Journal Entry – Full Explanation - Concept 1 of 500

1. Meaning of Journal

A Journal is the book of original entry in which transactions are recorded in chronological order.

Each record in the Journal is called a Journal Entry. It captures:

• Date of transaction
• Accounts affected (Debit & Credit)
• Amounts involved
• Narration (short explanation)

2. Definition of Journal Entry ()

“Recording a transaction in the Journal, showing which account is debited and which is credited according to the rules of accounting, is called a Journal Entry.”

3. Golden Rules of Accounting

Journal Entries follow the Golden Rules:

• Personal Account → Debit the Receiver, Credit the Giver.
• Real Account → Debit what comes in, Credit what goes out.
• Nominal Account → Debit all Expenses & Losses, Credit all Incomes & Gains.

These rules ensure proper classification of accounts and accuracy in recording.

4. Steps in Journalising

1. Identify the transaction from source documents.
2. Classify the accounts into Personal, Real, Nominal.
3. Apply the Golden Rules to decide Debit/Credit.
4. Record in Journal format:

Date        Particulars                 Debit (₹)   Credit (₹)
dd/mm/yyyy  Debit A/c name Dr.                      Amount
                To Credit A/c name                  Amount
(Narration)
    

5. Types of Journal Entries

• Simple Entry → One Debit & One Credit
• Compound Entry → Multiple Debits or Credits
• Opening Entry → Records opening balances
• Closing Entry → Transfers income/expenses to P&L
• Adjustment Entry → For accruals, depreciation, etc.
• Rectification Entry → To correct errors
• Transfer Entry → To shift balances

6. Illustrations

Business Started with Cash ₹1,00,000

Cash A/c        Dr. 1,00,000
     To Capital A/c        1,00,000
(Being capital introduced)
    

Rent Paid ₹10,000

Rent A/c        Dr. 10,000
     To Cash A/c           10,000
(Being rent paid in cash)
    

Goods Purchased on Credit from X ₹50,000

Purchase A/c    Dr. 50,000
     To X A/c              50,000
(Being goods purchased on credit)
    

7. Journal Entries → Ledger → Trial Balance → Financial Statements

(A) From Journal to Ledger

Every Journal Entry is posted into the Ledger.

Example: “Rent A/c Dr. To Cash A/c” → Rent A/c (Debit side), Cash A/c (Credit side).

(B) From Ledger to Trial Balance

At the end of the period, balances from all ledger accounts are extracted.

They are listed in a Trial Balance, which ensures:
Total Debits = Total Credits.

(C) From Trial Balance to Financial Statements

• Trading Account → Shows Gross Profit or Loss.
• Profit & Loss Account → Shows Net Profit or Loss.
• Balance Sheet → Shows the financial position.

8. Importance of Journal Entries in the Accounting Cycle

• Foundation Step – No Trial Balance or Final Accounts are possible without Journal.
• Legal Evidence – Each entry is backed by documents.
• Error Prevention – Ensures double-entry accuracy.
• Audit Trail – Provides the first record auditors check.
• Financial Reporting – Journal → Ledger → Trial Balance → Final Accounts → Financial Statements.

9. Complete Flow

Transaction → Journal Entry → Ledger Posting → Trial Balance → Financial Statements (Trading, P&L, Balance Sheet)