CONCEPT OF DO UB LE

ENTRY SYSTEM
''E very b usine
· ss trans actio
n has a two-f old effect and that it• a11~ects two accou n ts in onpo site
direc tions and if a comp lete record were made of each such r
trans actio n, it woul d be neces sa ry
to debit one accou nt and credi t anoth er accou nt. It is this
recor ding to two-f old effect of every
trans actio n that has given rise to the term Double Entry
Syste m." -J. R. B atlibo i
MEA NING OF DOU BLE ENTRY SYSTEM
Ever y busin ess trans actio n h as two fold aspec ts i.e.,
debit and credi t. A syste m of
Acco untin g in whic h both the aspec ts of each trans actio
n are recor ded as per presc ribed rules
is calle d Doub le Entry Syste m. It does not mean that every
trans actio n is recor ded two times ,
but one aspec t is recor ded at on e place and other aspec
t is recor ded at other place , e.g. , ~ 500
are recei ved from Moha n. This is a trans actio n. In this trans
actio n cash is recei ved and Moha n
is paye r of this cash. Thus , it h as two aspec ts (i) Recei ving
of Cash and (ii) Paym ent by Moha n.
One of these aspec ts is debit ed and the other is credi ted
accor ding to certa in presc ribed rules .
On the basis of above , doub le entry syste m may be defin
ed "as a syste m of accou nting in
whic h out of the two aspec ts of a transactio n, one aspec t is
debit ed and the other aspec t is credi ted
accor ding to certa in presc ribed rules."
As per the above discu ssion it thus leads to concl ude
that unde r doub le entry syste m of
book -keep ing every busin ess trans actio n has two-fold effect
on the busin ess enter prise and the
dual aspec t of each trans actio n brings abou t chang es in asset
s, liabil ities and capit al in such a
way that the debit and credi t is affect ed in such
a way whic h leads to the satisf actio n of the
accou nting equat ion , i.e. , Asset s = Liabilities + Capit al.
Mean ing of Debi t
The word Debi t has been deriv ed from the Latin word debit
um , whic h mean s 'due for that'.
In fact , debit is a symbol of accou nting , which is used to m
ake the rules of accou nting clear and
opera tive.
Mean ing of Cred it
The word credi t has been der ived from Latin word 'c reder
' whic h m eans 'due to that'. It
is also used as a symbol in accou nting which is used to m
ak e th~ rules of accou nting clear and
opera tive.
DEFI NITI ONS 014"' DOU BLE ENTR Y SYST EM
Follo wing are the main defin itions of Doub le Ent ry Syste
m :
( 1 ) Acco rding to ~-l.. N . Ca rter , ·'Dou ble Entry Syste m is a
syst em of book-kee ping by means
of botJ1 perso nul and 1mpe rsona l accou nts ."
 CONCEPT OF DOUBLE ENTRY SYSTEM 23
- ---------
(2) According to William Pickles. "The system of Book-keeping which is almost universally
employed is that whereby every debit has a cr edit. This is known as the Double Entry System."
( 3 ) According to M. J. Keller, "The most comm on system of accounting data for an enterprise
is the Double Entry Systen1. As the name implies the entry made for each transaction is
composed of two parts, a 'debif and a 'credit."
Ideal Definition : Double Entry System is a scientific system of accounting in which out of
two aspects of transaction, one aspect is debited and the other aspect is credited according to
crtain prescribed rules. It means every debit has a credit and every credit has a debit.
CHARACTERISTICS OF DOUBLE ENTRY SYSTEM
1. Where a transaction is entered into, two aspects are affected. Both of these aspects are
recorded. If one aspect is recorded and other is omitted, then it is not justified. Thus, the first
principle of Double Entry System is that both the aspects of a transaction are recorded, hence,
it is treated as a characteristic of double entry.
2. Both personal and impersonal aspects of a transaction are recorded in Double Entry
System. It is possible that both the aspects of a transaction may be personal or both may be
impersonal or one may be personal and the other may be impersonal.
3. In Double Entry System one aspect is debited while other aspect is credited. It does not
mean that any aspect may be debited and any aspect may be credited. There are certain rules
for debiting and crediting various aspects of a transaction and credits and debits are made on
the basis of these specified rules.
4. Since one aspect of each transaction is debited and other aspect is credited, therefore,
total of all debits is always equal to the total of all credits. This helps in finding out arithmetical
accuracy of accounting record. This is done by preparing trial balance.
 STAGES OF DOUBLE ENTRY SYSTEM OF ACCOUNTING
There are following five stages of double entry syste m of accounting :
( 1)First Stage : When the transaction takes place, it is recorded in a primary book called
journal. When the business is a big one, subsidiary books of journal are kept. Thus , recording
in journal or in its subsidiary book is the first stage of double entry system. It is also known as
original -record stage .
(2 ) S econd St:age : Records of journal or its subsidiary books are transferred in a classified
form to another book which is called ledger. These classified groups are technically known as
accounts. P ostings in ledger and its maintenance is the second stage of Double Entry System.
It is also known as classification stage.
(3 ) Third S tage : Balance of each account in ledger is found out and is transferred to a
statement which is called arrial Balance'. Thus, preparation of Trial Balance is the third stage
of Double E n try System of Accounting.
(4 ) Fourth Sw.ge: From Trial Balance, final accounts are prepared. Final accounts include
trading account, profit and loss account and balance sheet. In case of manufacturing concern,
before trading account , manufacturing account is also prepared. Preparation of manufacturing
account, trading account, profit and loss account and balance sheet is the fourth stage of Double
Entry System of Accounting.
( 5 J Fi~ h Stage : After pr eparation of final accounts, analysis and interpretation of these
accounts are m ade in order to have true and fair idea about the earning capacity and financial
position of the business. This is the fifth stage of accounting.
AOCOUNTING STRUCTURE
,All the above-ment ioned F ive Stages namely, original record, classification, trial balance,
fina l acc.ounts and analysis and interpretation. are included in accounting structure.
 CONCEPT OF DOllRLE ENTRY SYSTEM

Aec-ounting StructurP. at a (Han ce

Transacti ons
j
I. tloumal or its Subsidiary Rooks
I .
r
~ l l J 1 J l l
Purchases Sale's Purchases SaleR Bills Bills Cash Journal
Book Book Retnms Returns ReceivablE> Payable Book Proper
Book Book Rook Book

... ~ ~ \ ► •
II. Classification (Ledger) ~
j,
ll 1. Trial Balance
j,
IV. Final Accounts

j,
J l
Profit & Loss Balance Sheet
Manufactu ring Trading Account
Account Account

/ //
-~ /
V. Analysis and Interpretat
IMPORTANT WORDS USED IN ACCOUNTING
ion
/
Assets : The cash, goods or property which is owned by the business entity in its name are
called assets. In addition to it, such amounts which the business entity has to receive, are also
treated as assets . Whatever business owns, is treated as asset of the business.
Business : Any activity or service or work which is carried with the object of making profit
is called business. It must be understood that the object should be to make profit, the result may
be either profit or loss.
Capital : Any account of money or goods with which business is commenced is called capital.
It is treated as liability of the business.
Creditor : A person from whom goods or services have been purchased on credit, is called
a creditor. The person to whom payment is to be made, is called a creditor.
Drawings : Any amount of money or goods which is withdrawn from the business by the
proprietor/owner of business for personnel use is called drawings.
Debtor : A person to whom goods or services have been ~old on credit is called a debtor. The
person from whom amount is to be received, is a debtor.
Liabilities : Whatever amount is payable by the business, is the liability of the business.
Any amount which business owes, is its liability.
Livestock : Horses, bullocks and other animals which are used in business, ar e called
Livestock of that business.
Tangible Assets : Such assets which have physical existence, i. e. , they can be seen, touched
and felt are called tangible assets namely, machinery, cash, vehicles, houses, furniture, etc.
Intangible Assets : Those assets which have no physical existence, i.e., they cannot be seen
and touched are termed as intangible assets, namely, trademarks, goodwill, copyrights, etc.
Voucher : Documentary evidence of a transaction is called a voucher. When goods are
purchased for cash , a cash memo is given by the seller to the buyer, this cash memo is a voucher.
Every voucher should have an entry and every entry should have a voucher.
26 FINANCIAL AQ_CO~NJIN~ -

