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Category: Category - Journal Entries

If the question is focused on a journal entry regardless of it being related to an asset, liability, income, expense, or equity it should be put in this category.

Discy Latest Questions

  1. This answer was edited.

    As we all know, a payment is made when we purchase a good or service on a credit or cash basis. In terms of a business, a vendor (supplier/creditor) is a person who sells goods to the company on a cash or credit basis with an agreement to receive the payment within a specified period. This in turn aRead more

    As we all know, a payment is made when we purchase a good or service on a credit or cash basis. In terms of a business, a vendor (supplier/creditor) is a person who sells goods to the company on a cash or credit basis with an agreement to receive the payment within a specified period.

    This in turn affects the accounts payables as the vendors are the creditors of the company as well as considered a short-term liability and are recorded under the head of current liabilities in the balance sheet.

    Journal entry for payment to vendor

    1.

    Purchase a/c Debit Debit  the increase in expense
    To Vendor a/c Credit Credit the increase in liability

    (being goods purchased from the vendor on credit)

    2.

    Vendor a/c Debit Debit  the decrease in liability
    To Cash a/c Credit Credit the decrease in asset

    (being payment made to the vendor)

    Example

    XYZ Ltd. purchased goods from a vendor amounting to 60,000 on a credit basis in May and agreed to make the due payment in July. The journal entries in the books of XYZ Ltd. are as follows:

    May Purchase a/c Debit 60,000
    To  Vendor a/c Credit 60,000

    (being goods purchased on credit from the vendor)

    July Vendor a/c Debit 60,000
    To  Cash a/c Credit 60,000

    (being payment made to the vendor in cash)

    Note: In case the company purchases the goods from the vendor directly for cash then only the following entry shall be passed in the books of accounts:

     

    Purchase a/c

     

    Debit

    Debit the increase in expense
     

    To Cash a/c

     

    Credit

    Credit the decrease in asset

    (being goods purchased from the vendor for cash)

    Hope this helps.

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  1. This answer was edited.

    Salary due is the amount of salary payable for a particular period but the related services corresponding to the amount of salary payable have already been availed by the business entity. It is also known as salary outstanding. It is a liability for the business entity. Journal Entry for Salary DueRead more

    Salary due is the amount of salary payable for a particular period but the related services corresponding to the amount of salary payable have already been availed by the business entity. It is also known as salary outstanding. It is a liability for the business entity.

    Journal Entry for Salary Due

    Journal entry for salary due/payable can be recorded in the books of accounts using both the golden rule and the modern rule of accounting.

    1. According to the “Golden rules” of accounting

    a. Entry for salary due

    Salary A/c Debit Nominal account Debit all expenses and losses
     To Outstanding Salary A/c Credit Personal account (Representative) Credit the giver

    (Being salary due)

    b. Entry at the time of actual payment of the salary due

    Outstanding Salary A/c Debit Personal account (Representative) Debit the receiver
     To Cash/Bank A/c Credit Real account/Personal account Credit what goes out/Credit the giver

    (Being salary paid)

    2. According to the “Modern rules” of accounting

    a. Entry for salary due

    Salary A/c Debit Expense Debit the increase in expense
     To Outstanding Salary A/c Credit Liability Credit the increase in liability

    (Being salary due)

    b. Entry at the time of actual payment of the salary due

    Outstanding Salary A/c Debit Liability Debit the decrease in liability
     To Cash/Bank A/c Credit Asset Credit the decrease in asset

    Example

    ABC Ltd did not pay salary 100,000 for the month of March 20xx due on 31st March 20xx because of lack of funds. However, they paid the due salary on 25/04/20xx.

    1. Journal entry for salary due on 31/03/20xx

    Salary A/c Debit 100,000 Debit the increase in expense
     To Outstanding Salary A/c Credit  100,000 Credit the increase in liability

    (Being salary due for the month of March 20xx)

    2. Journal entry at the time of payment on 25/04/20xx

    Outstanding Salary A/c Debit 100,000 Debit the decrease in liability
     To Cash/Bank A/c Credit  100,000 Credit the decrease in asset

    (Being salary paid for the month of March 20xx)

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  1. In this modern business world, Banks performs various functions to an organization such as it accepts various deposits from the debtors, makes payment to the creditors on the standing instructions of the company. Banks provide various agency and miscellaneous services to an organization. The JournalRead more

    In this modern business world, Banks performs various functions to an organization such as it accepts various deposits from the debtors, makes payment to the creditors on the standing instructions of the company. Banks provide various agency and miscellaneous services to an organization.

    The Journal entry for cash withdrawn from the bank is a contra entry. Cash can be taken from the bank for two uses either for personal use (or) business use. I am assuming that cash is withdrawn from the bank for business use.

    Journal Entry for Cash Withdrawn from Bank

    This journal entry can be recorded in two different accounting perspectives they are-

    1. Traditional Accounting Perspective

    Particulars L.F. Amount Nature of Account Accounting Rule
    Cash a/c   XXX Real Debit- What comes into the business.
     To Bank a/c    XXX Personal Credit- The Giver.

    (Being cash withdrawn from the bank).

    2. Modern Accounting Perspective

    Particulars L.F. Amount Nature of Account Accounting Rule
    Cash a/c   XXX Asset Debit- The Increase in Asset.
     To Bank a/c    XXX Asset Credit- The Decrease in Asset.

