Simran started a new business and made some transactions on the first day which were as follow.
1. She invested $500,000 in the business.
2. She bought Building worth $200,000.
3. She bought Furniture on credt from Furnituremart ltd for $ 40.000
4.She bought raw material worth $20,000
5. She paid transportation $200.
6. She paid commission $20.
She wants to record the above transactions in the Journal. As she is not having any knowledge about accounting, she does not know how to make enrties in the Journal. She does not know the steps of Journalizing. She does not know how to identify the accounts in a transactiona and the rules to be applied for debiting and crediting any account.
Just like Simran the two common problems faced by some people while making entries in Journal like..
1. How to identify the accounts involved in the transaction ?
2. Which account is to be debited and which to be credited ?
We now give you a stepwise description of the process of making Journal entries.
Step1. Identify the accounts involved in the transaction.
For example the accounts involved in the above transactions are……..
Transaction no.1……..Capital account, cash account.
Transaction no.2……..Building account, Cash account
Transaction no.3……. Furniture account, Furnituremart ltd.
Transaction no.4…….. Purchases account, Cash account
Transaction no.5……..Transportation expenses account, Cash account
Transaction no.6. ……Commission account, Cash account
Identification of the types of accounts involved in a particular transaction requires a lot of practice. However with regular practice, you would be able to recoganise the type of accounts in any transaction.
Step 2. Classify the accounts into Personal, Real or Nominal.
Personal accounts:- Accounts related to persons(natural or artificial).
Real accounts:- Accounts related to assets.
Nominal accounts:- Accounts related to incomes and expenditures.
Step 3. Apply the following rules………
For Personal accounts…… Debit the Receiver, Credit the Giver.
For Real accounts ………… Debit what comes in, Credit what goes out.
For Nominal accounts ….. Debit all the Expenses and Losses, Credit all the Incomes and Gains.
Now we will discuss each transaction mentioned above and make journal entries
Transaction 1. Simran invested $500,000 in the business.
In this transaction the two accounts involved are; cash account and capital account. Cash account is a real account so we will debit this account ( debit what comes in) and capital account is a personal account representing the owner i.e. Simran so we will credit this account (credit the giver).
Transaction 2. She bought Building worth $200,000.
In this transaction two accounts are Building account and cash account. Both the accounts are real accounts. According to the rule of debit and credit for real accounts we will debit building account (debit what comes in) and credit cash account (credit what goes out).
Transaction 3. She bought Furniture on credt from Furnituremart ltd for $40,000
In this transaction the accounts involved are Furniture account ( real account) and Furnituremart ltd (personal account). Furniture account is debited (debit what comes in) and Furnituremart ltd account is credited (credit the giver)
Transaction 4. She bought raw material worth $20,000
The accounts involved in this transaction are Purchases account (real account) and cash account (real account). WE will debit purchases account (debit what comes in) and credit cash account ( credit what goes out)
Transaction 5. She paid transportation $200
In this transaction we have Transport expensesc account( Nominal account) and Cash account (Real account). We will debit transport expenses account (debit the expenses) and credit cash account ( credit what goes out)
Transaction 6. She paid commission $20
This transaction involves two accounts ; Commission account (nominal account ) and cash account ( real account). Commission account will be debited (debit the expenses) and cash account will be credited (credit what goes out).