Using Debit and Credit, Journal and Ledger

Using Debit And Credit

The Double Entry System of accounting is based on the concept that every transaction has two equal and opposite effects. These effects are recorded using the terms Debit (Dr.) and Credit (Cr.). Understanding when to debit and when to credit is fundamental to maintaining accounting records under this system.

Debit and Credit are simply the left and right sides of an account, respectively. They represent increases or decreases in accounts, depending on the type of account. The rules for applying debit and credit are derived from the nature of the accounts involved in a transaction.

Rules Of Debit And Credit

To simplify the application of debit and credit rules, accounts are classified into different categories. There are two main approaches to account classification: the Traditional Approach and the Modern Approach (also known as the Accounting Equation Approach).

Traditional Approach (English Approach):

Classifies accounts into Personal Accounts and Impersonal Accounts (further divided into Real Accounts and Nominal Accounts).

• Personal Accounts: Accounts of persons or organisations (individuals, firms, companies).
  • Rule: Debit the Receiver, Credit the Giver.

  Example 1. Goods sold to Mr. Sharma on credit for ₹5,000.

  Answer:

  Mr. Sharma is receiving goods. Mr. Sharma's A/c is Personal A/c. Debit Mr. Sharma's A/c (Receiver). Sales A/c is Nominal A/c (Revenue). Credit Sales A/c (Income).

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  Example 2. Cash received from Mr. Gupta ₹3,000.

  Answer:

  Mr. Gupta is giving cash. Mr. Gupta's A/c is Personal A/c. Credit Mr. Gupta's A/c (Giver). Cash A/c is Real A/c (Asset). Debit Cash A/c (What comes in).
• Impersonal Accounts: Accounts that are not Personal Accounts.
  • Real Accounts: Accounts of assets (both tangible and intangible).
    • Rule: Debit what comes in, Credit what goes out.

    Example 3. Purchased furniture for cash ₹10,000.

    Answer:

    Furniture (Asset) is coming in. Furniture A/c is Real A/c. Debit Furniture A/c (What comes in). Cash (Asset) is going out. Cash A/c is Real A/c. Credit Cash A/c (What goes out).

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    Example 4. Paid cash into bank ₹20,000.

    Answer:

    Bank (Asset) is coming in (in terms of balance). Bank A/c is Personal A/c (Representative Personal A/c - Bank is an institution). Debit Bank A/c (Receiver). Cash (Asset) is going out. Cash A/c is Real A/c. Credit Cash A/c (What goes out). Note: Bank can be treated as Personal or Real (Cash at Bank), but Personal is more common in Traditional Approach.
  • Nominal Accounts: Accounts of expenses, losses, incomes, and gains.
    • Rule: Debit all Expenses and Losses, Credit all Incomes and Gains.

    Example 5. Paid salary ₹8,000.

    Answer:

    Salary is an Expense. Salary A/c is Nominal A/c. Debit Salary A/c (Expense). Cash (Asset) is going out. Cash A/c is Real A/c. Credit Cash A/c (What goes out).

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    Example 6. Received commission ₹2,000.

    Answer:

    Commission is an Income. Commission Received A/c is Nominal A/c. Credit Commission Received A/c (Income). Cash (Asset) is coming in. Cash A/c is Real A/c. Debit Cash A/c (What comes in).

Modern Approach (Accounting Equation Approach):

Classifies accounts into five main categories based on the Accounting Equation (Assets, Liabilities, Capital, Revenues, Expenses). The rules are based on how transactions affect these categories.

Assets = Liabilities + Capital

Revenues increase Capital, and Expenses decrease Capital.

Assets + Expenses = Liabilities + Capital + Revenues

(Expanding Capital: Capital at start + Fresh Capital + Revenues + Gains - Expenses - Losses - Drawings)

The rules are:

• Debit increases: for Assets and Expenses.
• Credit increases: for Liabilities, Capital, and Revenues.

Conversely:

• Credit decreases: for Assets and Expenses.
• Debit decreases: for Liabilities, Capital, and Revenues.

This approach directly links the debit/credit rules to the Accounting Equation, making it conceptually aligned with the fundamental structure of double-entry bookkeeping.

Answer:

Answer:

Answer:

Both approaches lead to the same result (which accounts are debited and credited), but the Modern Approach is often considered more intuitive as it directly relates to the impact of transactions on the Accounting Equation.

Books Of Original Entry

After identifying a transaction and preparing a voucher based on the source document, the next step in the accounting process is to record the transaction in the books of original entry. These are the first books where a transaction is systematically recorded.

Journal

The Journal is the primary book of original entry (or prime entry) in the Double Entry System. Transactions are recorded in the journal chronologically as they occur. The process of recording transactions in the journal is called Journalising.

Purpose of Journal:

• Provides a chronological record of all business transactions.
• Shows the two-fold effect of each transaction (which accounts are debited and credited).
• Provides a brief explanation of the transaction (Narration).
• Reduces the possibility of errors by recording the debit and credit aspects of a transaction at the same place.
• Provides information for subsequent posting to the Ledger.

Format of a Journal:

Ledger Folio (LF): A column used to note the page number of the Ledger account to which the journal entry is later posted.

Journal Entry Example:

Answer:

Answer:

In businesses with many similar transactions (like cash sales, credit sales, cash purchases), instead of journalising every single transaction, specialised journals called Subsidiary Books are used (e.g., Cash Book, Purchases Book, Sales Book, Purchases Return Book, Sales Return Book, Bills Receivable Book, Bills Payable Book). Transactions that cannot be recorded in subsidiary books are recorded in the main Journal, which is then called the Journal Proper.

The Ledger

The Ledger is the principal book of accounts where all transactions, after being initially recorded in the Journal or subsidiary books, are posted to individual accounts. It contains a summarised record of all transactions relating to a particular account at one place.

While the Journal provides a chronological record of transactions, the Ledger provides a summarised, classified record by account. It is often called the book of secondary entry or the book of final entry because entries from the journal are 'posted' to the ledger.

Purpose of Ledger:

• To know the net effect of all transactions relating to a particular account (e.g., the balance of Cash A/c, the amount owed by a specific Debtor, the total salary paid during a period).
• To provide information required for preparing the Trial Balance and Financial Statements.

Format of a Ledger Account:

Each account in the ledger is presented in a 'T' format, with a debit side (left) and a credit side (right).

Journal Folio (JF): A column used to note the page number of the Journal from which the entry is posted. This helps in cross-referencing.

Classification Of Ledger Accounts

Ledger accounts can be broadly classified into the same categories as used in the Modern Approach to Debit and Credit:

• Asset Accounts: E.g., Cash A/c, Bank A/c, Furniture A/c, Machinery A/c, Debtors A/c, Stock A/c. These generally show a Debit balance.
• Liability Accounts: E.g., Creditors A/c, Bank Loan A/c, Bills Payable A/c, Outstanding Expenses A/c. These generally show a Credit balance.
• Capital Account: Represents the owner's equity. Generally shows a Credit balance.
• Revenue (or Income) Accounts: E.g., Sales A/c, Interest Received A/c, Commission Received A/c. These generally show a Credit balance.
• Expense (or Loss) Accounts: E.g., Purchases A/c, Salary A/c, Rent A/c, Electricity A/c, Depreciation A/c. These generally show a Debit balance.

Understanding the normal balance (Debit or Credit) of each type of account is important for posting and preparing the Trial Balance. Assets and Expenses normally have Debit balances; Liabilities, Capital, and Revenues normally have Credit balances.

Posting From Journal

Posting is the process of transferring journal entries from the Journal to the relevant accounts in the Ledger. This is done periodically (e.g., daily, weekly, or monthly), not necessarily after every single transaction.

The process involves locating the appropriate account in the Ledger for each debit and credit entry in the Journal and transferring the date, amount, and a cross-reference (Journal Folio number).

Steps in Posting:

• Locate the first account debited in the Journal entry in the Ledger.
• On the debit side of that Ledger account, write the date, the name of the account that was credited in the journal entry (preceded by "To"), the Journal Folio number from the Journal page, and the amount.
• Go back to the Journal entry and note the Ledger Folio number (page number of the Ledger account) in the LF column next to the debited account name.
• Locate the account credited in the Journal entry in the Ledger.
• On the credit side of that Ledger account, write the date, the name of the account that was debited in the journal entry (preceded by "By"), the Journal Folio number, and the amount.
• Go back to the Journal entry and note the Ledger Folio number in the LF column next to the credited account name.
• Repeat for all entries in the Journal.

Example of Posting:

Answer:

Posting from subsidiary books (like Cash Book) is similar. Cash transactions from the Cash Book are posted to the debit or credit side of the relevant other accounts in the Ledger, noting the Cash Book page number in the JF column.

The Ledger is the ultimate destination of all recorded transactions, providing the balances needed to prepare the Trial Balance and subsequently, the Financial Statements.