    (Being cash withdrawn from the bank).

    Example

    On 15th May, Anna Ltd withdraws 5,00,000 from their Bank account for business purpose. Journalise the following transaction.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    15th May Cash a/c   5,00,000 Asset Debit- The Increase in Asset.
       To Bank a/c    5,00,000 Asset Credit– The Decrease in Asset.

    (Being cash withdrawn from the bank).

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  1. This answer was edited.

    Cash Withdrawn from Bank for Office Use the cash withdrawn from bank for office use shall be recorded in the books as: Journal Entry: (Using modern rules of accounting) Why is cash account debited? When we withdraw an amount from the bank we receive cash i.e the entity's cash in hand balance increasRead more

    Cash Withdrawn from Bank for Office Use

    the cash withdrawn from bank for office use shall be recorded in the books as:

    Journal Entry: (Using modern rules of accounting)

    cash withdrawn from bank for office use

    Why is cash account debited?

    When we withdraw an amount from the bank we receive cash i.e the entity’s cash in hand balance increases. As per the modern rules of accounting, we debit the increase in an asset. And so in the above entry cash account is debited.

    Why is bank account credited?

    When an amount is withdrawn from the bank the entity receives cash while the balance in his bank account reduces. Thus as per the modern rules of accounting, we credit the decrease in an asset. The bank account of an entity is shown under the head of current assets and so it’s credited since the withdrawals lead to a reduction in the balance with the bank. Hence, in the above entry bank account is credited.

    Journal Entry: (Using golden rules of accounting)

    Cash withdrawn for office use

    Why is the cash account debited?

    As per the golden rule of accounting, cash account is classified as a real account. As per the rule for a real account, we debit what comes in and credit what goes out. Hence, when the cash is withdrawn for the office use we receive cash hence, cash account is debited.

    Why is the bank account credited?

    As per the golden rule of accounting, the bank account is classified as a personal account. As per the rule for a personal account, we debit the receiver and credit the giver. Here, Bank balance reduces i.e bank is the giver hence, its credited.


    Aastha Mehta.

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  1. This answer was edited.

    Rent Paid in Advance A rent paid in advance is nothing but the prepaid rent. When an entity rents a factory it is liable to pay a pre-decided sum of money for using the premise or property of another person. Thus, when this pre-decided amount is paid for such factory even before availing the benefitRead more

    Rent Paid in Advance

    A rent paid in advance is nothing but the prepaid rent. When an entity rents a factory it is liable to pay a pre-decided sum of money for using the premise or property of another person.

    Thus, when this pre-decided amount is paid for such factory even before availing the benefits. It can be said that the rent is paid in advance.

    Journal Entry for Advance Rent Paid

    Accounting treatment of advance paid for rent by using the “Modern Rules of Accounting” –

    At the time of making an actual payment –

    Prepaid Rent using modern rules of accounting

    Why do we debit prepaid rent?

    Rental payment is basically an expense for an organization or any person for that matter hence we debit the increase in expenses. When such rent is paid in advance it can be called as an asset since it will generate some economic value to an organization or an entity in future.

    Since prepaid rent is an asset as per the modern rules of accounting we debit the increase in an asset.

    Why do we credit cash a/c?

    Cash is an asset, to be precise it’s a current asset. And when an entity makes an advance payment of rent the cash in hand balance with an entity reduces.

    Hence, as per the “Modern Rules of Accounting,” we credit the decrease in an asset hence cash being an asset is credited as such payment reduces the organization’s cash balance.

    At the time when the prepaid rent actually applies-

    Journal entry when actual rent is incurred

    For Example,

    Mr Max pays rent of 10,000 every month. Thus, the landlord and Mr Max entered into an agreement that Mr Max will pay rent at the beginning of each quarter for the entire quarter. So, Mr Max pays at the beginning of every quarter the amount of 30,000.

    The journal entries for above shall be:

    Particulars Debit/Credit Amount Amount
    Advance Rent Paid
    Prepaid Rent A/c Debit 30,000
        To Cash A/c Credit 30,000
    (Being rent paid in advance)

    And at the end of every month, the journal entry to be passed shall be –

    Particulars Debit/Credit Amount Amount
    Rent Expense When Actually Incurred
    Rental Expenses A/c Debit 10,000
        To Prepaid Rent A/c Credit 10,000
    (Being rental expense incurred at every month end)

    I have tried to explain the journal entry for prepaid rent as simply as I can. I hope it helped.


    Aastha Mehta.

     

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  1. In this growing competitive world, every organization needs to retain its loyal and trustworthy staff members and make a timely payment towards wages and salaries to its workers and employees. Timely payment not only motivates and built the confidence of the workers and employees but also encouragesRead more

    In this growing competitive world, every organization needs to retain its loyal and trustworthy staff members and make a timely payment towards wages and salaries to its workers and employees. Timely payment not only motivates and built the confidence of the workers and employees but also encourages them to achieve organizations short term and long term goals.

    Journal Entry for wages paid in cash

    This entry can be recorded in the books of accounts by using two different approaches of accounting. They are-

    1. Traditional Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Wages a/c   XXX Nominal Debit- All expenses and Losses
     To Cash a/c    XXX Real Credit- What goes out of the business.

