Let us go through the nature of transactions and their treatment in our books of accounts. The following accounting entries are commonly used in every business and they come under the category of routine journal entries.
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S.No. |
Transaction Nature |
Analysis and Treatment |
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1 |
Capital |
Capital account is personal account. Whenever the owner introduces capital in the form of cash, goods or assets, the entry will be as here under:
(Being cash/goods/assets introduced as capital) |
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2 |
Drawing Account |
Drawing account is also a capital account. Whenever the owner of the business withdraws money for his personal use, it is called drawing. The balance of Drawing account is transferred to the capital account at the end of the accounting year.
(Being withdrawal of cash for personal use) |
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Notes: 1. Introduction of capital as well as withdrawal of capital may occur any time during the accounting year. 2. In addition to cash, there may be other expenses of the owner/proprietor which may pay directly on his behalf debating his account. For example, payment of his insurance, taxes, rent, electricity or personal phone bills. 3. Business account and personal account of proprietor are different as owner of the business and business, both are separate entities. |
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3 |
Trade Discount |
Trade discount is allowed by seller to buyer directly on their sales invoice. Buyer in this case are usually whole-sellers, traders or manufacturers, who further sell this material to their customers or use the material in their manufacturing process. Rate of discount may vary from customer to customer. Treatment - No need to pass any journal entry in this case. The sale is booked on the net of trade discount. Similarly, if we get trade discount from our supplier, we book our purchase at the net of trade discount. |
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4 |
Cash Discount |
Cash discount is also allowed by seller to his buyer; still it does not come in the category of trade discount. Cash discount is a sort of scheme to inspire their debtors to release their due payment in time. For example, a seller may allow 5% cash discount, if he gets payment within a week against the time limit of 45 days. Treatment - If A allowed a discount of 5% to B, then
(Being 5% discount allowed to B on payment of Rs........)
(Being payment of Rs xx made to A and getting a discount of 5%) Note - In the above case, discount is a loss to A and income to B. |
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5 |
Bad Debts |
Part of credit sale which is unrecovered from debtors due to some reason like insolvency, dishonesty, etc. are called bad debts of the company. Bad debts are loss to the company. Treatment: (1) To book bad debts
(Being loss on account of bad debts) (2) To recover bad debts
(Being recovery of bad debts) |
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6 |
Expenses on purchase of Goods |
There are a few types of expenses incurred on the purchases of goods like inward freight, octroi, cartage, unloading charges, etc. Treatment:
(Being freight charges paid on purchase of goods) |
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7 |
Expenses on Sale of Goods |
Expenses are also incurred while selling products to customers such as freight outward, insurance charges, etc. Treatment:
(Being freight charges paid on sale of goods) |
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8 |
Expenses on Purchase of Assets |
Sometimes we need to pay expenses on the purchase of fixed assets like transportation charges, installation charges, etc. Treatment: Expenses incurred on purchases of fixed asset are added in the value of fixed assets and could not be treated like expenses on purchases of goods:
(Expenses incurred on purchase of asset) |
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9 |
Payment of Expenses |
Treatment:
(Being expenses incurred) |
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10 |
Outstanding Expenses |
Sometimes expenses remain outstanding at the end of the financial year, but due to the accrual basis of accounting, we need to book those expenses which are due for payment and to be paid in the next accounting year. For example, the salary due on the last day of the accounting year to be paid in the next year. Treatment:
(Being salary for the month of .........due) |
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11 |
Prepaid Expenses |
Sometimes we pay expenses in advance such as insurance paid three months before the closing of the accounting year. Since insurance is usually paid for the whole year, in this case, the insurance for nine months is treated as prepaid insurance. Similarly, rent for the first month of next accounting year may be paid in advance. Treatment:
(Being prepaid expenses for month paid) Note: Expenses account is replaced with the respective head of expense account. |
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12 |
Income Received |
Treatment:
(Being Income received in cash) Note: Income account will be replaced with the respective head of Income account. |
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13 |
Banking Transactions |
(1) Cheque deposited in bank Cheque received from party is deposited in bank, Cheque direct deposit by party in our bank account, payment made by party through NEFT or RTGS, or cash directly deposited by party in our bank account. The entry remains same in all the above cases.
(2) Payment made to party through cheque Cheque issued to party or directly deposited in his bank account, or payment made through either by NEFT, RTGS, or cash directly deposited in his bank account. Entry remains same in all the above cases except in the case of cash deposited in his bank account.
(Being payment made through ..... ) If we deposit cash in his bank account, entry will be as follows:
(Being payment made through ..... ) (3) Cash withdrawn for office Expenses
(Being cash withdrawn from bank for office use) (4) Cash deposited with Bank
(Being cash withdrawn from bank for office use) Note: The above entries No. 3 & 4 are called ‘contra’ entries. (5) Bank charge debited by bank Sometimes banks debit from our account against some charges for service provided by them. For example, cheque book issuing charges, demand draft issuing charges, Bank interest, etc.
(Bank charges/commission/interest debited by bank) |
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14 |
Interest on Capital |
Interest on capital, introduced by sole proprietor or partners of the firm: This entry is passed on the last date of the accounting year as follows:
(Being interest @..... on capital provide) |
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15 |
Payment on behalf of others |
Some expenses may be on behalf of our debtors or creditors.
(Being expenses debited to party, paid on his behalf) |
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16 |
Advance received against supply of goods/services |
Sometimes the customers pay an advance amount for the supply of goods/services, which need to be adjusted later:
(Being advance received from xxxxxxxx) |
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17 |
Advance paid against supply of goods/services |
As above, we may also pay an advance amount to our supplier against supply of goods/services:
(Being advance paid against supply of goods/services) |
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