1. What This Revision Sheet Covers
Use this revision sheet alongside Journal Entries Fundamentals Practice Resource 1 to strengthen the reasoning behind journal entries. The aim is to identify the accounts affected, decide whether each account increases or decreases, and record equal debit and credit amounts. All transactions below are original practice examples for a sole proprietorship. Amounts are in rupees. Ignore GST, and use the periodic inventory approach: goods purchased for resale are recorded in Purchases Account.
2. Debit and Credit: The Essential Rules
- Assets: debit an increase and credit a decrease. Cash, bank balance, furniture, and amounts receivable from customers are common examples.
- Liabilities: credit an increase and debit a decrease. Amounts payable to suppliers and outstanding expenses are examples.
- Capital: credit an increase and debit a decrease. Money introduced by the proprietor increases capital.
- Expenses and losses: debit increases. Rent, salaries, carriage inward, and depreciation are examples.
- Incomes and gains: credit increases. Sales, commission received, and interest earned are examples.
- Drawings: debit withdrawals by the proprietor for personal use. Drawings reduce the owner's equity but are not business expenses.
- Traditional rules provide another route: personal accounts—debit the receiver, credit the giver; real accounts—debit what comes in, credit what goes out; nominal accounts—debit expenses and losses, credit incomes and gains.
Do not interpret debit as always meaning an increase or credit as always meaning a decrease. Their effect depends on the account category. For example, receiving a bank loan increases both Bank Account, an asset, and Loan Account, a liability. Therefore, Bank is debited and Loan is credited.
3. A Reliable Method for Every Transaction
- Read from the business's viewpoint, not the proprietor's personal viewpoint.
- Identify every account affected. A compound entry may involve more than two accounts.
- Classify each account and determine its increase or decrease.
- Apply the debit-credit rules and calculate the amount to be recorded.
- Check that total debits equal total credits, then add a short narration explaining the transaction.
A journal normally contains Date, Particulars, Ledger Folio, Debit Amount, and Credit Amount columns. Write the debited account first with 'Dr.' and the credited account below it, preceded by 'To'. Ledger Folio refers to the relevant ledger page and is completed during posting. The compact entries in this sheet show account names and amounts; expand them into the full journal format when practising.
4. Worked Examples with Reasoning
- Capital introduced: The proprietor starts business with ₹75,000 cash. Entry: Cash A/c Dr. ₹75,000; To Capital A/c ₹75,000. Cash increases and the proprietor's capital increases. Narration: Being cash introduced as capital.
- Asset versus purchases: A stationery trader buys a shop counter for ₹9,000 cash. Entry: Furniture A/c Dr. ₹9,000; To Cash A/c ₹9,000. The counter is for business use, not resale, so Purchases Account is inappropriate.
- Credit purchase with trade discount: Goods with a list price of ₹20,000 are purchased from Neha at a 10% trade discount. Discount = ₹2,000; recorded amount = ₹18,000. Entry: Purchases A/c Dr. ₹18,000; To Neha A/c ₹18,000. No separate Trade Discount Account is opened.
- Settlement with cash discount: The business owes Neha ₹18,000 and pays ₹17,640 by bank in full settlement. Entry: Neha A/c Dr. ₹18,000; To Bank A/c ₹17,640; To Discount Received A/c ₹360. The full liability is removed, while the reduction in payment is income.
- Goods withdrawn: The proprietor takes goods costing ₹1,200 for personal use. Entry: Drawings A/c Dr. ₹1,200; To Purchases A/c ₹1,200. Use cost, not selling price. This is not a sale to a customer.
- Outstanding expense: At year-end, salaries of ₹2,500 remain unpaid and unrecorded. Entry: Salaries A/c Dr. ₹2,500; To Outstanding Salaries A/c ₹2,500. The expense belongs to the current period, although payment will occur later.
5. Original Practice: Journalise These Transactions
Record the following transactions of Meera Traders in sequence. Add a narration to each entry. Treat the stated purchases and sales as goods for resale unless the transaction specifies a business asset. For ordinary sales, record the sales entry only; do not add a separate cost-of-goods-sold entry under the periodic approach used here.