    (Being paid wages in cash)

    2. Modern Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Wages a/c   XXX Expense Debit- The Increase in Expense
     To Cash a/c    XXX Asset Credit- The Decrease in Asset.

    (Being wages paid in cash)

    Example

    On 4th March, Anna Ltd. makes a payment towards wages amounting to 40,000 in cash. Journalise the following transaction in the books of Anna Ltd.

    In the Books of Anna Ltd.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    4th March Wages a/c   40,000 Expense Debit- The Increase in Expense
       To Cash a/c    40,000 Asset Credit- The Decrease in Asset.

    (Being wages paid in cash)

    Hope this helps.

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  1. This answer was edited.

    Cash is commonly received by the business under the following situations: 1. Receipt of payment by a debtor in cash. 2. Sale of goods by the business on a cash basis. 3. Withdrawal of cash from the bank. 4. Cash received from other income. 5. Additional capital introduced by the partner, etc. It isRead more

    Cash is commonly received by the business under the following situations:

    1. Receipt of payment by a debtor in cash.

    2. Sale of goods by the business on a cash basis.

    3. Withdrawal of cash from the bank.

    4. Cash received from other income.

    5. Additional capital introduced by the partner, etc.

    It is important to note that the receipt of cash in any of the above-mentioned scenarios is always debited in the books of accounts because it is an asset for the business.

    1. Journal entry for cash received by the debtor

    Cash a/c Debit Debit the increase in asset
    To Debtor a/c Credit Credit the decrease in asset

    (being cash received from the debtor)

    2. Journal entry for cash received from the sale of goods

    Cash a/c Debit Debit the increase in asset
    To Sales a/c Credit Credit the increase in revenue

    (being goods sold)

    3. Journal entry for cash received from withdrawal

    Cash a/c Debit Debit the increase in asset
    To Bank a/c Credit Credit the decrease in asset

    (being cash received from withdrawal)

    4. Journal entry for cash received from other income

    Cash a/c Debit Debit the increase in asset
    To Other income a/c Credit Credit the increase in revenue

    (being cash received from other incomes such as commission, rent, interests, etc)

    5. Journal entry for additional capital introduced by the partner

    Cash a/c Debit Debit the increase in asset
      To Capital a/c Credit Credit the increase in revenue

    (being additional capital introduced)

    Hope this helps.

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  1. This answer was edited.

    Individuals employed in an organization receive salary but salaried individuals do not maintain books of accounts. They are not required to pass any journal entry and prepare financial statements. So, it is assumed that the question asked is “journal entry for salary paid” and not for salary receiveRead more

    Individuals employed in an organization receive salary but salaried individuals do not maintain books of accounts. They are not required to pass any journal entry and prepare financial statements.

    So, it is assumed that the question asked is “journal entry for salary paid” and not for salary received. An employer paying salary to his employees will be required to pass the journal entry in his books of accounts for salary paid.

    Journal Entry for Salary Paid

    I will present the journal entry in the books of the employer for salary paid using both the golden rule and the modern rule of accounting.

    1. According to the “Golden rules” of accounting

    Salary A/c Debit Nominal account Debit all expenses and losses
     To Cash/Bank A/c Credit Real account/Personal account Credit what goes out/Credit the giver

    (Being salary paid by cash/cheque)

    2. According to the “Modern rules” of accounting

    Salary A/c Debit Expense Debit the increase in expense
     To Cash/Bank A/c Credit Asset Credit the decrease in asset

    (Being salary paid by cash/cheque)

    Example

    1. Textile Inc. paid salary amounting to 500,000 to its employees by cheque or through online modes for the month of March 20xx on 31/03/20xx.

    Journal entry in the books of Textile Inc. on 31/03/20xx will be as follows-

    Salary A/c Debit 500,000 Debit the increase in expense
     To Bank A/c Credit  500,000 Credit the decrease in asset

    (Being salary paid by cheque or through online modes for the month of March 20xx)

    2. Jute Inc. paid salary amounting to 75,000 to its employees in cash for the month of March 20xx on 31/03/20xx.

    Journal entry in the books of Jute Inc. on 31/03/20xx will be as follows-

    Salary A/c Debit 75,000 Debit the increase in expense
     To Cash A/c Credit  75,000 Credit the decrease in asset

    (Being salary paid in cash for the month of March 20xx)

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  1. To begin with, three types of businesses can be commenced i.e. sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting. Journal entry fRead more

    To begin with, three types of businesses can be commenced i.e. sole proprietorship, partnership, and joint-stock company. As we all know, to start any business a certain sum of money has to be invested by the owner which is known as the capital of the business in terms of accounting.

    Journal entry for started business with cash

    The cash a/c is debited as it is an asset for the business and the capital a/c is credited as it is a liability for the business according to the business entity concept.

    1. According to the golden rules of accounting:

    Cash a/c Debit Debit what comes in
    To Capital a/c Credit Credit the giver

    (being business commenced with cash)

    2. According to the modern rules of accounting:

    Cash a/c Debit Debit the increase in asset
    To Capital a/c Credit Credit the increase capital

    (being business commenced with cash)

    Example

    Mr. A commenced business with cash (capital) amounting to 1,00,000. The journal entry in the books of Mr. A is as follows

    Cash a/c Debit 1,00,000
    To Capital a/c Credit 1,00,000

    (being business commenced with cash)

    Hope this helps.

