he receives a credit bill from the supplier of goods.

3. Receipt
When a trader receives cash from a customer, he issues a receipt containing the date, the
amount and the name of the customer. The original copy is handed over to the customer and
the duplicate copy is kept for record. In the same way, whenever we make payment, we
obtain a receipt from the party to whom we make payment.

4. Debit Note
A debit note is prepared by the buyer and it contains the date of the goods returned, name of
the supplier, details of the goods returned and reasons for returning the goods. Each debit
note is serially numbered. A duplicate copy or counter foil of the debit note is retained by the
buyer. On the basis of debit note, the suppliers account is debited in the books.

5. Credit Note
A credit note is prepared by the seller and it contains the date on which goods are returned,
name of the customer, details of the goods received back, amount of such goods and reasons
for returning the goods. Each credit note is serially numbered. A duplicate copy of the credit
note is retained for the record purpose. On the basis of credit note, the customer’s account is
credited in the books.

6. Pay-in-slip
Pay-in-slip is a form available in banks and is used to deposit money into a bank account.
Each pay-in-slip has a counterfoil which is returned to the depositor duly sealed and signed
by the bank official. This source document relates to bank transactions. It gives details
regarding date, account number, amount deposited (in cash or cheque) and name of the
account holder.

7. Cheque
A cheque is a document in writing drawn upon a specified banker to pay a specified sum to
the bearer or the person named in it and payable on demand. Each cheque book has a
counterfoil in which the same details in the cheque are filled. The counterfoil remains with
the account holder for his future reference. The counterfoil forms the source document for
entries to be made in the books of accounts.

8. Vouchers
A voucher is a written document in support of a business transaction. Vouchers are prepared
by an accountant and each voucher is counter signed by an authorized person of the
organization. The vouchers are properly filed according to their serial numbers so that the
auditors may easily vouch them and these may also serve as documentary evidence in future.

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Test Your Knowledge & Practice

1. Following accounts are being maintained in the books of Ram. Classify these under personal, real and
nominal headings:
Capital Plant and Machinery Travelling Expenses Creditors
Commission Paid Commission received Rent Outstanding Sales
Purchases Insurance Prepaid Bank Patents
Goodwill Salary Bank Overdraft Sales Return
Furniture Discount Allowed Cash Debtors

2. Following accounts are being maintained in the books of Ashok. Classify them under; Assets,
Liabilities, Expenses and Revenue Accounts.
Land; Investments; Building; Interest Received; Salary; Bank Overdraft; Debtors; Creditors; Bad Debts;
Capital; Depreciation; Motor Vehicles; Freight; Wages; Goodwill; Repairs.

3. Classify the following into assets, liabilities, capital, revenue, and expenses:
Plant and Machinery; Bank Loan; Sales; Rent; Discount Received; Carriage Inwards; Carriage Outwards;
Purchases; Bills Payable; Wages; Advance Income; Accrued Income; Goodwill; Furniture and Fixtures;
Outstanding Expenses; Capital.

4. Locate the odd items which do not fit to a particular category:

(a) Cash, Bank, Bill receivable, Goodwill.
(b) Building, Plant, Land, Capital.
(c) Capital, Drawings, Net profit, Reserves
(d) Machinery, Motor vans, Furniture, Cash at bank
(e) Building, Machinery, Trade mark, Furniture and fixtures
(f) Goodwill, Bill receivable, Copyright.
(g) Goodwill, Rent, Depreciation, Bad debts.

5. Journalize the following Opening Entry:

Particulars ₹
Cash in hand 2,000
Plant 50,000
Furniture 5,000
Creditors 13,000
Debtors 18,000

6. Journalize the following transactions in the books of Goyal:

2023 Particulars ₹
Dec.01 Business started with cash 75,000
Dec.07 Purchased goods for cash 10,000
Dec.09 Sold goods to Ram 5,000
Dec.12 Purchased furniture 3,000
Dec.18 Cash received from Ram in full settlement 4,000
Dec.25 Paid rent 1,000
Dec.30 Paid salary 1,500

7. Journalize the following transactions in the books of Gaurav:

1. Received ₹ 9,500 from Sohan in full settlement of his account for ₹ 10,000.
2. Received ₹ 9,500 from Shyam on his account for ₹ 10,000.
3. Paid ₹ 4,800 to Mohan in full settlement of his account for ₹ 5,000.
4. Paid ₹ 4,800 to Ashok on his account for ₹ 5,000.

