Journal Entries

Learning Objective: Record business transactions in journal format

When a grocery shop in New Road, Kathmandu sells goods worth Rs. 15,000, where does that transaction first get written down? The answer is the journal -- the book of original entry where every business transaction is recorded in chronological order before being posted to ledger accounts.

What Is a Journal?

A journal (also called the "book of original entry" or "day book") is where transactions are first recorded in a standardized format. Each entry includes the date, accounts affected, amounts debited and credited, and a short narration.

Format of a Journal Entry:

| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |------|------------|------|-------------|--------------| | 2081/01/05 | Cash A/c ...Dr. | | 1,00,000 | | | | To Capital A/c | | | 1,00,000 | | | (Being capital introduced by owner) | | | |

Chart of Accounts

A chart of accounts is a list of all account names used by a business, organized by category:

• Assets: Cash, Bank, Stock, Furniture, Machinery
• Liabilities: Creditors, Bank Loan, Outstanding Expenses
• Capital/Equity: Owner's Capital, Drawings
• Revenue: Sales, Commission Received
• Expenses: Rent, Salaries, Electricity, Purchases

Rules of Journalizing

1. Identify which accounts are affected by the transaction.
2. Determine whether each account is debited or credited (using the rules of debit and credit).
3. Write the debit entry first, then the credit entry (indented).
4. Add a narration in brackets explaining the transaction.

Worked Examples

Example 1: Ram starts a clothing business in Butwal with Rs. 3,00,000 cash on 2081/01/01.

| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |------|------------|------|-------------|--------------| | 2081/01/01 | Cash A/c ...Dr. | | 3,00,000 | | | | To Capital A/c | | | 3,00,000 | | | (Being business started with cash) | | | |

Example 2: Purchased goods worth Rs. 50,000 on credit from Hari on 2081/01/05.

| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |------|------------|------|-------------|--------------| | 2081/01/05 | Purchases A/c ...Dr. | | 50,000 | | | | To Hari (Creditor) A/c | | | 50,000 | | | (Being goods purchased on credit) | | | |

Example 3: Paid rent Rs. 10,000 by cash on 2081/01/10.

| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) | |------|------------|------|-------------|--------------| | 2081/01/10 | Rent A/c ...Dr. | | 10,000 | | | | To Cash A/c | | | 10,000 | | | (Being rent paid in cash) | | | |

Key Term: Narration is the brief explanation written below each journal entry describing the nature of the transaction.

Summary

• The journal is the first place where transactions are recorded chronologically.
• Each journal entry has a debit side, a credit side, and a narration.
• A chart of accounts organizes all account names into categories.
• Always record the debit entry first and indent the credit entry.