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  1. Journal entry for an interest received from a bank The interest received from the bank can be transacted in the journal book using the modern rules of accounting as -   Why Bank A/c is Debited? when the interest income is accrued it increases the bank balance and the bank balance is recorded asRead more

    Journal entry for an interest received from a bank

    The interest received from the bank can be transacted in the journal book using the modern rules of accounting as –

     

    Journal entries for interest income received from a bank

    Why Bank A/c is Debited?

    when the interest income is accrued it increases the bank balance and the bank balance is recorded as a current asset. Hence, its debited since interest income increases the entity’s bank balance.

    Why is Interest Received Credited?

    The interest received is an income for an entity and as per the modern rules of accounting, we credit the increase in income. Therefore, we credit interest income a/c.

    The interest received from the bank can be transacted in the journal book using the golden rules of accounting as –

    Journal entries for interest on income from bank using golden rules of accounting

    Why is Bank A/c Debited?

    Bank Account is classified as a “personal account” and as per the golden rule of accounting for personal account “we debit the receiver and credit the giver.”And hence, we debit the bank account.

    Why is income received from bank credited?

    Income received from a bank can be classified as “nominal account” and as per the golden rule of accounting for nominal account “we debit all expenses and losses and credit all incomes and gains.” so, interest received from the bank is credited.

    For Example,

    Mr Alex has a savings account with ABC Bank. The balance at the end of the first quarter with the bank is 1,00,000. The bank offers 6% p.a interest on such balance. Journalise the same.

    Solution :

    Journal of Mr Alex

    Particulars Debit/Credit Amount Amount
    Interest received from a bank
    Bank A/c Dr Debit 1,500
        To Interest Income A/c Credit 1,500
    (Being interest @ 6% p.a received from the bank for the first quarter)

     

    I have tried to logically explain the entry for interest income from the bank. I hope it helps.


    Aastha Mehta.

     

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  1. Salary is an indirect expense incurred by every organization as consideration for the efforts undertaken by the employees of the organization. It is one of the most recurring transactions because it is paid monthly. It is usually paid by cheque or through netbanking. Here, I will explain you the jouRead more

    Salary is an indirect expense incurred by every organization as consideration for the efforts undertaken by the employees of the organization. It is one of the most recurring transactions because it is paid monthly. It is usually paid by cheque or through netbanking.

    Here, I will explain you the journal entry for salary paid by cheque.

    Journal entry for paid salary by cheque

    I will present the journal entry using both the golden rule and the modern rule of accounting.

    1. According to the “Golden rules” of accounting

    Salary A/c Debit Nominal account Debit all expenses and losses
     To Bank A/c Credit Personal account Credit the giver

    (Being salary paid by cheque)

    2. According to the “Modern rules” of accounting

    Salary A/c Debit Expense Debit the increase in expenses
     To Bank A/c Credit Asset Credit the decrease in asset

    (Being salary paid by cheque)

    Example

    Samsung Inc. paid salary amounting to 250,000 to its employees by cheque for the month of March 20xx on 31/03/20xx.

    Journal entry in the books of Samsung Inc. on 31/03/20xx will be as follows-

    Salary A/c Debit 250,000 Debit the increase in expenses
     To Bank A/c Credit  250,000 Credit the decrease in asset

    (Being salary paid by cheque for the month of March 20xx)

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  1. Commission Received refers to a percentage amount received by the company (or) an individual on the total sales incurred. It is an indirect income/revenue recorded on the credit side of profit and loss account. The term "commission" is more likely used in the stock market which is paid to a broker oRead more

    Commission Received refers to a percentage amount received by the company (or) an individual on the total sales incurred. It is an indirect income/revenue recorded on the credit side of profit and loss account. The term “commission” is more likely used in the stock market which is paid to a broker on the sale of shares (or) securities.

    Journal Entry for Commission Received

    Nowadays many organization uses a bank account for every business transaction i.e., either to make or receive payment. The journal entry on the commission received can be recorded in two different approaches of accounting. They are

    1. Traditional Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Bank a/c   XXX Personal Debit- The Receiver
     To Commission Received a/c    XXX Nominal Credit- All Incomes and Gains

    (Being commission received)

    2. Modern Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Bank a/c   XXX Asset Debit- The Increase in Asset.
     To Commission Received a/c    XXX Income Credit- The Increase in Income.

    (Being Commission received)

    Example

    On 1st March, Anna Ltd. received a commission amounting to 70,000 through cheque. Journalise the following transaction.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st March Bank a/c   70,000 Asset Debit- The Increase in Asset
       To Commission Received a/c    70,000 Income Credit- The Increase in Income.

    (Being commission received through cheque)

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  1. Every entity deposits its idle cash in its bank account. Depositing cash in the bank account will fetch interest to the entity and also ensure safety of the money. Cash deposit in the bank is one of the most recurring transactions in every entity’s day-to-day business activity. So, it is important tRead more

    Every entity deposits its idle cash in its bank account. Depositing cash in the bank account will fetch interest to the entity and also ensure safety of the money. Cash deposit in the bank is one of the most recurring transactions in every entity’s day-to-day business activity. So, it is important to know the journal entry for the same.

    Journal Entry for Cash Deposit in Bank

    I will present the journal entry using both the golden rule and the modern rule of accounting.

    1. According to the “Golden rules” of accounting

    Bank A/c Debit Personal account Debit the receiver
     To Cash A/c Credit Real account Credit what goes out

    (Being cash deposited in the bank)

    2. According to the “Modern rules” of accounting

    Bank A/c Debit Asset Debit the increase in asset
     To Cash A/c Credit Asset Credit the decrease in asset

    (Being cash deposited in the bank)

    Example

    Sugar Ltd has idle cash 500,000. The finance manager deposited the idle amount in the company’s Bank of America A/c.

    Journal entry in the books of Sugar Ltd will be as follows-

    Bank of America A/c Debit 500,000 Debit the increase in asset
     To Cash A/c Credit  500,000 Credit the decrease in asset

    (Being Cash deposited in Bank of America A/c)

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  1. This answer was edited.

    There are various operating and Non-operating expenses incurred by an organization in its ordinary course of business such as- Salaries, Legal expenses, Electricity charges etc., Therefore, it is the primary responsibility of an accountant to record all these expenses in the books of accounts for deRead more

    There are various operating and Non-operating expenses incurred by an organization in its ordinary course of business such as- Salaries, Legal expenses, Electricity charges etc., Therefore, it is the primary responsibility of an accountant to record all these expenses in the books of accounts for deriving genuine net profit at the end of the accounting year.

    Journal Entry for Electricity Bill paid

    1. Traditional Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Electricity Bill a/c XXX Nominal Debit- All expenses and Losses
     To Bank a/c  XXX Personal Credit- The Giver.

    (Being Electricity Bill paid).

    2. Modern Accounting Approach

    Particulars L.F. Amount Nature of Account Accounting Rule
    Electricity Bill a/c XXX Expense Debit- The Increase in Expense.
     To Bank a/c  XXX Asset Credit- The Decrease in Asset.

    (Being paid electricity bill).

    Example

    On 12th March, Alex Ltd. paid electricity bill amounting to 8,000 through cheque. Journalise the following transaction in the books of Alex Ltd.
    In the Books of Alex Ltd.

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    12th March Electricity Bill a/c 8,000 Expense Debit- The Increase in Expense
     To Bank a/c  8,000 Asset Credit- The Decrease in Asset.

    (Being paid electricity bill through cheque).

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  1. A company incurs several expenses arising from its operating activities. For example, rent, rates, taxes, telephone bills, electricity bills, etc. It is important to record the same in the books of accounts to ascertain the true financial position of a company. Journal entry for paid telephone billRead more

    A company incurs several expenses arising from its operating activities. For example, rent, rates, taxes, telephone bills, electricity bills, etc. It is important to record the same in the books of accounts to ascertain the true financial position of a company.

    Journal entry for paid telephone bill

    The telephone charges a/c is debited and the respective cash or bank a/c is credited.

    1. According to the golden rules of accounting:

    Telephone charges a/c Debit Debit  all expenses and losses
    To Cash a/c Credit Credit what goes out

    (being telephone bill paid)

    2. According to the modern rules of accounting:

    Telephone charges a/c Debit Debit the increase in expense
    To Cash a/c Credit Credit the decrease in asset

    (being telephone bill paid)

    Example

    ABC Ltd. paid the telephone bill amounting to 10,000. The journal entry in the books of ABC Ltd is as follows:

    Telephone charges a/c Debit 10,000
    To Cash a/c Credit 10,000

    (being telephone bill paid)

    Hope this helps.

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  1. This answer was edited.

    A customer can purchase on two basis: cash or credit. In case of a cash purchase, the payment is made immediately by the customer however, in case of a credit purchase, the payment is expected to be made in the future as per the agreement. Journal entry for purchase of machinery on credit basis: MacRead more

    A customer can purchase on two basis: cash or credit. In case of a cash purchase, the payment is made immediately by the customer however, in case of a credit purchase, the payment is expected to be made in the future as per the agreement.

    Journal entry for purchase of machinery on credit basis:

    Machinery a/c Debit Debit  the increase in asset
    To Creditor/suppliers a/c Credit Credit the increase in liability

    (being machinery purchased on credit)

    Journal entry for purchase of machinery for cash:

    Machinery a/c Debit Debit  the increase in asset
    To Cash Credit Credit the decrease in asset

    (being machinery purchased for cash)

    Example

    1. Mr. K purchased machinery from ABC Ltd. amounting to 20,000 on credit. The journal entry in the books of Mr. K is as follows:

    Machinery a/c Debit 20,000
    To ABC Ltd. a/c Credit 20,000

    (being machinery purchased on credit)

    2. Mr. A purchased machinery from XYZ Ltd. amounting to 20,000 on a cash basis. The journal entry in the books of Mr. A is as follows:

    Machinery a/c Debit 40,000
    To Cash Credit 40,000

    (being machinery purchased for cash)

    Hope this helps.

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  1. This answer was edited.

    It is believed that every organization requires goods for running its business. Goods can be purchased in two different ways- on cash and credit. Most of the companies prefer credit purchase of goods over cash. I would like to explain to you the meaning of credit purchases followed by journal entryRead more

    It is believed that every organization requires goods for running its business. Goods can be purchased in two different ways- on cash and credit. Most of the companies prefer credit purchase of goods over cash. I would like to explain to you the meaning of credit purchases followed by journal entry and simple practical example.