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8. Journalize the following transactions in the books of Mohan:

1. Withdrawn goods for personal use (sale price ₹ 360, cost ₹ 300).
2. Goods costing ₹ 300 given as charity, (sale price ₹ 360)
3. Goods costing ₹ 600 distributed as free samples, (sale price ₹ 720)
4. Goods stolen in transit (sale price ₹ 600, cost ₹ 480)
5. Goods destroyed by fire (sale price ₹ 600, cost ₹ 480)
6. Goods stolen by an employee (sale price ₹ 600, cost ₹ 360)
7. Goods used in making of furniture (sale price ₹ 1,200, cost ₹ 900)

9. Pass Journal Entries for the following transactions:

2023 Particulars
Jan 5 Sold goods to Muskaan of list price of ₹ 2,00,000 at trade discount of 20%.
Jan 10 Muskan returned goods of the list price of ₹ 5,000.
Jan 15 Received from Muskan as full & final payment after a cash discount of 4%.

10. Journalize the following transactions in the books of Ram Gopal:

2023 Particulars
Feb 1 Goods destroyed by fire ₹ 16,000. Goods were uninsured.
Feb 4 Goods destroyed by rain ₹ 90,000. Insurance company admitted the full claim.
Feb 8 Goods destroyed in transit ₹ 25,000. Transport company admitted the claim for ₹ 19,000.
Feb 10 Goods destroyed by flood ₹ 38,000. Full claim received from government by cheque.
Feb 12 Cash stolen from the cash box ₹ 45,000.
Feb 16 Goods destroyed by accident ₹ 91,000. Insurance company paid the claim of ₹ 71,000.

11. Journalize the following transactions in the books of Bal Krishan:

2023 Particulars
April 1 Purchased goods for ₹ 8,000, carriage on purchase ₹ 100.
April 2 Purchased machinery for ₹ 14,500, freight on purchase ₹ 500.
April 4 Goods sold for ₹ 12,000, selling commission paid ₹ 600.
April 8 Furniture costing ₹ 15,000 sold for ₹ 18,000, brokerage on sale ₹ 1,000.
April 10 A business vehicle costing ₹ 35,000 was sold for ₹ 30,000, selling commission paid ₹ 900.

12. Journalize the following transactions in the books of Shweta:

2023 Particulars ₹
April 1 Rent paid 6,000
April 4 Rent due but not paid 7,000
April 8 Rent received 8,000
April 10 Rent due but not received 9,000
April 12 Rent paid for the next year 10,000
April 16 Rent paid for the last year 11,000
April 20 Rent received for the next year 12,000
April 21 Rent received for the last year 13,000

13. Journalize the following transactions in the books of Dhoni:

2023 Particulars ₹
Jan. 1 Salaries paid by cheque 6,000
Jan. 4 Salaries due but not paid 3,000
Jan. 6 Interest received 5,000
Jan. 10 Interest due but not received 1,500
Jan. 14 Commission paid for the current year 4,500
Jan. 16 Commission paid for the next year 4,000
Jan. 19 Commission of last year paid 3,500
Jan. 21 Rent of current year received 6,800

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Jan. 22 Rent of next year received 7,000

Jan. 25 Rent of last year received 8,500

14. Record the following transactions in the books of Aarti:

2023 Particulars
March 1 Pooja who owed ₹ 60,000 is declared insolvent. First and final composition of 80% is
recovered from her.
March 2 Recovered ₹ 56,000 from Sneha on her insolvency, being 80% of the amount due.
March 5 Recovered ₹ 19,900 from Akanksha whose account of ₹ 24,800 was written off as bad in
the past.
March 8 Deepa who owed ₹ 45,000 is declared insolvent. First installment of 40% recovered from
her.
March 10 Second and final dividend of 30% was recovered from Deepa.

15. Pass the Journal entries for the following transactions:

1. Purchased goods from Suraj of ₹ 40,000 plus IGST @ 12% at 10% Trade Discount and 2% Cash
Discount. Paid amount at the time of purchase itself.
2. Purchased goods from Mohan ₹ 40,000 plus IGST @ 12% at 10% Trade Discount and 3% Cash
Discount. Half of the amount paid at the time of purchase.
3. Sold goods to Amit for ₹ 20,000 plus CGST and SGST @ 6% each, allowed him 10% Trade Discount
and 3% Cash Discount. Received half of the amount by cash and balance by cheque within agreed
time.
4. Sold goods to Rahul for ₹ 50,000 plus CGST and SGST @ 6% each at 10% Trade Discount and 2%
Cash discount. Half of the amount received by cheque within specified time.
5. Sold goods costing ₹ 40,000 to Vimal against a cheque at a profit of 25% on cost less 20% trade
discount plus IGST @ 12%. Cash discount is allowed @ 2%.

