1,70 Jowrnalizing Transactions i Each of the above categories of accounts and the relevant rule for ‘debit and g have been explained in detail in the following pages: Tey Personal accounts Personal accounts include the accounts of persons with who; business deals. These accounts can be classified into the three categories, ty 1. Natural Personal Accounts The term ‘Natural Persons’ means persons Who creation of God. For example, Mohan’s Account, Sohan’s Account, Abha’s Account PY 2. Artificial Personal Accounts These accounts include accounts of corporate beg, or institutions which are recognised as persons in business dealings. For example, 4 account of a Limited Company, the account of a Co-operative Society, the account Club, the account of Government, the account of an Insurance Company etc, . 3. Representative Personal Accounts These are accounts which represent a cert Person or group of persons. For example, if the rent is due to the landlord, a outstanding rent account will be opened in the books. Similarly, for salaries due to th, employees (not paid), an outstanding salaries account will be opened. The outstand rent account represents the account of the landlord to whom the rent is to be pat while the outstanding salaries account represents the accounts of the Persons ty whom the salaries have to be paid. All such accounts are, therefore, termed a ‘Representative Personal Accounts’. The rule is: > DEBIT THE RECEIVER > CREDIT THE GIVER For example, if cash has been paid to Ram, the account of Ram will have to be debited. Similarly, if cash has been received from Keshav, the account of Keshav will have to be credited. Real accounts Real accounts may be of the following types: 1. Tangible real accounts Tangible Real Accounts are those which relate to such things which can be touched, felt, measured etc, Examples of such accounts até cash account, building account, furniture account, stock account, etc. It should be noted that bank account is a personal account; since it represents the accoul! of the banking company—an artificial person. . Intangible real accounts These accounts represent such things which cannot be touched. Of course, they can be measured in terms of money. For example patents account, goodwill account, etc, nv The rule is: 3" peprr wHar Comes IN i Vat a 2, QREDIT WHAT GOES OUTCO _———— i Journalizing Transactions 1.71 For example, if building has been purchased for cash, building account should be debited (since it is coming into the business) while cash account should be credited (since cash is going out of the business). Similarly when furniture in urchased for cash, furniture account should be debited while the cash account should be credited. | Nominal accounts These accounts are opened in the books to simply explain the nature of the transactions. They do not really exist. For example, in a business, salary is paid to the manager, rent is paid to the landlord, commission is paid to the salesman—cash goes out of the business and it is something real; while salary, rent or commission as. such do not exist. The accounts of these items are opened simply to explain how the cash has been spent. In the absence of such information, it may be difficult for the person concerned to explain how the cash at his disposal was utilised. Nominal Accounts include accounts of all expenses, losses, The examples of such accounts are rent, rates li fire, etc. incomes and gains. ighting, insurance, dividends, loss by The rule is: > DEBIT ALL EXPENSES AND LOSSES > CREDIT ALL GAINS AND INCOMES ; Tutorial Note, Both Real Accounts and Nominal Accounts come in the category of Impersonal Accounts. The student should note that when some prefix or suffix is added to a Nominal Account, it becomes a Personal Account. A table is being given to explain the above rule: Nominal Account Personal Account 1. Rent account Rent prepaid account, Outstanding rent account. Outstanding interest account, Interest received Prepaid interest account. 2. Interest account in advance account, 3. Salary account Outstanding salaries account, Prepaid salaries account. 4. Insurance account Outstanding insurance account, Prepaid insurance account. 5. Commission account Outstanding commission account, Prepaid commission account. a. E Tiustravion 4.1. From the following transactions find out the nature of account and also state which account should be debited and which account should be credited. (a) Rent paid. (5) Salaries paid. (c) Interest received. (d) Dividends received. (€) Furniture purchased for cash. (/) Machinery sold. (g) Outstanding for salaries. (A) Telephone charges paid. (i) Paid to Suresh. (J) Received from Mohan (the proprietor). (&) Lighting.1.72. Journalizing Transactions SovuTion: Nominal A/c (a) | Rent paid Rent A/c Cash Ac Real Ne Cred (b) | Salaries paid Salaries A/c Nominal A/c Debit Cash Ale Real A/c _ | Cred Real Ale Deb ived Cash Ale - (c) | Interest recei eve eee | ce ~o ; Real Ale Debr dy | Dividends received Cash Ale 7 ee Dividends A/c Nominal A/c Cred Zy | Fumiture purchased | Furniture A/c Real Ale Debi Cash A/c Real A/c Credit 1 | Machinery sold Cash Ale Real Ave Debi Machinery A/c Real A/c Credit () | Outstanding for salaries | Salaries A/c Nominal Ave Debit Outstanding Personal A/c Credit ie Salaries A/c (iy | Telephone charges paid | Telephone Charges Ale | Nominal A/c Debit 4 Cash A/c Real A/c Credit (@ | Paid to Suresh Suresh Personal A/c Debit L Cash A/c Real A/c Credit @ | Received from Mohan | Cash Ale Real Ale Debit (the proprietor) Capital A/c Personal A/c Credit (A) | Lighting Lighting A/c Nominal A/c Debit Cash A/c Real Ale Credit The journalising of the various transactions is explained now with the help of th following illustration: TLiustration 4.2. Ram starts a business with capital of €20,000 on January 1, 2011. In this case there are two accounts involved. They are: () The account of Ram. (i) Cash Account. Sovution: 1, Ram is natural person and, therefore, his account is a Personal Account. Cash Account is a tangible ® and, therefore, it is a Real Account. As per the rules of Debit and Credit, applicable to Personal Accot! Ram is the giver and, therefore, his account, ie., Capital Account should be credited. Cash is coming it business and, therefore, as per the rules applicable to Real Accounts, it should be debited. The transactio ' now be entered in the Journal as follows: Journal| a ACCOUNTING PROCESS : JOURNAL AND LEDGER 8.7 These are explained below : (1) Assets Accounts ; Assets accounts are those which relate to the economic resources of an enterprise, such as cash in hand, cash at bank, debtors, stock, investments, furniture, machinery, building etc. (2) Liabilities Accounts : Liabilities accounts relate to the amounts payable by an enterprise to outsiders such as creditors, outstanding expenses, bank overdraft, bills payable, loan from bank etc. (3) Capital Accounts : Capital accounts relate to the owners of an enterprise such as capital account of owner, capital accounts of partners, drawings account, current accounts of partners. (4) Revenue Accounts : These accounts relate to sale of goods, rendering of service or permitting others to use enterprise resources yielding interest, royalty and dividend. Examples of revenue accounts are sales, discount received, bad debts recovered, interest received, commission received, subscription received etc. Rules for debit and credit are same for accounts of gains also. (5) Expenses Accounts : These accounts relate to the costs which are incurred in the process of obtaining revenue through the use or consumption of goods and services. Accounts of purchases, wages, salaries, discount allowed, depreciation etc. are expenses accounts. Rules for debit and credit are same for accounts of losses also, such as loss by fire. RULES FOR DEBIT AND CREDIT (TRADITIONAL) Rules for debit and credit when accounts are classified as personal, real and nominal are as follows : of Account | __Ruslesfor debit |" Rules for credit (1) Personal Account | Debit the receiver | Credit the giver (2) Real Account Debit what comes in Credit what goes out (3)_Nominal Account | Debit all expenses and losses Credit all incomes and gains ILLUSTRATION 2. From the following transactions, state the nature of the account according to the traditional classification and also state which account will be debited and which account will be credited: 1. Ashok started business with ® 2,00,000. 2. Purchased goods for cash & 50,000. 3. Purchased furniture for cash % 40,000. 4. Sold goods for cash & 10,000. 5. Purchased goods on credit from Birbal 20,000. _—— ——— TAxmann®OE 88 ACCOUNTING PROCESS : JOURNAL AND LEDGER 6. Purchased goods for cash € 80,000. 2. Sold goods on credit to Chander & 15,000. 8 Cash deposited in bank & 10,000. 9. Cash paid to Birbal ® 5,000. 10. Received cash from Chander & 10,000. 11. Paid wages & 1,000. 12. Cash withdrawn by Ashok for personal use ® 2,000. SOLUTION 1. Ashok started business with % 2,00,000 (a) Cash Account — Real — Debit (Debit what comes in) (b) Capital Account > Personal > Credit (Credit the giver) 2. Purchased goods for cash % 50,000 (a) Purchases Account -> Nominal -> Debit (Debit expense and loss) (b) Cash Account -> Real — Credit (Credit what goes out) 3. Purchased furniture for cash & 40,000 (a) . Furniture Account Real > Debit (Debit what comes in) (b) Cash Account — Real — Credit (Credit what goes out) 4. Sold goods for cash & 10,000 (a) Cash Account — Real -> Debit (Debit what comes in) (b) Sales Account -» Nominal — Credit (Credit income and gait) 5. Purchased goods on credit from Birbal ® 20,000 (a) Purchases Account -> Nominal - Debit (Debit expense and loss) (b) Birbal Account — Personal > Credit (Credit the give? 6. Purchased goods for cash ® 80,000 (a) Purchases -» Nominal > Debit (Debit expense and os! (b) Cash Account -» Real -> Credit (Credit what goes!” 7. Sold goods on credit to Chander @ 15,000 (a) Chander Account -» Personal -> Debit (Debit the eve” 6) Sales Account -» Nominal + Credit (Credit income and 8 8. Cash deposited in bank € 10,000 a) (a) - Bank Account -» Personal -» Debit (Debit the rece (6) Cash Account -» Real — Credit (Credit what 2085" 9. Cash paid to Birbal © 5,000 vet) (a) Birbal Account + Personal -» Debit (Debit the eee (6) Cash Account ~ Real -> Credit (Credit what 60% ” —_——_—— TAXMANN® ae —_[ | | 10. (6) Cash Account - Real > Credit 12. Cash withdrawn by Ashok (@) Drawings Person; (6) Cash Account > Re: RULES FOR DEBIT AND CR Rules for debit and credit when a capital, revenue, expenses or drawi for Personal use & 2,000 al Debit . ‘al ~ Credit 8.9 (Debit what comes in) (Credit the giver) (Debit expenses and loss) (Credit what B0es out) (Debit the receiver) (Credit what Boes out) EDIT (MODERN) ‘counts are classified as assets, liabilities, ings are as follows : qa (3) Dr. Assets Cr. Dr. Liabilities Cr. Increase Decrease Decrease Increase (@® oO oO «) (2) @ Dr. Expenses Cr Dr. Capital Cr Increase Decrease Decrease Increase () oO oO () (5) Dr, Revenues Cr Decrease Increase ) (+) The rules for debit and credit relatin, marised below: ig to all the five types of accounts are sum- (1) Q) @) (4) (5) ‘Account. Rules for debit Rules for credit Assets Accounts Expenses Accounts Liabilities Accounts Debit the increase Debit the increase Debit the decrease Credit the decrease Credit the decrease Credit the increase Capital Accounts Debit the decrease Credit the increase unt Revenue Accounts Debit the decrease Credit the increaseSn 8.10 ACCOUNTING PROCESS : JOURNAL AND LEDGER ILLUSTRATION 3. From the following transactions, state the nature of accounts according to the moden, classification and state which account will be debited and which account will be credite 1. Ashok started business with & 2,00,000. 2. Purchased goods for cash ® 50,000. 3. Purchased furniture for cash & 40,000. 4. Sold goods for cash ® 10,000. 5. Purchased goods on credit from Birbal € 20,000. 6. Purchased goods for cash % 80,000. 7. Sold goods on credit to Chander & 15,000. 8. Cash deposited in bank % 10,000. 9. Cash paid to Birbal @ 5,000. 10. Received cash from Chander ® 10,000. 11: Paid wages ® 1,000. Cash withdrawn by Ashok for personal use % 2,000. 12, SOLUTION : 1. Ashok started business with ® 2,00,000 (a) Cash Account - Asset — Debit (Increase in asset) (6) Capital Account > Capital + Credit (Increase in capital) 2. Purchased goods for cash ® 50,000 . (a) Purchases Account -> Expense — Debit (Increase in expen) (b) Cash Account - Asset -> Credit (Decrease in asse!) 3, Purchased furniture for cash ® 40,000 (a) Furniture Account > Asset > Debit (Increase in ass (b) Cash Account > Asset -> Credit (Decrease in ass) 4. Sold goods for cash & 10,000 (a) Cash Account -» Asset -> Debit (increase in a8) (6) Sales Account > Revenue - Credit (Increase in revert 5. Purchased goods on credit from Birbal % 20,000 ) (a) Purchases Account -» Expense + Debit (Increase in ce in) () Birbal Account > Liability + Credit (increase in lab 6. Purchased goods for cash ® 80,000 expe) (a) Purchases Account -» Expense -> Debit (Increase 7 © asst) (Decrease (6) Cash Account -» Asset -> Credit TAXMANN® _ _-ACCOUNTING PROCESS : JOURNAL AND LEDGER 8.11 son credit to Chander ® 15,000 t > Debit (Increase in asset) (Increase in revenue) sold good (a) Chander Account + Asset (b) Sales Account > Revenue — Credit Cash deposited in bank & 10,000 7 (Increase in asset) , (a) Bank Account > Asset —> Debit (6) Cash Account — Asset > Credit (Decrease in asset) 9, Cash paid to Birbal € 5,000 (a) Birbal Account > Liabilities > Debit (Decrease in liabilities) (b) Cash Account > Asset — Credit (Decrease in asset) 10. Received cash from Chander ® 10,000 (a) Cash Account — Asset > Debit (Increase in asset) (Decrease in asset) (b) Chander Account — Asset > Credit 11. Paid wages @ 1,000 (a) Wages Account > Expense > Debit (Increase in expense) (Decrease in asset) (b) Cash Account — Asset > Credit personal use € 2,000 12. Cash withdrawn by Ashok fo’ (a) Drawings Account -> Drawings > Debit (Decrease in capital) (b) Cash Account > Asset > Credit (Decrease in asset) RECORDING OF TRANSACTIONS IN JOURNAL Journal is a basic book of original entry. It is a book in which transactions are recorded in the order in which they take place. Thus Journal is a chronological record containing the individual transactions. It provides chronological record of all transactions with details of the accounts debited and credited, and the ate money columns for debits amount of each transaction. Journal has separ and credits. The process of recording a t entry made is called a journ: is called posting. The format of journal is as follows : FORMAT OF JOURNAL ransaction in the journal is called journalising. The al entry. The transfer of journal entry to an account te TAXMANN® ——————____——_________