    Purchased Goods on Credit

    In simple terms, when an organization (or) customer purchases the goods from the seller (or) supplier and agrees to pay the consideration (value or price) of the goods on some future date then it is called as credit purchases. Whenever credit purchase takes place accounts payable account/sundry creditor is created.

    Accounts payable increases when the organization keeps on purchasing goods on credit. It is considered as a short-term debt that an organization owes to another organization during the ordinary (or) normal course of business.

    Journal Entry for goods purchased on credit

    • Modern Accounting Approach-
    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st March Purchases a/c 25,000 Expense Debit The Increase in Expense
     To Accounts Payable/Supplier a/c  25,000 Liability Credit– The Increase in Liability.
    • Traditional Accounting Approach
    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st March Purchases a/c 25,000 Nominal Debit All expenses and losses.
     To Accounts Payable/Supplier a/c  25,000 Personal Credit The giver.

     Practical Example

    On 1st June, Alex Co. purchases goods from Max Co. for 2,00,000 on credit period of 30 days. Pass Journal entry for credit purchases in the books of Alex Co.
                                                                In the Books of Alex Co.

    1. When Credit Purchase of goods takes place-

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st June Purchases a/c 2,00,000 Expense Debit- The Increase in Expense.
     To Accounts Payable/Max Co. a/c  2,00,000 Liability Credit- The Increase in Liability.

    (Being goods purchased from Max Co. on credit).

    2. When consideration (value or price) of the goods is being duly paid-

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st July Accounts Payable/Max Co. a/c 2,00,000 Liability Debit- The Decrease in Liability.
     To Cash/Bank a/c  2,00,000 Asset Credit- The Decrease in Asset.

    (Being consideration paid for the goods purchased on credit).

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  1. This answer was edited.

    In the modern business world, sales are made on credit as well as cash basis. Even though there’s a high risk of bad debts in selling goods on a credit basis, the companies prefer the same to develop customer loyalty and meet the cut-throat competition. 'Sold goods on credit' is nothing but the saleRead more

    In the modern business world, sales are made on credit as well as cash basis. Even though there’s a high risk of bad debts in selling goods on a credit basis, the companies prefer the same to develop customer loyalty and meet the cut-throat competition.

    ‘Sold goods on credit’ is nothing but the sale of goods on a credit basis i.e. providing goods to the customer with an expectation of receiving the payment in the future. This amount owed by the debtor leads to an increase in the accounts receivables of the company and is a current asset.

    Journal entry for sold goods on credit

    The respective debtor account is debited while the sales account is credited.

    1. According to the golden rules of accounting:

    Debtors a/c Debit Debit  the receiver
    To Sales a/c Credit Credit all incomes and gains

    (being goods sold on credit)

    2. According to the modern rules of accounting:

    Debtors a/c Debit Debit  the increase in asset
    To Sales a/c Credit Credit the increase in revenue

    (being goods sold on credit)

    Example

    XYZ Ltd. sold goods amounting to 50,000 to Mr. A on credit. The journal entry in the books of XYZ Ltd. is as follows:

    Mr. A’s a/c Debit 50,000
    To Sales a/c Credit 50,000

    (being goods sold on credit)

    Hope this helps.

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  1. This answer was edited.

    I believe that every business organization uses inventory for generating sales. If an organization manufactures products by using raw material instead of offering service then he needs to prepare accounting records for inventory. Inventory can be purchased in two ways- on cash (or) credit. In this qRead more

    I believe that every business organization uses inventory for generating sales. If an organization manufactures products by using raw material instead of offering service then he needs to prepare accounting records for inventory. Inventory can be purchased in two ways- on cash (or) credit.

    In this question, I would like to tell you about inventory purchased on credit. Starting with its meaning followed by Journal Entry and a simple practical problem.

    Purchased Inventory on Credit

    When an organization purchases raw materials for manufacturing finished products from another organization on agreed terms that consideration (price or value) of raw materials (Inventory) will be paid on some future date then it is called Credit Purchase of Inventory.

     Journal Entry for Inventory purchased on credit

    1. Modern Accounting Approach

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st Feb Inventory- Raw material a/c 1,00,000 Asset Debit- The Increase in Asset.
     To Accounts Payable/Supplier a/c  1,00,000 Liability Credit- The Increase in Liability.

    2. Traditional Accounting Approach

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st Feb Inventory- Raw material a/c 1,00,000 Real Debit- What comes into the business.
     To Accounts Payable/ Supplier a/c  1,00,000 Personal Credit- The giver.

    Practical Example

    On 1st May Alexa Co., a manufacturer of sofa sets, purchases hardwood from Anna Co. for 5,00,000 on a credit period of 2 months. Journalise the following transaction in the books of Alexa Co.
                                                                 In the books of Alexa Co.

    1. When Inventory is purchased on credit from Anna Co.-

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st May Inventory- Raw material a/c 5,00,000 Asset Debit- The Increase in Asset.
     To Accounts Payable/ Anna Co. a/c  5,00,000 Liability Credit- The Increase in Liability.

    (Being Inventory purchased on credit).

