SUBJECT : BASICS OF FINANCIAL ACCOUNTING

Module: 2:- JOURNAL LEDGER TRIAL BALANCE

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 Journal

The word journal is derived from the French word “Jour” meaning ‘day’.
Journal therefore means daily record business transactions.

A journal or book of original entry is the place where journal entries are
recorded before they are posted to the ledger accounts. A journal is a record of
all the transactions a company has recorded.

A journal entry is the act of keeping or making records of any transactions

either Economic or non-economic. Transactions are listed in an accounting
journal that shows a company's debit and credit balances. The journal entry
can consist of several recordings, each of which is either a debit or a credit.
The total of the debits must equal the total of the credits, or the journal entry
is considered unbalanced.

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 Types of Accounts
i)Personal accounts- are those accounts which are maintained in the
names of persons who are involved in the dealings of the business.
ii)Impersonal accounts: are those accounts which are not personal
accounts. They can be categorized in to real accounts and nominal
accounts.
a) Real Accounts: Real accounts are accounts maintained by the
company which consists of the assets of the business. In this case,
the assets of the business can be either purchased for use or the
assets goods meant for use
b) Nominal Accounts: Nominal accounts are accounts which relates to the
items which relates to the result of the activities of the business. In
nominal accounts expenses and losses incurred or incomes and gains
earned are recorded.

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 Transaction analysis for Journal entries: Any business transaction must be analyzed
through the following steps to write the correct journal entry:

➢ The accounts affected by the transaction have to be identified.

➢ The identified accounts should be classified according the types of accounted

which they come under. The types of accounts are mainly personal, real or
nominal accounted.

➢ The accounts which are to be debited and credited should be deciding keeping the
“Golden rules of accounting” in mind.
➢

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JAIN (Deemed-to-be University)
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JAIN (Deemed-to-be University)
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 The Golden Rules of Accounting

1. Debit The Receiver, Credit The Giver

This principle is used in the case of personal accounts. When a person gives
something to the organization, it becomes an inflow and therefore the person must
be credit in the books of accounts. The converse of this is also true, which is why
the receiver needs to be debited.

2. Debit What Comes In, Credit What Goes Out This principle is applied in case of
real accounts. Real accounts involve machinery, land and building etc. They have a
debit balance by default. Thus when you debit what comes in, you are adding to the
existing account balance. This is exactly what needs to be done. Similarly when you
credit what goes out, you are reducing the account balance when a tangible asset
goes out of the organization.

3.Debit All Expenses And Losses, Credit All Incomes And Gains
This rule is applied when the account in question is a nominal account. The capital
of the company is a liability. Therefore it has a default credit balance. When you
credit all incomes and gains, you increase the capital and by debiting expenses and
losses, you decrease the capital. This is exactly what needs to be done for the
system to stay in balance.

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 2) Under the American System
a. Capital: If capital increases, it is credited, whereas, when it is reduced, it is debited.
“Debit Decrease in Capital Credit Increase in Capital”
b. Outsider’s Liability: If the liabilities increase, external accounts are credited. On
the other hand, if the liabilities decrease, external liabilities will be debited. “Debit
decrease in Liability Credit increase in Liability”
c. Revenue Income: The amount of revenue income leads to an increase in the
Owners’ equity. “Debit decrease in Incomes and Gains Credit increase in Incomes
and Gains”
d. Revenue Expenses: The amount of revenue expense leads to decrease in the
owners’ equity. “Debit increase in expenses and losses Credit decrease in expenses
and losses”
e. Assets: In case of an increase of assets of a company, assets will be debited.
Whereas, in case of decrease in the assets, it will be credited. “Debit increase in an
asset Credit decrease in an asset”

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 Thank you

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