- 1. Meera introduced ₹50,000 cash and furniture valued at ₹12,000 into the business as capital.
- 2. Deposited ₹30,000 of business cash into the business bank account.
- 3. Purchased goods from Arjun on credit at a list price of ₹16,000, less 5% trade discount.
- 4. Paid carriage inward of ₹600 in cash on those goods.
- 5. Sold goods on credit to Sana for ₹9,500.
- 6. Sana returned goods invoiced at ₹1,500.
- 7. Received ₹7,800 from Sana directly into the business bank account in full settlement of her remaining balance.
- 8. Returned goods to Arjun with a recorded purchase value of ₹2,200.
- 9. Paid Arjun ₹12,740 by bank in full settlement of his remaining balance.
- 10. Meera withdrew ₹1,000 cash and goods costing ₹800 for personal use.
- 11. Paid ₹3,000 shop rent by bank.
- 12. At year-end, wages of ₹1,400 were unpaid and had not yet been recorded.
6. Answer Guidance and Calculations
- 1. Cash A/c Dr. ₹50,000; Furniture A/c Dr. ₹12,000; To Capital A/c ₹62,000. This compound entry recognises both assets contributed by the proprietor.
- 2. Bank A/c Dr. ₹30,000; To Cash A/c ₹30,000. This is a transfer between business assets, not additional capital or income.
- 3. Purchases A/c Dr. ₹15,200; To Arjun A/c ₹15,200. Calculation: ₹16,000 − ₹800 trade discount.
- 4. Carriage Inward A/c Dr. ₹600; To Cash A/c ₹600. Transport expenditure on bringing purchased goods into the business is an expense.
- 5. Sana A/c Dr. ₹9,500; To Sales A/c ₹9,500. The credit sale creates an amount receivable from Sana.
- 6. Sales Returns A/c Dr. ₹1,500; To Sana A/c ₹1,500. Sana now owes ₹8,000.
- 7. Bank A/c Dr. ₹7,800; Discount Allowed A/c Dr. ₹200; To Sana A/c ₹8,000. Discount allowed is an expense; Sana's balance becomes nil.
- 8. Arjun A/c Dr. ₹2,200; To Purchases Returns A/c ₹2,200. The amount payable to Arjun falls to ₹13,000.
- 9. Arjun A/c Dr. ₹13,000; To Bank A/c ₹12,740; To Discount Received A/c ₹260. The full remaining liability is cleared.
- 10. Drawings A/c Dr. ₹1,800; To Cash A/c ₹1,000; To Purchases A/c ₹800. Both withdrawals are personal, not business expenses.
- 11. Rent A/c Dr. ₹3,000; To Bank A/c ₹3,000. Rent expense increases while the bank balance decreases.
- 12. Wages A/c Dr. ₹1,400; To Outstanding Wages A/c ₹1,400. No Cash or Bank Account is involved because payment has not occurred.
7. Quick Error-Spotting Challenge
- Claim: Every item bought is debited to Purchases Account. Correction: Purchases Account is used for goods acquired for resale. A computer bought for office use is debited to an appropriate asset account.
- Claim: A cash sale to a named customer must debit that customer's account. Correction: If cash is received immediately, debit Cash Account. The customer's name alone does not make the transaction a credit sale.
- Claim: Equal debit and credit totals prove an entry is correct. Correction: Equality checks arithmetic, not account selection. Debiting Purchases instead of Furniture can still produce equal totals.
- Claim: Trade discount and cash discount receive identical treatment. Correction: Trade discount reduces the invoice amount before recording; cash discount is recorded separately when allowed or received.
8. Final Self-Check
Before finishing, explain aloud why each account was debited or credited. Recalculate customer and supplier balances after returns but before settlement discounts. Check whether money moved through cash or bank, whether goods were for resale or personal use, and whether an expense remains unpaid. Finally, confirm that every entry balances and its narration describes the actual event. If an answer differs from the guidance, revisit the account classification before changing the amount.