MEANING OF AN ACCOUNT
tone place is known as accounts. In oth
Transaction of a similar nature when recor~ed a d events recorded at one place relat'1er
words , a summary of relevant business transactions_ an up of accounts is called a ledger ttg f
to a particular head is called an account and the entire gro · l
TYPES OF ACCOUNT
The accounts can be classified as under :
(1) Traditional Accounts;
(2) Accounts Based on Accounting Equation.
Traditional Accounts h• below ··
The classification of accounts as per trad1·t·ion al ap proac 1s as
Traditional Accounts

NOMINAL ACCOUNTS
PERSONAL ACCOUNTS REAL At COUNTS
I
/
I
Expenses & Losses
Individuals, Firms, Companies, Assets-Such as Cash, Land, Incomes & Gains
Banks, Corporations, Statutory Building, Patent, Goodwill, etc.
Authorities etc.

(1) Personal Accounts: The accounts which are related with real persons, artificial persons
and representative persons are called personal accounts.
Examples : (i) Real persons : (a) Sudhir's account, Sushil's account, Karola's account,
Prabha's account, Aruna's account, Ratna's account, Sharad's account, etc. Both males and
females are included in it.
(b) When a person starts a business, he is called proprietor. This proprietor is represented
by capital account for all that he invests in business and by drawings account for all that which
he withdraws from business. So, capital account and drawings account are also termed as
personal accounts.
(ii) Artificial persons' account-S : Firms' account, Limited Companies' accounts, Educational
Institutions' account, Corporations' accounts, etc. are known as artificial persons' accounts.
(iii) Representative Account : If the wages for the month of March, which is the last month
of the year, are not paid to some workers, then total amount of wages to be paid to them is
regarded as outstanding wages account. This amount represents all those workers to whom
wages are to be paid, hence it is personal account. Thus, all accounts representing outstanding
expenses and accrued or prepaid incomes are personal accounts.
Rule for debit & credit or journalising personal account : Debit, the receiver and Credit,
the giver.
Example : Head office is at Kanpur and it has one branch at Chennai and another at
Mumbai. Goods are transferred from Chennai branch to Mumbai branch under instructions from
head offi_ce_. In t~s _case while making en~ry in the head office books, Mumbai branch is debited
because 1t 1s rece1vmg goods and Chennru branch is credited because this branch is giving goods.
(2) Real Acco_un_ts : Real ~ccounts are of two types, i.e., tangible real accounts and intangible
real accounts. Building, Furmture, Cash, Machinery, etc. are examples of tangible real accounts ,
because these can be seen, touched and felt and they have a physical exi·st
· t 'bl al h ence.
Th ere ares oroe
m adngi eksre daccoundwillt~, t tese cannot be touched because they have no physical shape such as
t ra emar an goo , e c.
Rule for debit & credit or journalising real account : Debit what · C d· h t
goes out. , comes in. re it, w a
 CONCE PT OF DOllBLE EN'l' HY RYS'rn M '1.7

niw d ), h<•ncc
_E xample : J?u:ni tu r~ is purchA scd for cash . H<'r(' furnit ure iH rccoiv rd (purch
iH cn•dit<Jd in tht>
furnit ure accou nt 1s debited and cas h is going (paid ) out, hcnc<.' cnAh account
books of purch aser of furnit uro.
h,, makes Hom e
(3) Noniina,/ Accoun ts: Every businP ssman hai:, to incur Hom e oxprn 80A and
unci in comoi, oro
income also. Some name is given to tlw heud under which thet1c oxponACH
iH wngnR nccounl.
recorded, e.g., when wages arc paid, cash goes out but the na me for this he1HJ
ed. is nanwd
If intere st is received, cash comes in , but th e hrnd, under which th P cuAh iHrocord eci nomin nl
' a rc• cRll
as intere st accoun t. There fore. the names of head1, of e:x pensei:1 and incom<
t, rent accoun t, etc.
accounts. Exam ples are wages accoun t, sa]nries account, co mmi Asion accoun
expnu;e.c; '
Rule for debit & credit or journa lising nomin al nrcmm t : Debit all losses and
and credit all gains and incomes.
accou nt is
Example : \¥ages paid . Here amoun t of wageA is a n expen diture, hence wages ted .
t ncco un t is credi
debited . Intere st received in cash , here intere st is income, hence intercA
Rules
I
J,
Perso nal Account. r Nominal Accou nt
!(Debit the receiver's accoun t and I (Debit the accoun t of exp enses and l
credit the p ayer's accoun t) losses and credit the accoun t of
income and gains ) .J

Real Accou nt
(Debit the account of what comes in
and credit the acc<J_!!,n t of what goes out)
ption is called
Narra tion : Brief descri ption after each journa l entry is given. This brief descri
narrat ion.
TION
CLASS IFICA TION OF ACCOUNTS BASED ON ACCOUNTING EQUA
1. Accou nts related with Capital : Whate ver amoun t is invest ed
by the propri etor for
and credit in this
commencement of busine ss, is called capital of the business. Rule of debit
capital is credited
connection is-Dec rease in capital is debited to capital account and increase in
to capital account.
or proper ti es
2. Accounts related with Assets : Whenever business is started , some assets
ss. Assets are sold
are acquir ed, proper ties are also acquired even during the period of busine
or intang ible real
also whene ver such sale is deemed necessary. The assets may be tangible
is debited to the
assets. The rule for debit and credit in this connection is-Inc rease in asset
concerned asset account.
concerned asset account and decrease in asset is credited to the
se in liabili ty
3. Accounts related with Liabilities : When money is borrowed, there is increa
accounts which
and when this borrowed money is paid, there is decrease in liability. Thus,
d as liabilities. It
relates to financial obligations of a business entity towards outsiders is terme
t is- Decrease in
can be a short- term liability or long-term liability. The rule in this respec
is credited to the
liability is debited to the concerned liability account and increase in liability
concerned liability account.
goods sold or
4. Accounts related with Revenues: These accounts relate to amount charged for
d and whenever
services rendered. Whenever income increases, concerned income account is credite is debited
is-De crease in income
it decreases, concerned income account is debited, hence the rule ned income
concer
to the concerned income or gain account and increase in income is credited to the
or gain account.
genera ting
5. Accounts related with Expenses : Whenever any expen diture is incm·red for
n of the amoun t
revenue, concerned expenditure account is debited and whenever some portio
next year, the
of expen diture (which has already been incurred) is can·ied forwar d to the
. Hence , the rule
concerned expen diture account is credited with the amoun t carried forward
28 FINANCIAL ACCOUNTIN G

~s-Increase in expenditure or loss is debikd w the con.cemed t'.tJ}('Tldifun. • or In...~ a('C't>unt 011d dtx-rvo~,
in expenditure or l.oss i.s credit.eel t.o the concerniYl expendiflm? or loss m•(tl11J1t .
The final rule is that when there is any increase in ru1~r nccow1t. t.lw snid H<'<~ount i~ dlc'bit('(!
if it is a debit account in nature and credited if the same is a credit acrount in n:\t un, and
similarily if there is any decrease in an account the said account is credited if it is debi t nC'count
in nature and debited if it is a credit accow1t in natw-e .
Compariso n o f Accounts U nder Traditional Approach & Accounting _E quation Appro nch
- - TI-udit~nal
--
Acco1111ti11g 1';c1 11otion
- +
Personal Accounts :
(a ) Those accounts having a debit balance but not relating to owner. Assets Accou n t:.s
(b) Those accounts having a credit balance but not. relating to owner. Liabilities Account.s
(c) Those accounts related to owner. Capital Accounts.
Nominal Accounts :
(a ) Relating to revenue (income & gains) R.e,renue Accounts
(b ) Relating to expenses (expenses & losses) Expenses Account.s
Real Accounts ___ ______ - Assets Accounts
- -
PREPARAT ION OF PERSONAL ACCOUNTS FROM NOMINAL ACCOUNTS
Nominal Account Personal Account
Prepaid Rent Ale
Rent Account r Rent Recd. in Advance Ale
1 Outstanding Rent Ale
Prepaid Salary Ale
Salary Account
{ Salary Recd. in Advance Ale
Outstanding Salary Ale
Prepaid Interest Ale

Interest Account
{ Interest Recd. in Advance Ale:
Interest Accrued Ale
Interest Earned Ale
Interest Outstanding Ale

Discount Account
{ Discount Received in Advance Ale
Unexpired Discount Ale
Rebate on Bills Discounted Ale
Premium Account
{ Outstanding Premium Ale
Premium Received in Advance Ale
Claims Account Outstanding Claim Ale

Commission Account

Subscription Account
{ Prepaid Commission Ale
Outstanding Commission Ale
Commission Recd. in Advance Ale
Unexpired Commission Ale
{ Subscription Recd. in Advance Ale
Outstanding Subscription Ale
.. • . . . . . . . . . I!!'_

ILLUST RATION 4.
Sho'"' the effect of the following transactions on Assets, Liabilities and Capital
through accounting equation :
~

(a) Started business with cash 1,20,000

( b) Rent received 10,000
( c) Invested in shares 50,000
(d) Received dividend 5,000
( e) Purchase d goods on credit from Ragani 35,000
(f) Paid cash for household expenses 7,000
(g) Sold goods for cash (costing ~10,000) 14,000
(h) Cash paid to Ragani 35,000
( i) Deposite d into bank 20,000
I '-':! I'! :: • •-•:.s:••ar :::: ~ ~!!5:-'. CJ> t4 2 I ts Q J & 9 : !!2 tgt st SL £2! @ iii I i
SOLUTION : /4)
.,."(;
ACCOUNTING EQUATION C
C
S. :\-o. Transaction Assets = Liabilities + Capital ~
-:
Cash + Shares + Stock + Bank = Creditors + Capital
(a) Started business with Cash
~ 1,20,000 1,20,000 + 0 + 0 + 0 = 0 + 1,20,000
- - - --- - - -
Equation 1,20,000 + 0 + 0 + 0 = 0 + 1,20,000
(b) Rent received ~ 10,000 + 10,000 ...L
0 + 0 + 0 = 0 + 10,000
New Equation 1,30,000 + 0 + 0 + 0 = 0 + 1,30,000
(c) Invested in shares ~50,000 (-) 50,000 + 50,000 + 0 + 0 = 0 +
--
0
---
New Equation 80,000 + 50,000 + 0 + 0 = 0 + 1,30,000
(d) Received Dividend ~5 ,000 (+) 5,000 + 0 + 0 + 0 = 0 +
---
5,000
---
New Equation 85 ,000 + 50,000 + 0 + 0 = 0 + 1,35,000
{e) Purchased goods on credit 0 + 0 + 35,000 + 0 = 35,000 + 0
t35 ,000
New Equation 85,000 + 50,000 + 35,000 + 0 = 35,000 + 1,35,000
(/) Paid cash for household expenses
f7,000 (-) 7,000 + 0 + 0 + 0 = . 0 (-) 7,000
New Equation 78,000 + 50,000 + 35,000 + 0 = 35,000 + 1,28,000
(g) Sold goods for cash (Costing
tl0,000) for fl4 ,000 (+) 14,000 + 0 (-) 10,000 + 0 = 0 +
---
4,000
New Equation 92,000 + 50,000 + 25,000 + 0 = 35,000 + 1,32,000
(h) Cash paid to Ragani f35 ,000 (-) 35,000 + 0 + 0 + 0 = (-)35,000 + 0
New Equation 57,000 + 50,000 + 25,000 + 0 = 0 + 1,32,000
(i) Deposited into bank f20,000 (-) 20,000 + 0 + 0 + 20,000 = 0 + 0
+ =
I

Final Equation 37,000 50,000 + 25,000 + 20,000 0 + 1,32,000

--- I
C
 ILLU STRA T/ON 5 .
Trans action s of Mis Vipin Traders are given below :
Sho'"' the effect s on Assets , Liabilities and Capita l with the help of accou nting
equ.a t1on.
~

(a) Busin ess started with cash 1,25,0 00

( b) Purch ased goods for cash 50,000
( c) Purch ased furniture from R.K. Furnit ure on Credi t 10,000
(d) Sold goods to Parul Traders (Costing ~7,00 0 vide bill no. 5,674 ) 9,000
( e) Paid cartag e 100
(/) Cash Paid to R.K. Furniture in full settlem ent 9,700
(g) Cash sales (costing ~10,000) 12,000
II
( /1 ) Rent receiv ed 4,000
(i ) C ash with_d rew for personal use -;,ooo
 .-
. ... ... ... ...: (5) ACCOUNTfNG EQUATION
0
-
SO LUTION JC
..,. Capital
Transaction Assets
S.N o
Cash + Stock + Furniture + Debtors = + Capital
(a) Started business with Cash
f 1,25,000 1,25,000 + 0 + 0 + 0 = 0 + 1,25,000
- --
Equation 1,25,000 + 0 + 0 + 0 = 0 + 1.25 ,000
(b) Purchased goods for cash (-) 50,000 + 50,000 + 0 + 0 - 0 1-- 0
f50,000
New Equation 75,000 + 50,000 + 0 +- 0 - 0 + 1,25 ,000
(c) Purchased Furniture from R.K.
I
Furniture f 10,000 0 + 0 + 10,000 + 0 = I 0,000 + 0
I
New Equation 75,000 + 50,000 + I0,000 + 0 = I 0,000 + 1,25,000
(d) Sold goods to Parul Traders
Costing t7,000 for f9,000 0 (-) 7,000 + 0 t- 9.000 = 0 1-- 2,000 I
- -
New Equation 75,000 + 43 ,000 + 10,000 + 9,000 = I0,000 1-- 1,27,000
(e) Paid Cartage ~ I 00 (- ) 100 + 0 + 0 T 0 = 0 (- ) 100 I

New Equation 74,900 + 43,000 + 10.000 t- 9,000 = I0,000 1,26,900

(/) Paid cash to R.K. Furniture in full
settlement f9,700 (-) 9,700 + 0 + 0 + 0 = (- ) I0,000 + JOU
-- - 65,2 00 + 43 ,000 + 10,000 9,000 = 0 1,27,200
New Equation T f-
IJ
(g) Cas h sales (Costing t I 0,000) for I~
t 12,000 (+) 12,000 (- ) I0,000 + 0 ~
0 = 0 + 2,000 (
I c.
New Equation 77,200 + 33,000 -t I0,000 +- 9,000 = 0 1-- 1,29,200 '

(h) Rent received ~4,000 (+) 4,000 + 0 + 0 + 0 = 0 I- 4,000

Ic
New Equation 81 ,200 + 33,000 + I0,000 -t 9,000 C:
u 1-- 1,33,200
(i) Cash \\ ithdre\\ for personal use I.
I

~3,000 (- ) 3,000 + 0 + 0 t 0 == 0 ( ) 1,000

I·

Fina l Equatio n 78,2 00 33 ,000 i 10,000 + 9,000 - 0 I ,30,200

Ii
(
 - ' """'""' *'- V' " , ,, _,v,,, vv , '-''tJ1,1..•• --.,- · .
. f' . the following :
Q. -t. Prepare Accounting Equation rotn

r= (a) Kuna! started business with cash - - - - -- ------~

(b) 1He purchased furniture for cash 35,00o
(c) He paid conunission 2;00o
(d) He purchased goods on credit
1
40,00()
(e) He sold goods (Costing ~20,000) for cash 26,00()
[ .\n,. Assets : Cash t2,39,000 + Furniture t35,000 + st0 ck ' 20,000 == Liabilities:
' Creditors t 40,000 + Capital t2,54,000.]
(). 5. Mohit has the following transactions, prepare Accounting Equation :

[ ~=-=-~---~-~ ~
(a) jBusiness started with cash 1,75,000
50,000
(b) Purchased goods from Rohit
(c) Sold goods on credit to Manish (costing? 17,500) 20,000
(d) Purchased furniture for office use l0,000
(e) Cash paid to Rohit in full settlement 48,500
(/) Cash received from Manish 20,000
(g) Rent paid 1,000
(h) Cash withdrew for personal use 3,000
---
f \ n,. Assets : Cash t 1,32,500 + Stock ?32,500 + Furniture t 10,000 = Capital
I j
~l ,75,000.]
I
<) . <>. What will be the effect of the following on the Accounting Equation?
I I ( i) Harish started business with cash ~ 1,80 f\flO.
(ii) Purchased goods for cash ?60,000 and 0 11 c.:rcdit t J0,000.
(iii) SoJd goods for cash ~40,000; costing ~24,000.
(iv) Rent paid t 5,000; and rent outstanding ~2,000.
( v) Sold goods on credit ?50,000 (costing ~38,000).
(vi) Salary paid in advance , 3,000.

I Au,. Assets · C~sh_~ ! ,52,0~0 _r Stock t 28,000 + Debtor~ t 50,000 + Prepaid

J~xpenscs ~3,000 - l ,1abtl1tws : Cred1tors t10,000 t Outstand · , E' . ~2 000 +
Capital t2,01,000.j ing .,xpenscs ,
 MEANING OF JOUR NAL
The word 'jour nal'h as been deriv ed from Fren ch word 'Jour ', whic h mean s 'diary '.
Journ al
is the book of origi nal entry in whic h preli mina ry recor d of both aspec ts of a busin ess
trans actio n
are recor ded in order in whic h they arise , i.e., in chron ologi cal order . Whe neve r a
trans actio n
takes place , it is recor ded direc tly in this book and both the aspec ts of the trans
actio n are
recor ded syste matic ally in the orde r in whic h trans actio ns take place .
A journ al is calle d as a book of origi nal recor d or a book of prim e entry becau se
all the
trans actio ns and even ts are recor ded first in this book. The proce ss of recor ding
transactions
and event s in a journ al is calle d journ alisin g.
 FEATURE S/CHARAC TERISTIC S OF JOURNAL
The main features/c haracteris tics of journal are as follows:
1. Ajournal is a daily accounting record.
2. It contains day-to-day transactio ns in chronologi cal order.
3. It records both the debit and credit aspects of a transactio n by ·using double entry
system of book-keep ing.
4. It shows the complete details of a transactio n in one entry.
5 . Brief explanatio n of each journal entry is appended to the journal entry which is called
'Narration '. Narration of each journal entry helps to understan d the meaning and
purpose of transactio n in future.
6. All journal entries are based on vouchers or written documents /evidence.
7. It shows the complete and separate story of transactio n in one entry.
8. A single journal entry is capable of recording more than one transactio n at one place
involving more than two accounts (e.g., compound entry.)
9 . It is a basic book of original entries. After recording all the transactio ns in journal,
these are subsequen tly recorded in ledger which is the primary book of account.
10. In journal, total of debit column and credit column always match and agree.
 ---- ~ - -- .......... ..., ...~.._.v ... ~ .........., n .1..u.\Ju cu c lHJt, rel:ur ueu lll tne s pecia l JOUr nalS.
JOUR NAL : A PRIM ARY /PRIN CIPA L BOO K OF ORIG INAL ENTR Y
Journ al is a book of origi nal entry in whic h trans actio ns ar e origi nally recor
ded in a
chron ologi cal (day- to-da y) order from sourc e docu ment s (vouc hers) show ing the
accou nts t o be
debit ed and credi ted in a syste matic m a nner. It is a princ ipal book of origi nal
entry beca use a
trans actio n is first writt en in journal from wher e it is trans ferre d, i.e., poste d
to the ledge r. On
the basis of journ al diffe rent t ypes of accou nts are prepa red in ledge r. Proce
ss of accou nting
(prep aratio n of trial balan ce, t radin g accou nt, profi t & loss accou nt and bal ance
shee t) is base d
upon journ al.
PROFORMA OF JOURNAL
Profo rma of Jour nal is given below :
Jour nal of .................
I
Date Partic ulars I Amou nt Amou nt
L.F.
I Dr. Cr.
(1) (2) (3)
I

(4) I (5)
Year N aine of the Accou nt ... Dr. t f
Month /Date To Name of the Accou nt
(Narr ation or expla nation )
I
(6) Grand Tot al t
32 FINANCIAL ACCOUNTING

Column 1 : In this column 'year' is written at t he top. Month is written on left big part of it
and date is written in the right small part of it in chronological order.
Column 2 : In this column , the account which has to be debited in the transacti on is recorded
from the left comer of the particula r column and in the extreme right corner in the same line
the abbrevia ted word 'Dr' is recorded . In the next line, the account which is to be credited is
writ ten leaving few space from left by prefixing word 'To' before the name of the account. The
next process involves writing of explanati on of the transacti on recorded in the next line in
brackets . This explanat ion is termed as "narration" in accounting language . After writing the
narratio n a straight line is drawn in particula r column which indicates end of the journal entry.
Column 3 : This column is not used while journalis ing the transacti on but is used when the
process of 'posting' the transacti on in ledger is done. It records the page number of ledger book
where the relevant accounts are opened.
Column 4 : This column records the amount to be debited against account which has been
debited.
Column 5 : This column records the amount to be credited against the account which has
been credited .
Column 6 : This column records the total of column 4 and column 5. Total of column 4 and
column 5 must be equal.
Carried forward or C/F and Brought forward or B/F :
If all the transact ions ofjournal require more than one page for their record, total of amount
column of journal is made on each page at the end of the page and the words carried forward
ar e r ecorded before this total amount. On the next page in the first line when this amount of
total is recorded and the words 'Brought Forward or Brought Down' are recorded before this
total amount.
This process is repeated on every page and on the last page 'Grand Total' is cast .
 BOOK OF ORIGINAL RECORDS : J OURNAL 35
RULES OF DEBIT AND CREDIT IN JOURNA L
Or
RULES OF JOURNA LISING
According to the kinds and nature of Accounts, there are followin g two rules of debit and
credit in journal (journalising) :
I
I
Modern Approach
(Accounting Equation Method) Traditional Approach (English Method)
(American Method)

TRADITIONAL APPROACH : ENGLISH METHOD

Or
GOLDEN RULES OF JOURNAL
Types of Accounts Meaning Rules for Rules for
Examples
Debit Credit
1. PERSONA L These accounts are Natural Person : Ashok DEBIT THE CREDIT THE
ACCOUNT S related to natural Artificial Person : Ashok RECEIVER GIVER
persons, artificial & Co. Representa tive Per-
persons and repres- sons : Outstandin g Salary
entative persons. Ne
2. REAL These accounts are Tangible Assets : Land DEBIT WHAT CREDIT
ACCOUNT S related to the tangible A/ c COMES IN WHAT GOES
and intangible assets of Intangible Assets OUT
the business. Goodwill Ne
3. NOMINAL These accounts are Expenses : Salary DEBIT ALL CREDIT ALL
ACCOUNT S related to the expenses, Gain Gain from EXPENSES INCOMES
losses, profit and gains investmen ts AND LOSSES AND GAINS
Loses : Loss by fire
Profit : Profit on sale of
assets
MODERN APPROA CH: ACCOUNTING EQUATION METHOD

Types ofAccounts Meaning Examples Rules for Debit Rules for

Credit
1. ASSETS These accounts are Tangible Assets : Land DEBIT THE CREDIT THE
ACCOUNT S related to tangible and Ne INCREASE IN DECREASE
real assets of the Intangible Assets ASSETS IN ASSETS
business Goodwill Ne
Purchases Ne
Sales Ne
2. LIABILITI ES These accounts are Outsider liabilities : Long DEBIT THE ~~~~
ACCOUNT S related to the financial terms loans, .Short term DECREASE LIABILITIES
obligations of an loans,_ Creditors, Out- ~ILITIE S
enterprise towards standing expenses
outsiders of the business CREDIT THE
3. CAPITAL This account is related to Capt·ta z Al c .· Drawings DEBIT
DECREASE
THE
INCREASE IN
ACCOUNT S the proprietor' s capital Ne IN CAPITAL CAPITAL
36 FINANCIAL ACCOUNTIN G _ _ _ _ _ _ _ _ _ _ _
------------------
·-
4. ~"UE These accoun ts arell nterest received DEBIT THE CREDIT ~
A:CCOL~"T relate d to the amount Divide nd received DECR EASE INCREAsE ~
charge d for goods sold or Discou nt received IN INCO MES INCOMES
servic es render ed or Appre ciation (Sales Ale AND PROF ITS AND PROFITS
permi tting others to use may be treate d as
the resour ces of the revenu e if purch ase is an
busine ss to earn incom e expens e)
5. EX.PE SSES These accoun ts are Wages paid Rent paid DEBI T THE CREDIT THE
ACCOUNT relate d to the amoun t Depreciation, INCR EASE IN DECREASE
spent or even lost in Loss by fire. EXPE NSES IN EXPEN-
carryi ng on busine ss (Purchases may be AND LOSS ES SES AND
operat ion treated as expenses if LOSS ES
sales is revenue)