UNIT 2: PRIMARY BOOKS (JOURNAL)
Journal is the book of original entry in which, after following the rules of debit and credit, all business transactions are recorded in a chronological order. The word journal has been derived from the French word “jour”, which means “a day”. Thus, journal means a book which records all monetary transactions of a business on daily basis. The monetary transactions are recorded in chronological order i.e., in the order of their occurrence.
As the recording of transactions is done first in the journal, it is also called the book of original entry or prime entry. Journalizing is defined as the process of recording transactions in the journal. After determining the particular account to be debited and credited, each transaction is separately recorded.
A short explanation of each transaction is written under each entry which is called narration. The subject matter of the transaction can be ascertained through narration. Besides this, if there be any mistake in determining debit or credit aspect of a transaction, it can be easily detected from narration. “A journal entry is not complete without narration”.
Journal has the following features:
Journal is the first successful step of the double entry system. A transaction is recorded first of all in the journal. So, the journal is called the book of original entry.
A transaction is recorded on the same day it takes place. So, the journal is also called a day book.
Transactions are recorded chronologically. So, the journal is called chronological book.
For each transaction, the names of the two concerned accounts indicating which is debited and which is credited, are clearly written into consecutive lines. This makes ledger – posting easy. That is why the journal is called “assistant to ledger” or “subsidiary book”.
The narration is written below each entry.
The amount is written in the last two columns – debit amount in debit column and credit amount in the credit column.
Advantages of Journal:
The following are the advantages of the journal:
Each transaction is recorded as soon as it takes place. So there is no possibility of any transaction being omitted from the books of account.
Since the transactions are kept recorded in journal chronologically with narration, it can be easily ascertained when and why a transaction has taken place.
For each and every transaction which of the two concerned accounts will be debited and which account credited, are clearly written in the journal. So, there is no possibility of committing any mistake in writing the ledger.
Since all the details of transactions are recorded in the journal, it is not necessary to repeat them in the ledger. As a result, ledger is kept tidy and brief.
Journal shows the complete story of a transaction in one entry.
Any mistake in the ledger can be easily detected with the help of journal.
Limitations of Journal:
(i) Bulky and voluminous:
Journal is the main book of original entry which records all business transactions. Sometimes, it becomes so bulky and voluminous that it cannot be handled easily.
(ii) Information in the scattered form:
In this book, all information is recorded on daily basis and scattered form; hence it is very difficult to locate a particular transaction unless one remembers the date of occurrence of that transaction.
Unlike posting from subsidiary books, posting the transactions from journal to ledger accounts take too much time because every time one has to post the transactions in different ledger accounts.
(iv) Lack of internal control:
Unlike other books of original entries like subsidiary books and cash book, the journal does not facilitate the internal control, because in the journal only transactions are recorded in chronological order. However, subsidiary books and cash book gives a clear picture of the special type of transactions recorded therein.
Format of Journal:
The various columns of the journal are explained in details below:
This column is used to write the date of the business transaction. Different date formats are used in different countries. Different formats of date are 15.03.1981, 03.15.1981, 15 March 1981 etc.
Particulars or Details Column:
In this column the names of the two connected accounts are written in two consecutive lines – in the first line the name of account debited and in the second line the name of account credited. While the name of account debited always placed close the the left hand margin line, the name of account credited is commenced a short distance away from the margin line. This arrangement will show clearly which account is debited and which credited. This also shows that credit amount is placed on the right side of debit amount. The world “Dr” is used at the end of the name of account debited. It is not necessary to place the word “Cr.” after the name of the credited account because if one account is Dr. it follows that the other account must be Cr. Below the names of the two accounts, i.e. in the third line narration is written usually within a bracket. According to tradition, the narration is written starting with a word “being”. But modern practice is not to use this word. In most of the countries even in Great Britain using the word “To” at the beginning of the name of account credited has become out-dated. So, here it has not been used too. But it is optional for the students.
Ledger Folio (L.F):
The page numbers of the ledger where the two concerned accounts have been posted are written in this column against the name of each account. This will help to locate easily the two concerned accounts from the ledger. On the other hand, when a transaction is posted to the ledger, the concerned folio number of the ledger is written in this column. Thus if a folio number stands written in this column, it will mean that the transaction has already been posted to the ledger.
The debit amount is written in the first “amount” column against the name of account debited and the credit amount in the second “amount” column against the name of account credited.
At the end of each page, both the Dr. and Cr. columns are totalled up. The total of both these columns should be equal as the same amount is entered in the debit as well as in the credit columns. The totals are carried forward to the next page with the words ‘total carried forward (c/f) and then at the top of the next page in Particulars column, we write totals brought forward (b/f) and the amount of totals is written in the respective amount columns.
Rules of Debit & Credit
Debit and credit are simply additions to or subtraction from an account. In accounting, debit refers to the left-hand side of any account and credit refers to the right-hand side. Asset, expenses and losses accounts normally have debit balances; liability, income and capital accounts normally have credit balances.
The term debit is derived from the Latin base debere (to owe) which contracts to the “Dr” used in journal entries to refer to debits. Credit comes from the word credere (that which one believes in, including persons, like a creditor), which contracts to the “Cr.” used in journal entries for a credit.
Debit the account of the person who receives something and credit the account of the person who gives something.
Debit the account of the asset/property which comes into the business or addition to an asset, and credit the account which goes out of the business. When furniture is purchased for cash, furniture account is debited (which comes into the business) and cash account is credited (which goes out of the business).
Debit the accounts of expenses and losses, and credit the accounts of incomes and gains. When wages are paid, wages account is debited (expense) and cash account is credited (asset goes out).
Debit the account when the account is to be reduced and credit the account when the account is to be increased.
Rules of Debit & Credit at a glance
Opening entries are those entries which record the balances of assets and liabilities, including capital brought forward, from a previous accounting period. In the case of going concerns, there is always a possibility of having balances of assets and liabilities, including capital, which was lying in the previous accounting year. To show a true and fair view of the business concern, it is necessary that all previous balances are to be brought forward in the next year by way of passing an opening entry.
An opening entry (with imaginary figures) looks like the following:
Simple Entry and Compound Entry:
Every transaction affects two accounts – one is debited and another is account is credited. Thus in recording a transaction in a journal one account is debited and another account is credited. This type of entry is called simple entry.
The entry in which more than one account is debited or more than one account is credited, is known as a compound entry. Three or more accounts are connected with a compound entry
Example of Simple Entry:
For example, on 10.04.05 we bought furniture from S. The entry is: