Special Cases of Journalling

A business concern has bank relationship and takes up bank transactions such as cash paid into bank, payment of cheques for expenses and cheques issued to suppliers or creditors, cheques and bills received from customers paid into bank for collection. Any cheque received is treated as cash.
Consider a sample transaction,
July 18, 2009 – Opened a current account with Indian Bank Rs.10,000.

Step 1	Determine the two accounts involved in the transaction	Bank Account	Cash Account
Step 2	Classify the account under Real, Personal, Nominal	Personal Account	Real Account
Step 3	Find out the rules of debit credit	Debit the receiver	Credit what goes out
Step 4	Identify which account is to be debited and credited	Bank A/C is to be debited	Cash Account is to be credited

Date	Particulars	L.F	Debit Rs	Credit Rs
July 18,	Indian Bank A/c Dr.	34	10000	-
2009	To Cash A/c	10	-	10000
	(Opened Cash Account)

September 3, 2009 – Rent paid by cheque Rs. 5,000.

Step 1	Determine the two accounts involved in the transaction	Real Account	Bank Account
Step 2	Classify the account under Real, Personal, Nominal	Nominal Account	Personal Account
Step 3	Find out the rules of debit credit	Debit all expenses and loses	Credit the giver
Step 4	Identify which account is to be debited and credited	Rent A/C is to be debited	Bank Account is to be credited

Date	Particulars	L.F	Debit Rs	Credit Rs
Sep 3,	Rent A/c Dr.	56	5000	-
2009	To Bank A/c	34	-	5000
	(Rent Paid by Cheque No.)

As per principles of accounting business is a separate entity from business owners. Hence all transactions have to be analysed from business point of view and not from proprietor’s point of view. The initial amount with which a business is started is known as Capital. The owner may withdraw certain amounts from the business to meet personal expense or goods for personal use. It is called Drawings. Following table shows treatment of this transaction.

Drawing from business	Goods	Value of purchases decreases	Debit drawings A/c
			Credit Purchases a/c
	Cheque	Bank-the giver	Debit drawings A/c
			Credit Bank a/c
	Cash	Cash goes out	Debit drawings A/c
			Credit bank a/c

Lets consider one such transaction.

 July 31, 2009 – Shrikant withdrew for personal use Rs. 20,000.

Step 1	Determine the two accounts involved in the transaction	Drawings Account	Cash Account
Step 2	Classify the account under Real, Personal, Nominal	Personal Account	Real Account
Step 3	Find out the rules of debit credit	Debit the receiver	Credit what goes out
Step 4	Identify which account is to be debited and credited	Debit Drawing Account	Credit Cash Account

Date	Particulars	L.F	Debit Rs	Credit Rs
Jul 31,	Drawing A/c Dr.	99	20000	-
2009	To Cash A/c	10	-	20000
	(Cash withdrawn for personal use)

Compund journal entry is made when transactions of same nature occur on the same day. Similar transactions are entered as combined journal entry. The total debit should be equal to credit.

Lets try to understand this by an example.
July 23, 2009 – Shrikant contributed capital Rs. 50,000
                          Arun contributed capital Rs. 50,000

Date	Particulars	L.F	Debit Rs	Credit Rs
Jul 23,	Cash A/c Dr.	10	100000	-
2009	To Shrikant's A/c	91	-	50000
	To Arun's A/c	92	-	50000
	(Cash withdrawn for personal use)

Sometime the goods are sold to a customer on credit and if the amount becomes irrecoverable due to buyer’s insolvency or for some other reason, then that amount becomes bad debts. For recording this transaction, the bad debts account is debited because the unrealised amount is a loss to the business and the customer’s account is credited.

Let’s see this transaction in the journal.
Camlin Ltd which owed us Rs.10,000 is declared insolvent and 25 paise in a rupee is received from her on 15th July, 2009.

Date	Particulars	L.F	Debit Rs	Credit Rs
Jul 15,	Cash A/c Dr.	10	2500	-
2009	Bad Debt's A/c	100	7500	-
	To Camlin Ltd's A/c	92	-	10000
	(25 paise in a rupee received)

If bad debt written off previously is recovered then cash account is debited and bad debts recovered account is credited because the amount so received is a gain to the business.
Received cash for a Bad debt written off on July15, 2009, Rs.7,500 on 15th decemeber, 2009.

Date	Particulars	L.F	Debit Rs	Credit Rs
Dec 15,	Cash A/c Dr.	10	7500	-
2009	Bad Debt's Recovered A/c Dr	45	-	7500
	(Bad Debt Recovered)

In the beginning of each year “opening entry” is passed to record closing balance of assets and liabilities of the previous year. While doing this, asset account is debited and ‘capital and liabilities” account is credited. (Capital=Assets-liability)
Lets see an example. Following balances appeared in the books of Tata motors ltd
1st January 2009 – Cash Rs. 7,000, Bank Rs.70,000, Stock Rs.80,000, Furniture Rs.10,000, Computer Rs.50,000, Debtors Rs.33,000 and Creditors Rs.90,000.

Date	Particulars	L.F	Debit Rs	Credit Rs
Jan1,	Cash A/c Dr.	10	7000	-
	Bank A/c Dr	45	70000	-
	Stock A/c Dr		80000	-
	Debtor A/c Dr		33000	-
	Furniture A/c Dr		10000	-
	Computer A/c Dr		50000	-
	To Creditors A/c		-	90000
	To Capital's A/C		-	160000
	(assets and liabilities brought forward)

Recap

In this section, we shall review what we learnt in paragraphs above and some new concepts. We learnt that every business transaction affects at least two accounts, and hence our accounting system is known as a double entry system.

• For example, when a your company borrows Rs1,000 crores from a bank, the transaction affects the company's Cash account and Notes Payable account. When the company repays bank loan, the Cash account and the Notes Payable account are also involved.
• If a company buys supplies in exchange for cash, its Supplies account and Cash account will be affected. If supplies are bought on credit, the accounts involved are Supplies and Accounts Payable.
• If a company pays rent for the current month, Rent Expense and Cash are the two accounts involved.
• If a company provides service on credit and gives client 30 days for payment, the company's Service Revenues account and Accounts Receivable are affected.

Though the system is referred to as double entry, a transaction may involve more than two accounts. In case of loan payment by company to the bank, three accounts are involved: Cash, Notes Payable, and Interest Expense.
Generally following types of accounts are increased with a debit:

1. Dividends (Draws)
2. Expenses
3. Assets
4. Losses 

Remember D – E – A – L

Generally following types of accounts are increased with a credit:

1. Gains 
2. Income 
3. Revenues 
4. Liabilities 
5. Stockholders' (Owner's)

Equity Remember G – I – R – L – S.

To decrease an account we shall do the opposite of what was done to increase the account.
We also learnt about real and nominal account. Asset, liability, and most owner/stockholder equity accounts (capital) are referred to as " real accounts " (or " permanent accounts"). These accounts are not closed at the end of the accounting year; their balances are automatically carried forward to the next accounting year.

Nominal accounts (or "Temporary accounts ") include all of the revenue accounts, expense accounts, the owner drawing account, and the income summary account. The balances in temporary accounts increase throughout the accounting year and are "zeroed out" and closed at the end of the accounting year. “Zeroing out” in case of revenue and expense account is done by closing/transferring/clearing balances to the income summary account. The net amount is then closed/transferred/cleared to owner’s equity account (capital) or Retained earnings (in case of corporations). The Drawing A/c of the owner is also temporary account which is closed directly without going through an income summary account. This is means new accounting year starts with no revenue or expense or drawing amount.

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