16. Give a journal entry for the following events:

1. Goods costing ₹ 1000/- (CGST, SGST 6% each) lost by fire. The goods were uninsured.
2. Goods costing ₹ 5000/- (CGST, SGST 9% each) lost by fire. The goods were fully insured. Insurance
claim has been admitted.
3. Goods costing ₹ 2000/- (CGST, SGST 6% each) has been withdrawn by proprietor for personal use.
4. Goods costing ₹ 1000/- (CGST, SGST 9% each) given away as charity.
5. Goods costing ₹ 3000/- (CGST, SGST 6% each) has been distributed as free sample to distributors.
6. Old Furniture worth ₹ 5000/- sold at a loss of 10%. Rate of IGST is 18%.

17. Record the following transactions in a Journal, assuming CGST and SGST@ 6% each. (ICAI Module)
1. Sold goods to Mukesh at the list price of ₹ 50,000 less 20% trade discount.
2. Sold goods to Mukesh at the list price of ₹ 1,00,000 less 20% trade discount and 5% cash discount.
3. Sold goods to Mukesh at the list price of ₹ 1,50,000 less 20% trade discount. Out of the amount due 60%
is received out of which three-fourth is received by cheque.

18. Give a journal entry for the following transactions:

1. Bought goods for ₹ 5,000 plus CGST and SGST @ 6% each.
2. Purchased goods from Ram for ₹ 30,000 plus CGST and SGST @ 6% each.
3. Purchased goods from Ram for ₹ 40,000 plus CGST and SGST @ 6% each, issued him cheque ₹
20,000, balance payable after two months.
4. Purchased goods from Mohan for ₹ 50,000 plus IGST @ 12% against cheque payment.
5. Sold goods to Saurav for ₹ 50,000, charged CGST and SGST @ 6% each.
6. Sold Goods for ₹ 6,000, charged CGST and SGST @ 6% each.
7. Sold goods to Amit for ₹ 50,000, charged CGST and SGST @ 6% each against cheque for ₹ 6,000,
balance to be received after two months.
8. Sold goods to Kamal for ₹ 60,000 against cheque, charged IGST @ 12%.

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9. Furniture purchased by Shyam & Co., Delhi for office use from Diwan Mart for ₹ 50,000 plus IGST @
12%, payment made by cheque.
10. Purchased computer for office use from Computer Mart for ₹ 50,000 plus IGST @ 12%, paid ₹ 25,000
by cheque and balance to be paid after one month.
11. Paid telephone bill of ₹ 5,000 plus CGST and SGST @ 6% each.
12. Goods that were purchased paying CGST and SGST @ 6% each costing ₹ 2,000 given as sample.
13. Goods that were purchased paying CGST and SGST @ 6% each costing ₹ 1,000 given as donation.
14. Goods purchased paying IGST @ 12% costing ₹ 20,000 were destroyed by fire.
15. Goods purchased paying IGST @ 12% costing ₹ 20,000 were destroyed by fire. These goods were
insured and Insurance Co. admitted the claim for ₹15,000.
16. An old furniture was sold for ₹ 5,000 against cheque and charged CGST and SGST @ 6% each.

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ACCOUNTING EQUATION

An accounting equation is a statement of equality between the sources of funds and application of
funds i.e. resources.

Resources mean anything which has economic value/benefit to the holder. In that sense it may be
termed as assets. The assets may be tangible (e.g. Land & Building, Plant & Machinery, Furniture,
Investments, Stock, Debtors, Bank Balance, Cash Balance) or intangibles (e.g. Patents, Trademarks,
Copyright) owned by an enterprise through which future economic benefits accrue to the business.

Sources of finance mean Equity and includes Internal Sources (i.e., capital) and External Sources
(i.e. liabilities).

Capital refers to the amount invested in an enterprise by its owners.

Liabilities are the financial obligations of an enterprise other than the owners’ funds.

Thus, the aforesaid accounting equation may be expressed as follows:

Total Assets = Total Equity

Or

Assets = Internal Equity + External Equity

Or

Assets = Capital + Liabilities

Since, the liability holders have a definite and prior claim against the assets; the capital is also called
as a residual of assets over liabilities and may be expressed as follows:

Capital = Assets - Liabilities

The accounting equation holds good at the time of each transaction recorded in the books. This is
due to the Dual Aspect Concept of accounting i.e. to every debit there is an equal credit. Thus,
accounting equation verifies the accounting accuracy at each stage of accounting.

