Book of Original Entry

Meaning and Concept of Journal

The word journal is derived from the French word "Jour", which means a day. So journal means a day book, a daily record, or a book of financial transactions.

According to R.N. Carter:

"The 'journal' or 'daily record' as originally used was a book of prime entry in which transactions were copied in order of date from a memorandum or waste book. The entries as they were copied, were classified into debits and credits, so as to facilitate their being correctly posted afterwards in the ledger."

According to L.C. Cropper:

"A journal is a book, employed to classify or sort out transactions in a form convenient for their subsequent entry in the ledger."

Objectives of Journal

• To maintain a systematic record of different financial transactions of a business organization.
• To show the financial transactions in chronological order.
• To present detailed information regarding the recording of different financial transactions.
• To use as legal evidence of recording.
• To facilitate the preparation of ledger accounts.

Importance / Advantages of Journal

a) Transactions recorded date wise with explanation: All business transactions are entered in the journal in chronological order, i.e. according to the order of their occurrence.

b) Process of classification at convenience: Since transactions are recorded in the journal as and when these take place, it ensures that nothing shall be omitted which should be recorded.

c) Ensures the double entry rules have been followed: Each transaction, before it is recorded in the journal, is analyzed for the aspects involved, the accounts to be debited and credited, and also the debit and credit amount.

d) Reliable evidence: As the transactions take place, their recording is made at the same time along with the supporting documents, therefore the chances of manipulating the facts can be minimized.

e) Provides primary source of data: The journal is directly written on the basis of vouchers, so the information contained in the journal is a primary source of financial statistics of the business.

Journal Entries and Journalizing

Journal entries refer to the record maintained in the journal by following the specified rules of debit and credit.

Journalizing is an act of recording the different financial transactions in a systematic manner in the journal.

Rules of Debit and Credit

a) Rules based on the type of account (Traditional approach)

This is the traditional concept of explaining the rules of debit and credit.

i) Personal account: Transactions related to natural and artificial persons, like Ram, Shyam, Sita, a college, ABC company etc., are recorded under the personal account rule, where the receiver's account is debited and the giver's account is credited.

• Dr : The receiver
• Cr : The giver

ii) Real account / Property account: Transactions related to property or assets, like cash, bank, debtors, machinery, furniture, vehicles, are recorded by using the real account rule, where whichever asset comes in should be debited and whichever asset goes out should be credited.

• Dr : What comes in
• Cr : What goes out

iii) Nominal account: Transactions related to expenses, losses, income and gains are recorded under the nominal account rule. All expenses and losses should be debited and all income and gains should be credited.

• Dr : All expenses and losses
• Cr : All income and gains

b) Rules based on the accounting equation (Modern approach)

The rules of debit and credit under this approach are based on the accounting equation. Thus it is also known as the accounting equation approach.

• i) Assets, Expenses, Losses increased
• ii) Assets, Expenses, Losses decreased
• iii) Capital, Liabilities, Income, Gains increased
• iv) Capital, Liabilities, Income, Gains decreased

(The source text lists these four categories of change but does not print which side, debit or credit, each corresponds to; that part of the page is not legible in the source.)

Types of Journal Entries

1) Simple journal entry: If a journal entry consists of only one debit account and one credit account, then that type of journal entry is called the simple journal entry.

2) Compound journal entry: If a journal entry consists of more than one debit or credit account, then that type of journal entry is called the compound journal entry.

Accounting for Bill of Exchange

A bill of exchange means a bill drawn by a person directing another person to pay the specified sum of money to another person.

According to Mukherjee and Hanif:

"A bill of exchange comes from an open credit arrangement where the creditor gets the documentary evidence of the amount owing and also the terms of payment."

Features of a Bill of Exchange

• The order should not have any condition (unconditional order).
• The bill of exchange amount should be defined.
• There is a fixed date for the amount to be paid.
• The bill must be signed by both the drawer and the drawee.
• The amount stated on the bill should be paid on demand or on the expiry of a fixed time.

Worked Problems

1. Business Started

Journal entries in the books of the business: