Hints for JournalizingThe following discussion will help
in diagnosing the transaction with a view to find out which accounts are
relevant for passing the journal entry.
1. Treatment of cash/credit transaction.Read carefully the following
transactions:
(i) Purchased goods for Rs. 1,200
cash. .
(ii) Purchased goods for Rs. 1,200.
(iii) Purchased goods for Rs. 1,200
from Arun.
(iv) Purchased goods for Rs. 1,200
from Arun on cash.
Transaction (i) and (iv) are clear
as it has been specifically stated that purchases have been made on cash. Thus
the entry is :
Purchases
account Dr. 1,200 To
Cash account 1,200
Transaction (ii) and (iii) are not
specific as to whether the purchases are for cash or on credit. However
transaction (ii) does not mention any name of the supplier; therefore it implies
that the purchases are for cash. Similarly transaction (iii) mentions the name
of the supplier but is silent regarding cash-it implies that purchases are on
credit: Thus the entry for transaction (iii) is
Purchases
account
Dr.1,200 To Amex 1200.
2. Treatment of payment on personal/expenses account.When payment is made to a person
against amount due to him as per his ledger account-the personal account of the
creditor should be debited. However if the payment is being made to a person
representing business expenditure then the particular expenditure (nominal)
account should be debited.
3. Treatment of receipt on personal/ income account.When amount is received from a
person against amount recoverable from him as per ledger account-the personal
account of the debtor should be credited. However if the amount received
represents business income, then the particular income (nominal) account should
be credited.
4. Treatment of trade discount.In many cases the seller allows to
the buyer deduction off the list price. Such deduction is known as 'trade
discount'. Trade discount as such is not recorded in the books. The transaction
is recorded with only the net amount i.e. (list price -trade discount).
5. Treatment- of cash discount (full settlement).In some cases creditor may allow
some concession to his debtor to prompt him to make the payment within the
period of credit allowed. Such concession is known as 'cash discount'. It is
allowed by the person receiving the payment and represents, expenditure. It is
availed by the person making the payment and represents income.
6. Treatment of Bad debts (debtor becoming insolvent).An amount due from a debtor may
become irrecoverable either partially or wholly. Reason may be that he has been
declared insolvent or any other. Such irrecoverable amount represents loss to
the business and is debited to Bad debts amount.
7. Treatment of Bad debts recoveredIt is evident from the above entry
that whenever irrecoverable amount is written off the personal account is
credited. If after some time any paymentis received against a debt previously
written of then it represents income and as such should be credited to an
account styled as 'Bad debts recovered account'. Personal account must not be
credited.
8. Treatment of personal expenses of the ownerIt is quite common for the
proprietor to withdraw cash or goods from the business for personal or domestic
use. Sometimes premium on the life policy of the owner may also be paid by the
business. Similarly income tax payable by the proprietor may be paid by
business. All this represents owner's personal expenses and are debited to his
personal account viz. Drawings account.
9. Treatment of payment/ receipt on behalf of customer or supplier.In some cases business might pay
expenses on behalf of its customers. Such payments do not constitute the
expenditure of business. Hence it should be debited to the personal account of
the concerned customer.
10. Treatment or exchange or new asset with old one.Sometimes business may exchange its
old asset with new one-only the difference in value is paid in cash. In such
cases asset account needs debit only with the actual amount paid.
11. Treatment of goods given as charity/ advertisement.Business might distribute goods as
'free samples' to advertise its products. In some cases it may also distribute
goods as charity to boost its image. Both 'advertisement' and 'charity' are
expenses of the business, hence should be debited and purchases account should
be credited.
12. Treatment of goods lost in accident/ fire.In certain case a business might
suffer loss of goods due to some accident or fire etc., destroyed or damaged
goods might have been insured also. In such cases total value of goods lost or
destroyed is credited to purchases account and the (i) insurance claim admitted
is debited to Insurance Company (ii) balance is debited to loss by accident/
fire account.
13. Treatment of depreciation charged on fixed assets.Fixed assets are those properties/
possessions of the business which are used for carrying on of business viz.
plant, machinery, building etc. Depreciation is the permanent decrease in the
value of an asset due to wear and tear, passage of time and obsolescence.
Depreciation is treated as a business expenditure. Depreciation account is
debited and the respective asset account is credited.
14. Treatment of payment/ receipt of representative personal accounts.At the close of the previous
accounting year a business might have incurred expenditure which remained
unpaid. It is known as 'Outstanding expenditure'. It is a representative
personal account. When actual payment is made in current accounting period the
concerned account is debited and cash account is
credited. |
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