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Test Your Knowledge & Practice

1. If the capital of a business is ₹ 3,00,000 and other liabilities are ₹ 2,00,000, calculate the total assets of the
business.
(Ans: ₹ 5,00,000)

2. If the total assets of a business are ₹ 3,60,000 and capital is ₹ 2,00,000, calculate liabilities.
(Ans: 1,60,000)

3. If the total assets of a business are ₹ 4,50,000 and outside liabilities are ₹ 2,50,000, calculate the capital.
(Ans: 2,00,000)

4. Calculate the total assets if:

(a) Capital is ₹ 40,000.
(b) Creditors are ₹ 25,000.
(c) Revenue during the period is ₹ 50,000.
(d) Expenses during the period are ₹ 40,000.
(Ans: Total Assets: ₹ 75,000)

5. Mr. A commenced his cloth business on 1st April, 2022 with a capital of ₹ 3,00,000. On 31st March, 2023
his assets were worth ₹ 5,00,000 and liabilities ₹ 1,00,000. Find out his closing capital and profits earned
during the year.
(Ans: Closing Capital: 4,00,000; Profit earned: ₹ 1,00,000)

6. Ram started business on 1st April 2022 with a Capital of ₹ 25,000 and a loan of
₹ 12,500. On 31st March, 2023, his assets were ₹ 50,000. Find his capital as on 31st March, 2023 and the
profit earned during the year.
(Ans: Closing Capital: ₹ 37,500; Profit earned: ₹ 12,500)

7. Mohan started a business on 1st April, 2022 with a capital of ₹ 25,000 and a loan of ₹ 12,500 borrowed
from Shyam. During 2022-23 he had introduced additional capital of ₹ 12,500 and had withdrawn ₹ 7,500
for personal use. On 31st March, 2023 his assets were ₹ 75,000. Find out his capital as on 31st March 2023
and profit made or loss incurred during the year 2022-23.
(Ans: Closing Capital: ₹ 62,500; Profit: ₹ 32,500)

8. On 31st March 2023, the total assets and external liabilities were ₹ 2,00,000 and ₹ 6,000 respectively.
During the year, the proprietor had introduced capital of ₹ 20,000 and withdrawn ₹ 12,000 for personal
use. He made a profit of ₹ 20,000 during the year. Calculate the capital as on 1st April, 2022.
(Ans: Opening Capital: ₹ 1,66,000)

9. Calculate the Missing Figures marked as (?) in the following cases:

Case Opening Capital Additional Capital Drawings Profit/Loss Closing Capital

(i) ? 50,000 6,000 8,000 1,52,000

(ii) 55,000 ? 5,000 - 7,000 58,000
(iii) 1,25,000 14,000 ? 10,000 1,41,000
(iv) 2,50,000 3,500 33,500 9,000 ?
(v) 1,00,000 15,000 8,000 ? 1,20,500
(Ans. (i) ₹ 1,00,000 (ii) ₹ 15,000 (iii) ₹ 8,000 (iv) 2,29,000 (v) ₹ 13,500)

10. Show the effect of the following transactions on the Accounting Equation:
(a) Started business with cash ₹ 50,000.
(b) Salaries paid ₹ 2,000.

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(c) Wages outstanding ₹ 200.

(d) Interest due but not paid ₹ 100.
(e) Rent paid in advance ₹ 150.
(Ans: Assets: ₹ 48,000 = Liabilities: ₹ 300 + Capital: ₹ 47,700)

11. What will be the effect of the following on the Accounting Equation:
(a) Harish started business with cash ₹ 18,000.
(b) Purchased goods for cash ₹ 5,000 and on credit ₹ 2,000.
(c) Sold goods for cash ₹ 4,000 (costing ₹ 2,400).
(d) Rent paid ₹ 1,000 and rent outstanding ₹ 200.
(Ans: Assets: ₹ 20,600; Liabilities: ₹ 2,200; Capital: ₹ 18,400)

12. Prepare an Accounting Equation from the following:

(a) Started business with cash ₹ 1,00,000.
(b) Purchased goods for cash ₹ 20,000 and on credit ₹ 30,000.
(c) Sold goods for cash costing ₹ 10,000 and on credit costing ₹ 15,000 both at a profit of 20% on cost.
(Ans: Assets: ₹ 1,35,000; Liabilities: ₹ 30,000; Capital: ₹ 1,05,000)

13. Prove that the Accounting Equation is satisfied in all the following transactions:
(a) Started business with cash ₹10,000.
(b) Paid rent in advance ₹ 300.
(c) Purchased goods for cash ₹ 5,000 and credit ₹ 2,000.
(d) Sold goods for cash ₹ 8,000 costing ₹ 4,000.
(e) Paid salary ₹ 450 and salary outstanding being ₹ 100.
(f) Bought motorcycle for personal use ₹ 3,000.
(Ans: Assets: ₹ 12,550; Liabilities: ₹ 2,100; Capital: ₹ 10,450)

