Journal - Book of Prime Entry, Journalising

Need for the Journal

Let us recollect what we were going through

What is the basic purpose of accounting??

Derivation of Information

What is targeted to be achieved through the accounting process?

Collecting all the information relating to an element at a single place.

What were we trying to do?

To achieve the target i.e. to collect all the information relating to an element at a single place, we need a system of accounting. We have been learning the steps in constructing that system of accounting.

What did we learn till now?

We learnt
  • Three concepts of accounting
    • Money Measurement Concept
    • Separate Entity Concept
    • Dual Entity Concept
  • Elements or accounting heads
  • Types or nature of accounts (real, personal and nominal)
  • The principles of debit and credit.
  • Deciding which account is to be debited and which account is to be credited in relation to an accounting transaction using the principles of debit and credit.

What next?

We learn how to present the information that has been gathered till now in a specific format called a journal entry.

Proof a Transaction

In actual practice in accounting, we do not come across statements like "Purchased Furniture for cash 20,000", "Received cash from Mr. Imran on account 12,000", "Bought goods on credit from M/s Shyam & Co.", etc. We only find proofs for these transactions.

The interpretation of these proofs sounds/reads like these sentences. We do not write down the interpretation. We only do it orally so that it would aid our accounting effort.

We interpret

  • The payment voucher for 20,000 towards Furniture purchases as

    Purchased Furniture for cash 20,000

  • The cash receipt for 12,000 from Mr. Imran as

    Received cash from Mr. Imran on account 12,000

  • The purchase invoice received from M/s Shyam & Co., as

    Bought goods on credit from M/s Shyam & Co.

Actual Proofs of Accounting Transactions

Whenever a transaction takes place, there is a relevant document prepared as a proof the transaction.
  • A "Receipt" when cash is received
  • A "Voucher" when payment is made
  • A "Sales Invoice" when sales are made on credit etc.
Documents such as these form proof transactions. They are records which aid the accounting process. They should only be considered as proofs of transactions and not the actual accounting records.

In the later stages of learning accounting we do not come across such simple statements indicating accounting transactions. We will be required to derive the interpretations ourselves from the information provided.

Writing the Journal » Recording » Journalising

By analysing a transaction, we identify the two elements affected by the transaction, then we identify the nature of the elements, then we decide which element is to be debited and which is to be credited by applying the rules of debit and credit and then we write the Journal entry based on that decision.

The actual and real process of accounting starts with writing the journal. It would not be possible without the use of the proof the transaction though.

Journal

  • A daily written record of (usually personal) experiences and observations.
  • A book in which transactions are recorded as they occur.
  • daybook
  • diary
A Journal is a book in which an accounting transaction is written in accounting terms. This is the first accounting record for an accounting transaction.

Journalising ≡ Recording

The act of writing the Journal is called RECORDING or JOURNALISING.

Journalising (or Recording) is writing down the information relating to an accounting transaction that is relevant in accounting into the accounting records (generally in a specific format) based on the principles of debit and credit.

Journal Entry

One unit of recording in the book called Journal, representing an accounting transaction is what is called a Journal Entry.

It is made up of a set of information relating to the transaction, generally presented in a specific format

A single journal entry in its simplest form pertains to a single transaction. There may be a single entry that would be representing one or more transactions combined together called compound/combined journal entry.

Entry

  • An item inserted in a written record

Journal » A book of Prime Entry

Since an accounting transaction relating to business is entered in the accounting records (in accounting terms) for the first time in a journal, it is also called a Book of Prime Entry.

Prime

  • First in rank or degree
  • Important

Every Accounting Transaction has to be Journalised

Every accounting transaction is brought into the accounting records through the Journal. For every accounting transaction there would be a relevant Journal entry

No Journal » No Accounting

The importance of the Journal can be assessed from the fact that "There would be no accounting without a journal". That is the reason it called a book of prime entry meaning both the "First Book" as well as an "Important Book".

Format of the Journal

Conventionally, a Journal is prepared/written in a specific format as below.

Journal in a conventional format

Journal in the books of M/s __ for the period from ____ to _____
Date V/R
No.
Particulars L/F Amount
(Dr)
Amount
(Cr)
Jun 15th Cash a/c
To Capital a/c
Dr
2,00,000
2,00,000
[Being the amount brought in cash towards capital vide receipt no:__ dated:__]
17th Furniture a/c
To Cash a/c
Dr
12,000
12,000
[Being the amount paid in cash towards Furniture purchased from M/S____ vide bill no:___ dated:___]

Journal Entry

This would be what we call a journal entry.
Jun 15th Cash a/c
To Capital a/c
Dr
2,00,000
2,00,000
[Being the amount brought in cash towards capital vide receipt no:__ dated:__]

In modern day mechanised (computerised) accounting, the journal is presented in various formats. Whatever may be format used, the information shown above in the conventional format would be present in a journal.

Writing & Reading a Journal Entry

To understand how a journal entry is constructed, let us consider a transaction.

Bought Furniture for cash 20,000

The analysis for the transaction forms the basis for recording the journal entry.

To record the journal entry, we need to know

  1. The two elements effected by the transaction
  2. which one of the two accounts is to be debited and which is to be credited and
  3. the amount of (or value involved in) the transaction.
Furniture a/c

Tangible aspect/Asset

Real a/c

Coming in

Debit
[Debit what comes in]
Cash a/c

Tangible aspect/Asset

Real a/c

Going out

Credit
[Credit what goes out]

Writing/Recording the Journal entry

Once we decide which account is to be debited and which to be credited, writing the journal entry amounts to placing each element in its place within the format and recording the relevant amount.
Journal in the books of M/s __ for the period from ____ to _____
Date V/R
No.
Particulars L/F Amount
(Dr)
Amount
(Cr)
Jun 15th Furniture a/c
To Cash a/c
Dr
12,000
12,000
[ Being the amount paid towards Furniture purchased from M/s ____ vide bill no:___ dated:__ ]

Recording

The process of writing a transaction in the journal is called recording.

When used in the context of the journal, "Recording" in accounting is a technical term.

Reading the Journal entry

In reading a journal entry we state which account is debited and which is credited in the form of a single statement, optionally including the amount.

There are two orders in which the journal entry can be read.

  • Normal Order

    Furniture a/c "Debtor (pronounced detor) To" Cash a/c.

    We begin reading with the debits in the entry.

  • Reverse Order

    Cash a/c "Credited By" Furniture a/c.

    We begin reading with the credits in the entry.

Please read the entry both ways whenever you write one till you get accustomed to it. It would make the process of preparation of the ledger (the next step) easy.

Illustration

Practice Problems » Journal

Information in the Journal

Heading

Journal in the books of M/s __ for the period from ____ to _____
The heading gives the following information:
  • The organisation whose accounting transactions are being recorded
  • The period relating to which the journal entries are being recorded.

Date

Jun 15th Cash a/c
To Capital a/c
Dr
2,00,000
2,00,000
Date on which the transaction occurs.

To ensure that the accounting system is functional and useful, transactions are recorded on the date on which they occur. In mechanised accounting this happens as and when the transaction takes place.

Therefore assume that the date here is the date on which the transaction has taken place (based on the proof the transaction) and not the date of recording the transaction.

V/R No » Voucher/Receipt Number

Jun 15th Cash a/c
To Capital a/c
Dr
2,00,000
2,00,000
  • A Voucher is a document which is prepared when a payment is made
  • A Receipt is a document which is made when an amount is received.
Vouchers and receipts form proof transactions.

They are generally numbered and have identifications like voucher number, receipt number etc., on them. These numbers are entered in this column to have a cross reference to the proof the transaction based on which that journal entry is being recorded.

There may be other forms of documents like sales invoices, debit notes, credit notes etc., which also form proof transactions. Please ignore them for now.

Note that we do not find statements like "Paid cash to Mr. Shyam" etc. in the accounting records. The documents which form proofs of transactions are the ones which enable us to interpret the transactions in such a way.

Particulars

Jun 15th Cash a/c
To Capital a/c
Dr
2,00,000
2,00,000
This is the column where the actual account heads, the one to be credited and the one to be debited, are written.
  • Debit Account

    The account to be debited is shown on the first line and is aligned to the left of the column.

    The element name i.e Account Head starts with a Capital Letter and is succeeded by the letters "a/c".

    The word "Dr" (read as detor {debtor - b silent}) is written on the same line, aligned to the right.

    Jun 15th Cash a/c
    To Capital a/c
    Dr
    2,00,000
    2,00,000
  • Credit Account

    The account to be credited is shown on the second line preceded by the word "To" and is succeeded by the letters "a/c".

    The line starting with "To" is indented (i.e. the first letter of the name of the Account that is Debited and the letter "T" do not fall in the same vertical line). "T" always lies to the right of the first letter of the account head that is debited.

    We do not find the use of the letters "Cr" on this line or anywhere in the entry.

Narration

Jun 15th Cash a/c
To Capital a/c
Dr
2,00,000
2,00,000
[Being the amount brought in cash towards capital vide receipt no:__ dated:__]
The sentence that appears below the lines containing the Account Heads that are Debited and Credited is called the narration for the journal entry.

The narration is a brief explanation for the entry. It includes certain details in relation to the transaction. The purpose of the narration is to enable anyone who reads it to get a preliminary idea of why the entry is being recorded. If the information in the narration does not provide the required detail, one can always refer the Voucher/Receipt (which is the actual proof for the transaction journalised through that entry) using the relevant voucher/receipt number recorded relating to that entry.

L/F » Ledger Folio

Jun 15th Cash a/c
To Capital a/c
Dr
2,00,000
2,00,000
The Ledger is a record that follows the journal. Each element (Account Head) has its own distinct page (folio) in the ledger.

"Ledger Folio" is the page number in the ledger record, where the information shown in the journal entry has been carried to. This information is distinct for each account head.

The Ledger Folio information will enable tracking of flow of information from the journal to the ledger.

Debit amount

Jun 15th Cash a/c
To Capital a/c
Dr
2,00,000
2,00,000
This is the amount relating to the element (account head) that is being debited. This generally is the transaction value. The amount is written in the same line as Debit entry i.e. in horizontal alignment with it. If required, the currency related to the amounts is written in the column header itself.

Credit amount

Jun 15th Cash a/c
To Capital a/c
Dr
2,00,000
2,00,000
This is the amount relating to the element (account head) that is being credited. This generally is the transaction value. The amount is written in the same line as Credit entry i.e. in horizontal alignment with it. If required the currency related to the amounts is written in the column header itself.

Multiple Debits and Credits

We may come across journal entries with multiple debits or multiple credits or both.
Jun 15th Cash a/c
Bank a/c
To Capital a/c
Dr

2,00,000
50,000


2,50,000
Nov 21st Drawings a/c
To Bank a/c
To Cash a/c
Dr

50,000
30,000
20,000
Feb 18th Cash a/c
Bank a/c
Debtors a/c
To Creditors a/c
To Capital a/c
Dr



48,000
65,000
14,000



37,000
80,000
The amounts in the debit and credit columns are correlated to the respective account heads on the same horizontal line.

Sum of Debits = Sum of Credits

Where in a journal entry, there are multiple debits or multiple credits or both, the sum of debits and sum of credits will have to be equal always.

Journal in Computerised Accounting

Computers are tools that enable us to accomplish our tasks in an easier, speedier, economical and efficient manner.

Computerised Accounting is also Accounting

Computerised Accounting is a software tool that is used to accomplish the task of organisational accounting. Just because you are accomplishing the task using a computer, the task itself does not become something new. Only the tools are new and you need to get accustomed to using them.

Thus Computerised accounting should be no different from manual accounting. Whatever you have been learnt till now and will learn from hereon form the mechanics of accounting and will be relevant to all forms of accounting.

The fundamental difference being that the formats used in computerised accounting may be different from the ones used in manual accounting. That should not create an understanding that computerised accounting is something completely different from manual accounting.

The Core Accounting information in a Journal Entry in Manual Accounting

Jun 15th Cash a/c
To Capital a/c
Dr
2,00,000
2,00,000
The core information in a journal entry includes the date of the transaction, the account head and the amount to be debited, the account head and the amount to be credited. This is just the information that is used in the mathematics of accounting.

All other information included in the journal entry is additional information that would aid the organisations need for information relating to an accounting transaction.

The Core Accounting Information in Computerised Accounting

The format used in Computerised accounting looks a bit different from the one used in manual accounting. Moreover, all computerised accounting programs do not use the same format.

Thus when you start using a accounting software program, it would be appropriate to correlate the information being entered at the time of recording an accounting transaction with the core information relating to a journal entry in manual accounting.

Core Accounting information in Computerised Accounting

Core Accounting Information in a ERP package's (SAP) Financials Component

Core Accounting information in SAP Financials Component

Why does Computerised Accounting seem alien

The specific format followed in manual accounting, for recording a journal entry allows recording of information in addition to the core information.

Manual Accounting » Limits/Limitations on additional data

Theoretically, the additional data is not really needed for the mathematics of accounting. Its purpose is to aid the organisations need for related information.

Because the additional data is useful, only a few related pieces of data like Voucher/Receipt number, Ledger Folio numbers, Narration etc. within a journal entry are only collected. We can think of a lot of other related information that can be collected, it is seldom done for the reason that a lot of effort is needed in collecting the data as well as putting that data to use (analysing the data).

Computerised Accounting » Breaks the barrier/limitation

The capability of computers in terms of collection, storage and processing of data has driven software programmers to expand the additional information that is collected with respect to each accounting transaction. The amount of data that is collected is only limited by the needs of the organisation.

One another variation that evolved out of computerisation is in the design of the forms used for collecting data, both core accounting data and additional data. This is especially seen in accounting softwares which work in tandem with software used for other functions within the organisation like in the case of ERP Packages.

ERP Packages » Core Accounting data + A lot of Additional data

In dealing with accounting software that enables collection of lot of related data as in the case of ERP packages, one must be able to identify accounting transactions from within the business transactions.

Especially in case of ERP packages, collection of data is segregated into a number of different areas known as modules. There may be business transactions that are not exclusively handled by the accounting department. The additional information to be collected along with the core accounting data would require the transaction to be handled by personnel dealing with other modules.

Moreover the format used for collecting the data would be compatible to the understanding of the personnel using that module and may not be in a format that is easily understood by the accountants.

The only difficulty for a person dealing with the financial accounting aspect is that he/she should be able to search for accounting transactions from within all the business transactions handled from within all the other modules.