    2. When the consideration (price or value) of Inventory is duly paid-

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    1st Aug Accounts Payable/ Anna Co. a/c 5,00,000 Liability Debit- The Decrease in Liability.
     To Cash/Bank a/c  5,00,000 Asset Credit- The Decrease in Asset.

    (Being consideration duly paid on the due date).

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  1. The sale of services might be a new concept for you as we have commonly heard more about the sale of goods by the businesses. However, the treatment of the two is the same in the books of accounts. Like goods, the sale of services is made on cash as well as credit basis. There are plenty of servicesRead more

    The sale of services might be a new concept for you as we have commonly heard more about the sale of goods by the businesses. However, the treatment of the two is the same in the books of accounts. Like goods, the sale of services is made on cash as well as credit basis. There are plenty of services provided by companies such as financial, management, software, consulting, marketing services, etc. 

    Journal entry for the sale of services on credit

    The respective debtor account is debited while the sales account is credited.

    1. According to the golden rules of accounting:

    Debtors a/c Debit Debit  the receiver
    To Sales a/c Credit Credit all incomes and gains

    (being services sold on credit)

    2. According to the modern rules of accounting:

    Debtors a/c Debit Debit  the increase in asset
    To Sales a/c Credit Credit the increase in revenue

    (being services sold on credit)

    Example

    Mr. K availed the financial services of XYZ Ltd. in May amounting to 20,000 with an agreement to pay the same in the following month. The journal entry in the books of XYZ Ltd. for the month of May is as follows:

    Mr. K’s a/c Debit 20,000
    To Sales a/c Credit 20,000

    (being services sold on credit)

    Hope this helps.

     

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  1. Meaning of Unbilled Revenue Unbilled Revenue refers to the revenue earned by an entity by rendering the goods or services in the current period ie. sale has been recognized but the entity has not yet issued the corresponding invoices to the customer. Unbilled Revenue arise in situations where- a. IsRead more

    Meaning of Unbilled Revenue

    Unbilled Revenue refers to the revenue earned by an entity by rendering the goods or services in the current period ie. sale has been recognized but the entity has not yet issued the corresponding invoices to the customer.

    Unbilled Revenue arise in situations where-
    a. Issue of invoice is delayed, or
    b. Invoice is issued only after the entire project/contract is completed.

    Unbilled Revenue is presented as a current asset in the balance sheet.

    Journal Entry for Unbilled Revenue

    1. Entry for recording the revenue as per the accrual method

    Unbilled Revenue A/c Debit Increase in asset
     To Revenue (Sales) A/c Credit Increase in Income

    We have debited Unbilled Revenue A/c because it is an asset for the supplier entity as the invoice will definitely be raised in the near future for the goods or services already rendered and the corresponding consideration is still receivable from the customer.

    We have credited the Revenue (Sales) A/c because the goods or services have been rendered by the entity. Therefore, as per accrual method it is recognized as revenue/sales by the seller entity in the current period itself.

    2. Entry when the invoice has been issued to the customer

    Unbilled Revenue is converted to Accounts Receivable once the invoice is issued.

    Accounts Receivable A/c Debit Increase in asset
     To Unbilled Revenue A/c Credit Reversal of unbilled revenue debited earlier as the invoice has now been issued

    Examples of Unbilled Revenue

    Example 1 – Issue of invoice is delayed

    Software Ltd completed a software development & installation project worth 150,000 for ABC Ltd on 10th March 20×1. But it did not immediately issue an invoice. It issued the invoice on 05th April 20×1.

    Following journal entries will be passed in the books of Software Ltd-

    1. Entry for recording the revenue on completion of the project on 10/03/20×1

    Unbilled Revenue A/c Debit 150,000
     To Revenue (Sales) A/c Credit  150,000

    2. Entry at the time of issue of invoice on 05/04/20×1

    Accounts Receivable-ABC Ltd A/c Debit 150,000
     To Unbilled Revenue A/c Credit  150,000

    Example 2 – Invoice is issued only after the entire project/ contract is completed

    R&D Ltd entered into a contract for carrying out research & development activities for Chemical Ltd. They agreed upon a contract price of 10 million which will be entirely invoiced at the end of the project. Out of 10 million, 3 million is related to research phase and 7 million for development phase.

    Research activities were completed in January 20×1 and development activities in the month of March 20×1. The invoice was raised in the month of April 20×1 for the entire project.

    Following journal entries will be passed in the books of R&D Ltd-

    1. Entry on completion of research phase in January 20×1 because it has completed its research obligation under the contract

    Unbilled Revenue A/c Debit 3 million
     To Revenue (Sales) A/c Credit  3 million

    2. Entry on completion of the development phase in March 20×1 because it has completed its development obligation under the contract

    Unbilled Revenue A/c Debit 7 million
     To Revenue (Sales) A/c Credit  7 million

    3. Entry at the time of issuance of invoice to Chemical Ltd and for recording receivable in the books in April 20×1

    Accounts Receivable-Chemical Ltd A/c Debit 10 million
     To Unbilled Revenue A/c Credit  10 million
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  1. This answer was edited.

    To begin with, let me explain to you the meaning of Subsidiary. Meaning of Subsidiary A subsidiary is a business entity in which another company termed as the parent/holding company owns & controls more than 50% of the share capital. If 100% share capital of an entity is owned by the parent compRead more

    To begin with, let me explain to you the meaning of Subsidiary.

