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A journal entry, in accounting, is a logging of transaction into accounting journal items. 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 said to be "unbalanced". Journal entries can record unique items or recurring items such as depreciation or bond amortization. In accounting software, journal entries are usually entered using a separate module from accounts payable, which typically has its own subledger that indirectly affects the general ledger. As a result, journal entries directly change the account balances on the general ledger.
In order to record journal entries, one needs to have knowledge about:
- Type of Accounts
- Golden Rules of Accounting
Type of accounts
There are three type of accounts in accounting:
- Personal account
- Real account
- Nominal account
Personal accounts consist of all those accounts which are related to a person, business, firm etc. There are also subtypes of personal account:
- Natural Personal Any person like Peter Account, Ram account etc.
- Artificial Personal Any company or group of people like Microsoft account, Hindustan Petroleum account etc
- Represntative Personal this type of Personal a/c represents owner like. Capital a/c, drawings a/c etc
For example: Mohan's account, Apple ltd. account etc. Capital account
Real accounts consist of all those accounts which are related to assets.
For example: Plant and Machinery account, Stock account etc.
Nominal accounts consist of all those accounts which are related to expenses, losses, Income and Gains.
For example: Rent account, wages account etc.
Golden rules of accounting
There are three golden rules in accounting to record journal entries. Each of these rules is associated with separate account.
"Debit the Receiver, Credit the Giver"
"Debit what Comes In, Credit what Goes out"
"Debit all Expenses and Losses, Credit all Income and Gains"
Refer to this article on Golden Rules of Accounting to know about these rules in detail.
To record a journal entry, the following questions must be considered:
- How many and which accounts are involved?
- Whether the accounts involved are personal account, real account or nominal account?
- Which Golden Rule will be used to here?
- Whether the accounts involved will be Debited or Credited?
Example: Cash received from Apple limited $6000
- Q1: How many and which accounts are involved?
- Ans: There are two accounts involved: cash account and Apple Limited Account
- Q2: Whether the accounts involved are personal account, real account or nominal account?
- Ans: Cash account is a real account and Apple Limited Account is a personal account
- Q3: Which Golden Rule will be used to here?
- Ans: The Golden Rules in case of real account and personal account will be used here.
- Q4: Whether the accounts involved will be Debited or Credited?
The cash account will be debited because cash is coming into the business (debit is what comes in) and the Apple Limited Account will be credited because it is giving cash into the business (credit the giver). Thus, the journal entry will be:
Cash a/c-------------------Dr $6000
To Apple a/c---------------$6000
Things to remember
Dr. Should be in a straight line every time you post a Dr. Entry. And while posting a Cr. Entry there should be a little gap.
Anything A/c-------------------Dr. $300
Anything A/c-------------------Dr. $600
To Anyone A/c. $900