14. Mr. Dravid. has provided following details related to his financials. Find out the missing figures: (ICAI
Module)
Particulars (₹ in ‘000)
Profits earned during the year 5,000
Assets at the beginning of year A
Liabilities at the beginning of year 12,000
Assets at the end of the year B
Liabilities at the end of the year C
Closing capital 35,000
Total liabilities including capital at the end of the year 50,000
(Ans: A ₹ 42000, B ₹ 50000, C ₹ 15000)

15. Calculate the missing amount for the following: (ICAI Module)
S.No Assets Liabilities Capital
(a) 15,00,000 2,50,000 ?
(b) ? 1,50,000 75,000
(c) 14,50,000 ? 13,75,000
(d) 57,00,000 - 2,80,000 ?
(Ans: ₹ 12,50,000, ₹ 2,25,000, ₹ 75,000, ₹ 59,80,000)

16. Following is the information provided by Mr. Gopi pertaining to year ended 31st March 2022. Find the
unknowns, showing computation to support your answer: (ICAI Module)
Particulars ₹ Particulars ₹
Machinery 12,00,000 Trade Receivables B

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Account Payable 1,00,000 Loans C

Inventory 60,000 Closing Capital D
Total Liabilities including capital 14,15,000 Opening Capital 10,00,000
Cash A Loss incurred during the year 35,000
Bank 80,000 Capital introduced during the year 1,00,000
Additional Information: During the year sales of ₹ 15,55,000 was made of which ₹ 15,00,000 have been
received.
(Ans: A ₹ 20,000, B ₹ 55,000, C ₹ 2,50,000, D ₹ 10,65,000)

True and False (ICAI Module)

1. In accounting equation approach, equity + Long-term liabilities = fixed asset + current assets
current liabilities.
2. In the traditional approach, for an entity a debtor will be receiver after sale of goods.
3. The rule of nominal account states that all expenses & losses are recorded on credit side.
4. Journal proper is also called a subsidiary book.
5. Capital account has a debit balance.
6. Purchase account is a nominal account.
7. All the personal & real account are recorded in P&L A/c.
8. Asset side of balance sheet contains all the personal & nominal accounts.
9. Capital account is a personal account.
10. Journal is also known as the book of original entry.
(Answers)
1. True: As per the modern accounting equation approach- it is the basic formula in the accounting process
2. False: In the traditional approach, a debtor will be giver since he will be paying money for the sale of
goods by the entity.
3. False: The rule of nominal account states that all expenses & losses are recorded on debit side.
4. True: It is one of the book where in the transactions not entered in the other books are entered in this
book.
5. False: Capital account has a credit balance.
6. True: As it is considered as an expense.
7. False: All the personal & real account are recorded in balance sheet.
8. False: Asset side of balance sheet contains all the personal & real accounts.
9. True: As it is in the name of the proprietor who is bringing in the capital to the business.
10. True: As the transactions are entered first in this book as a first-hand record.

Multiple Choice Question (ICAI Module)

1. The rent paid to landlord is credited to

(a) Landlord’s account.
(b) Rent account.
(c) Cash account.

2. In case of a debt becoming bad, the amount should be credited to

(a) Trade receivables account.
(b) Bad debts account.
(c) Cash account.

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3. A Ltd. has a ₹ 35,000 account receivable from Mohan. On January, 22, Mohan makes a partial payment
of ₹ 21,000 to A Ltd. The journal entry made on January, 22 by A Ltd. to record this transaction
includes:
(a) A credit to the cash received account of ₹ 21,000.
(b) A credit to the Accounts receivable account of ₹ 21,000.
(c) A debit to the cash account of ₹ 14,000.

4. Which financial statement represents the accounting equation - Assets = Liabilities + Owner’s equity:
(a) Income Statement
(b) Statement of Cash flows
(c) Balance Sheet.

5. Which account is the odd one out?

(a) Office furniture & Equipment.
(b) Freehold land and Buildings.
(c) Inventory of materials.

6. The debts written off as bad, if recovered subsequently are

(a) Credited to Bad Debts Recovered Account
(b) Credited to Trade Receivables Account.
(c) Debited to Profit and Loss Account.

7. In Double Entry System of Book-keeping every business transaction affects:

(a) Two accounts
(b) Two sides of the same account.
(c) The same account on two different dates.

8. A sale of goods to Ram for cash should be debited to:

(a) Ram
(b) Cash
(c) Sales

(Answers: 1. (c) 2. (a) 3. (b) 4. (c) 5. (c) 6. (a) 7. (a) 8. (b))

CA Manish Mahajan