    Meaning of Subsidiary

    A subsidiary is a business entity in which another company termed as the parent/holding company owns & controls more than 50% of the share capital. If 100% share capital of an entity is owned by the parent company then such an entity will be referred to as wholly-owned subsidiary.

    The parent company will report the “investment in subsidiary” as an asset in its balance sheet. Whereas, the subsidiary company will report the same transaction as “equity” in its balance sheet.

    Real-world examples of Holding & Subsidiary Company

    1. Whatsapp & Instagram are subsidiaries of Facebook Inc.
    2. Skype & LinkedIn are subsidiaries of Microsoft Corporation.

    Journal Entry for Investment in Subsidiary

    Suppose, Book Ltd acquires 60% shares in Paper Ltd in the month of April 20×1 against consideration of 5,000,000. In this case, more than 50% stake has been acquired by Book Ltd in the entity Paper Ltd. Therefore, Paper Ltd will be considered as a Subsidiary of Book Ltd.

    Journal entry to be passed in the accounting records of Book Ltd at the time of acquisition-

    Investment in Paper Ltd (Subsidiary) A/c Debit 5,000,000 Increase in asset
     To Bank A/c Credit  5,000,000 Decrease in asset

    Presentation in Financial Statements

    Financial Statement Treatment
    Balance Sheet Presented separately as “Investment in Subsidiaries” under the head “Non-Current Assets”
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  1. This answer was edited.

    Posting Reference A posting reference column is used to indicate that the entry is posted in the respective ledger accounts and it links journal with the respective ledger account. The abbreviation used for posting reference is "PR". It is also called a folio. Purpose of PR Column When an entity traRead more

    Posting Reference

    A posting reference column is used to indicate that the entry is posted in the respective ledger accounts and it links journal with the respective ledger account. The abbreviation used for posting reference is “PR”. It is also called a folio.

    Purpose of PR Column

    When an entity transacts in a large number on daily basis it becomes a troublesome task then for the bookkeeper to ascertain whether the entries are posted in appropriate ledgers. And it may so happen that the entry is posted twice. Later on, tracking that transaction and correcting the same becomes a tedious and time-consuming job.

    Hence, to avoid these issues its recommended to maintain a posting reference column. Thereby simplifying the job of a bookkeeper.

    It can be seen in the third column of the journal book generally. You can also see the same in the image inserted below-

     

    Posting Reference column

     

    Example

    when an entity purchases an immovable property for an amount of 100,000 it shall be recorded in the books of accounts as –

    Understanding with the help of an example

    The reference of the page number of the journal book shall be given in the respective ledger accounts to interlink the same. The ledger given below indicates the same-

    Interlinking journal book with ledger account

    Similarly, Cash Account shall also have a PR column wherein the reference of the page consisting of the primary journal entry shall be given. The below-given image presents the same

    Posting Reference

    I hope this was helpful.


    Aastha Mehta.

     

     

     

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  1. This answer was edited.

    Salary paid in advance - The term salary paid in advance is also known as prepaid salary. salary paid in advance is initially recorded as an asset because it provides some future economic benefit and is charged at the time when the actual benefit is realized in the succeeding accounting period. TheRead more

    Salary paid in advance –

    The term salary paid in advance is also known as prepaid salary. salary paid in advance is initially recorded as an asset because it provides some future economic benefit and is charged at the time when the actual benefit is realized in the succeeding accounting period.

    The amount of Prepaid salary is deducted from salary and shown on the debit side of profit and loss account. It is further shown under the head current asset in the balance sheet. Hence prepaid salary (or) salary paid in advance is treated as adjustment entry.

    Example- On 1st March, Company A Ltd paid 4 months prepaid salary amounting to 40,000 (10,000*4) to the employees of the company. Evaluate the treatment of the amount paid as prepaid salary by the company to the employees. Journalise the following transaction by recording payment and adjustment entry.

    • Traditional Accounting Approach-

     

                                      Journal Entry in the books of Company A 

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    March 1st Prepaid Salary a/c Dr 40,000 Representative Personal Debit– The receiver
     To Cash/Bank a/c  40,000 Real Credit– What goes out of the  business

    (Being the payment for prepaid salary made).

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    Aug 3rd Salary a/c              Dr 10,000 Nominal Debt– All Expenses and Losses
     To Prepaid Salary a/c  10,000   Representative Personal Credit– The Giver

    (Being the amount of prepaid salary adjusted to salary).

    • Modern Accounting Approach-

     

    We will record the same transaction by following the modern rules of accounting (widely recognized and followed all over the world).
                                           Journal Entry in the books of Company A

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    March 1st Prepaid Salary a/c  Dr 40,000 Asset Debit– The Increase in Asset
     To Cash/Bank a/c  40,000 Asset Credit– The Decrease in Asset

    (Being the payment for prepaid salary made).

    Date Particulars L.F. Amount Nature of Account Accounting Rule
    Aug 3rd Salary a/c             Dr 10,000 Expense Debit– The Increase in Expense
     To Prepaid Salary a/c  10,000 Asset Credit– The Decrease in Asset

    (Being the amount of prepaid salary adjusted to salary).

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