How to do Journal Entries/ How to make Journal :

 How to do Journal Entries/ How to make Journal :

Firstly, we should know the Journal format then we should have a knowledge about the Debit and Credit rules of Accounting. In Journal , we will have date columns, description or particular column , References column and debit and credit column. Now, we are going to see that how can we record the business transactions in Journal :

1.    Aqsa started Business with Cash on 2021, 1 January  with RS/-10,000.

So, in this entry , you will have two accounts cash and capital account. Cash is an assets and whenever assets increases it will be debited and  whenever capital increases, it will be credited.

 

 

2.    Purchased Goods of RS/-6,000 on January 2.

For goods purchases we will used purchases account so, purchases is our expenses and when expenses is increased it will be debited and we are paying cash so it means that we will do payment and whenever assets decreased it will be credited.

 

3.     Ali  buy goods  on January 3 for 6,000 in which he paid 3,000 in cash and remaining amount is billed for the next week.

            So, it is a compound entry in which Sales  account , cash and  Ali account is involved.         We will receive a cash and it will be debited because it is increasing and Sales  are credited because it is also increased and whenever it increased , it will be credited and Ali account is also debited because Ali is our debtor and debtor is Account receivable is asset so, it will be debited.

4.     Nadeem purchased goods from Aqsa on January 5, of RS/-8,000 in which she give him a discount allowed  of 2% .

Discount :

So, 8,000*2/100= 160.

Cash which Nadeem will pay :

Now, Subtract 8,000 from 160

 8,000-160=7,840.

 

5.    Aqsa pay rent in advance for Factory on Jan 9 of RS/-7,000.

In this entry, paid rent in advance is our prepaid assets because she does not utilize it so in this way , it is our assets . if you  don’t know about prepaid , I have explained it in detail in my previous blog of  types of Journal entries. Cash will be credit because it is decreasing.

 

6.    Aqsa take loan for four year  from bank of RS/-20,000 on Feb 1.

In this case, long term loan is liability and it is increasing so it will be credited and cash will be debited.

 

7.    Paid Salaries to employees on Feb 1 for RS/-3,000.

Salaries is expenses . expenses is increases so, debit the salaries account and cash will be credited.

 

8.    Withdraw cash of RS/-2,000 on Feb 2 for personal use.

Drawings is our expense so it is increasing so drawings will be debited and cash will be credited because it is decreasing from business.

 

9.    Aqsa purchases inventory on Feb 3 of RS/- 7,000 from Ayesha.

            Inventory is asset and it is increasing so debit the inventory account and credit the Ayesha account because  Ayesha is our creditor she has to pay them for inventory and creditor is our liability and it is increasing.

10. Ali paid RS/- 3,000 on Feb 6 which he had billed on January 3.

   So, Ali will be credited because he is our debtor and debtor is decreased because he paid. Cash will be credited.

 

11. Aqsa purchased furniture on Feb 7 for RS/-2,000 and received a discount of 8%.

Furniture is asset and it is increasing so debit furniture account and credit the cash account because she paid cash and discount received will be credited.

Discount Received :

2,000*8/100 = 160

Cash :

2,000-160 = 1840 because 160 is our discount and we don’t need to pay 160 that is why we will subtract 160 from original amount .

 

12. Aqsa paid RS/- 7,000 to Ayesha on Feb 9 which she  had billed previously

Ayesha account will be debited because she paid her liability and whenever lability decreased , it will be  debited and cash will be credit.

 

Top 5 Types of Journal Entries / Types of Rectifying Entries

Top 5  Journal Entries Types :

1.   Opening Entries :

In opening entries,  we will record only those business transactions  which balances are carry forward to the next accounting year. Assets, liabilities  and capital balances are carry forward to the next year  for the purpose of knowing the total assets and total debts and obligations etc.

 

 

For writing credit entry it is depends upon your willing that whether you want to write TO with credit entries or you want to intend it as I did in above picture.

 

 

2.  

  Closing Entries :

In this type of entry, the expenses and revenues balances are closed and we transferred their balances in Trading or profit and Loss Account  for closing them .

 

 

    Adjusting Entries:

3. These entries are made at the end of the accounting period . In this entries assets and liabilities are recorded with their real or true values and revenues are recorded by following the matching principle concept. According to this Matching Principle Concept, we will record only those expenses which are followed by revenues. In adjusting entries, we will have all of these :

1.    Deferral :

It means that you will received or paid an advance amount but yet we  have not delivered services and we have not used that assets for which you will pay in advance. So, basically deferrals is your prepaid means advance payment .

There are further two types of Deferrals :

·       Prepaid or deferral Expenses

For instance we will pay fee first, then we will studied and we will pay rent in advance then we are utilizing that assets in the form of house. So, payment in advance is our assets until we don’t utilize it completely.

·       Deferral revenues or Unearned revenues

For instance we will take an advance salary for our installation of machinery but we have not delivered our services yet so this revenue is unearned so  now  it is our responsibility to provide them services . In this way , unearned revenue is our liability till we have not delivered services. 

2.    Accruals

It means that we will received any goods or  services or used   but yet not paid it means that it is payable and outstanding.

There are further two types of accruals:

·       Accrual expenses

For instance we will purchase goods on credit so it is accrual expense.

·       Accrual revenues

For instance we will give goods on credit  to customers but  yet not received any revenue so it is our accrual revenue.

4.       Transfer Entries :

Transfer entries are important for transferring the correct or right account name and amount from one account to another.

For instance Aqsa purchased a furniture for RS/-2,000 and table for RS/-3,000 . Accountant had recorded total amount of 5,000 to furniture account. So in this case, we will pass an transfer entry :

             Table Account                        Debit with RS/-3,000

   To Furniture Account         Credit with RS/-3,000

    (Being an amount of Furniture overwritten now it is posted to table account )

5.      Rectifying Entries : 

th  entries are passed for the purpose of removing a mistake and make it correct. Sometimes, there is also a mistake in amounts as well. For instance in  given below  example it might be possible that it would be overstated or understated. We will make the entry correct by passing an rectified entry. If Ali Account is wrongly debited than we will credited Ali Account for correction in rectified entry and add the correct account in it. There are many types of rectifying entries:

1.    Error  of Commission:

In this error, it is posted to wrong account instead of right account.

Cash received from Abdullah  RS/- 7,000 posted to Ali .  So, rectified entry will be :

Ali Account                           Debit with  RS/-7,000
To Abdullah Account             Credit with RS/-7,000
(Being cash received from Abdullah was  wrongly posted to Ali  account now it is rectified)

2.    Error of Omission:

In this errors, we will completely omit or forget to record the business transaction. It is corrected by simply passing the entry.

3.    Error of Compensation:

This type of error is very difficult to find out because it is not a single error ,it is a  group or two error. In which one error  is offset against the another  error or account.  For instance  if fee charges paid RS/-1,000 is debited in the fee account as RS/-1,500 and the Rent  received RS/-2,000 is credited in the  Rent account as RS/-2,500, then the excess debit of RS/-500 in Fee account is set off against the excess credit in the Rent  account.

4.    Error of Original Entry:

   In this type, there is a mistake in the  recording of the amounts of accounts whether it will be overstated or understated. If the amount is recorded more than its original amount then it is called overstated and if the amount is recorded less than its original amount  then it is understated. For instance if rent received from Ali was wrongly credited with RS/-5,000 instead of RS/- 50,000. Then we will simply subtract the amount because it is overstated 50,000- 5,000 = 45,000 . So, 45,000 will be recorded in rectified entry.

 

Cash Account                             Debit with 45,000

  To Rent  Account                     Credit with 45,000

5.    Error of Principle:

In this accounts are posted to the correct side but  of the wrong type of account, For instance

In this principle, the names of accounts are wrongly passed. Such as Ali account is wrongly debited instead of Sim account.

For instance   RS/-4,000  paid to Sim was recorded in Ali Account so in this case we will pass an rectifying entry:

 

Sim Account                             Debit with RS/-4,000

 To Ali Account                        Credit with RS/- 4,000

     (Being amount paid to Sim was wrongly debited to Ali account but now it is rectified)

6.     Errors of Reversal:

When the entry is  wrongly debited instead of being credited and when it is wrongly credit instead of being debited is called error of reversal.

7.    Error of Transposition :

When two digits or numbers  are reversed  is called transposition error.  For example 8907 instead of 9807.

8.    Error of Duplication:

It is occur  when  we will recorded an entry two times or it is duplicated, it's debited or credited twice for the same entry. For example, an  Salaries Expense  was debited twice .

 

 

3 Common Types of Journal Entries/ Contra Entry

  Common Types of Journal  Entries :

There are the  basic or essential types of Journal entries  and it is usually used in Accounting.  First entry is called the Single entry and the other one is called the Double Entry and the third one is Compound entry  system  then contra entry.  I will discuss them one by one :

1.    Single Entry System  :

It is that system in which business transactions are recorded as a single instead of using Double entry . it is not an appropriate way for recording the economic events because if we record transactions according to this system then it is impossible for us to make trail balance. This system is usually focus on cash receipt and cash payments. The perfect instance / example of single entry system is Cash Book. This system does not consider Assets and liabilities. Using Double entry system is more valuable or accurate for recording them rather than single entry system.

1.    Double  Entry System  :

As its name, it is a simple entry or in simple words we can say that it is a single entry system in which  one is debited and the other item is credited. For instance Aqsa purchased Furniture for RS/- 3,000.

 

Furniture Account                          Debited with RS/- 3,000

       Cash Account                           Credited with RS/- 3,000

 

Rims  pay rent for RS/-7,000

 

     Rent Account                           Debit with RS/-7,000

          Cash Account                      Credit with RS/-7,000

 

 

In this entry assets  is increased  in the form of furniture and assets is decreased in the form of cash so it is a single entry.

 

3.    Compound Entry:

It is that type of entry which have more than one debit account and more than one credit account. For instance we purchased building of RS/-4,000 and pay RS/-2,000 in cash and promise to pay the rest of the amount on next day.

 

Building Account                                  Debit with RS/-4,000

        Cash Account                                 Credit with RS/- 2,000

         Creditor Account                           Credit with RS/-2,000

 

 

Another example of Compound entry is that supposed that Abdullah had purchased computer  of RS/- 8,000 in which Marry has give him a concession/Discount of RS/-600 which he previously billed.

 

 

Cash  Account                                  Debit with RS/-7,400

   Discount  Allowed  Account          Debit with RS/-600

            Abdullah Account                  Credit with RS/- 8,000              

 

So, in compound entry we will have more than one debit or credit accounts.

4.    Contra Entry:

Contra entry is the entry which has two accounts  named Bank Account and Cash Account or which has impact on both accounts . it is write down for the purpose of reversing  the entry. If  we recorded entry on debit side then we will reversed this by recording it on credit side and if we recorded entry on credit side and wants to reverse it then we will record it on debit side .  For instance  Cash is withdraw from bank for personal expenses:

 

Cash Account

      Bank Account  

 So, this is the contra entry in which cash account has a impact on bank account. It is most commonly used in cash book. It usually tell us withdraws from bank and deposits into bank.