Rules of Debit And Credit-Journal: NBSE Class 9 Book Keeping

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Get summaries, questions, answers, solutions, notes, extras, theories, practicles, PDF, and guide of Chapter 4 Rules of Debit And Credit-Journal, NBSE Class 9 Book Keeping (BK) textbook, which is part of the syllabus of students studying under Nagaland Board. These solutions, however, should only be treated as references and can be modified/changed.

Summary

In business, many types of transactions take place, such as buying and selling goods, paying and receiving money. Every transaction must be recorded properly with supporting documents like cash memos, invoices, and cheques. These documents are called source documents. Transactions are first recorded in the journal, following the rules of debit and credit, before being transferred to the ledger.

The words “debit” and “credit” come from Latin. Debit means “what is due to that account,” and credit means “what is due from that account.” In simple terms, debit is used when something is received, while credit is used when something is given. In accounting, every account has two sides: the left side is called the debit side, and the right side is the credit side. If money is paid to a creditor, the creditor’s account is debited. If money is received from a debtor, the debtor’s account is credited.

An account is a record of all transactions related to a particular item or person. It shows the amount, the direction of money flow, and the effect of each transaction. Accounts are usually drawn in a “T” format, with separate sides for debit and credit.

There are two ways to classify accounts: the traditional approach and the modern approach.

Under the traditional approach, accounts are divided into personal and impersonal accounts. Personal accounts are related to individuals or organisations. They are further divided into natural personal accounts (for human beings), artificial personal accounts (for companies, banks, and institutions), and representative personal accounts (which represent people, such as outstanding rent). The rule for personal accounts is: “Debit the receiver, credit the giver.”

Impersonal accounts are divided into real accounts and nominal accounts. Real accounts deal with assets, which can be tangible (land, buildings, cash) or intangible (goodwill, trademarks). The rule for real accounts is: “Debit what comes in, credit what goes out.” Nominal accounts deal with business expenses, losses, incomes, and gains, such as salaries, rent, and sales. The rule for nominal accounts is: “Debit all expenses and losses, credit all incomes and gains.”

In the modern approach, accounts are divided into five categories: assets, liabilities, capital, revenue, and expenses. In asset accounts, an increase is debited, and a decrease is credited. In liability accounts, an increase is credited, and a decrease is debited. Capital follows the same rule as liabilities. Revenue accounts are credited when income increases and debited when it decreases. Expense accounts are debited when costs rise and credited when they fall.

A journal is a book where transactions are first recorded in order of occurrence. It is called the book of original entry. Each entry is written in a specific format, showing the date, the accounts involved, the amounts, and a short description called a narration.

There are different types of journal entries. A simple journal entry affects only two accounts, while a compound journal entry affects more than two. An opening entry is made at the beginning of a new accounting year to carry forward the closing balances from the previous year.

Discounts are of two types: trade discount and cash discount. A trade discount is given to encourage bulk purchases and is not recorded in the books. A cash discount is given to encourage quick payments and is recorded separately.

Recording transactions in the journal ensures that no entry is missed, helps in tracking money flow, and makes it easier to post entries into the ledger. However, journals have limitations, such as being time-consuming for large businesses.

Understanding the rules of debit and credit is necessary for accurate financial records. By following these rules, businesses can keep track of their transactions and prepare financial statements correctly.

Textbook solutions

Multiple Choice Questions (MCQs)

1. Out of the following the Artificial Personal Account is:

(a) Account of Insurance Company
(b) Ram’s Account
(c) Outstanding Salary Account
(d) Drawings Account

Answer : (a) Account of Insurance Company

2. Out of the following Representative Personal Account is:

(a) Shyam’s Account
(b) Bank Account
(c) Prepaid Insurance Account
(d) Cash Account

Answer : (c) Prepaid Insurance Account

3. The Rule of Real Account is:

(a) Debit all expenses and credit all incomes
(b) Debit what comes in and credit what goes out
(c) Debit the Receiver and Credit the Giver
(d) Debit the Giver and Credit the Receiver

Answer : (b) Debit what comes in and credit what goes out

4. The Rule of Nominal Account is:

(a) Debit what comes in and credit what goes out
(b) Debit what goes out and credit what comes in
(c) Debit all expenses and losses and credit all incomes and gains
(d) Debit all incomes and gains and credit all expenses and losses

Answer : (c) Debit all expenses and losses and credit all incomes and gains

5. Cash discount is given:

(a) On cash payment
(b) On sale of goods
(c) On purchase of goods on credit
(d) On receipt of cash before time

Answer : (d) On receipt of cash before time

6. Real accounts are related to

(a) Assets
(b) Expenses, losses and incomes
(c) Debtors, Creditors etc.
(d) None of these

Answer : (a) Assets

7. Out of the following which is a feature of Journal:

(a) Journal is a book in which all the transactions are recorded, as and when they take place.
(b) A Journal has record of daily transactions, as and when they take place.
(c) In Journal, all the transactions are recorded in chronological order.
(d) All of the above.

Answer : (d) All of the above.

8. Goods worth 7,000 given away as charity would be credited to:

(a) Sales A/c
(b) Purchases A/c
(c) Charity A/c
(d) Trustee A/c

Answer : (b) Purchases A/c

9. In case of Personal Accounts, the rule of Journalising are:

(a) Debit the receiver and credit the giver
(b) Debit what comes in and credit what goes out
(c) Debit the expenses and losses and credit the incomes and gains
(d) Debit increase and Credit decrease.

Answer : (a) Debit the receiver and credit the giver

10. What shall be the amount of Capital if Cash is 5,000; Furniture ₹ 12,000; Stock ₹ 30,000 and Creditors ₹ 6,000?

(a) 53,000
(b) 47,000
(c) 41,000
(d) 52,000

Answer : (c) 41,000

11. Which account in the following will be credited on giving of goods in donation?

(a) Purchases Account
(b) Sales Account
(c) Donation Account
(d) Cash Account

Answer : (a) Purchases Account

12. The Types of Accounts are:

(a) One
(b) Two
(c) Three
(d) Four

Answer : (c) Three

13. Goods taken for personal use are called

(a) As Asset
(b) Liability
(c) Capital
(d) Drawings

Answer : (d) Drawings

14. Total assets in a business are ₹ 8,00,000 and total liabilities are ₹ 5,00,000. The difference is called:

(a) Income
(b) Expenses
(c) Capital
(d) Goodwill

Answer : (c) Capital

True/False

1. Journal is the book of secondary entry.

Answer: False

2. Opening entry is the first entry of everyday.

Answer: False

3. Debit means on increase in liability and decrease in Asset.

Answer: False

4. Withdrawal of cash from business by Proprietor should be debited to drawings account.

Answer: True

Assertion Reason Based Questions

Choose the correct option: 

A. Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of the Assertion (A).
B. Both Assertion, (A) and Reason (R) are correct but Reason (R) is not the correct explanation ofAssertion (A).
C. Only Assertion (A) is correct. 
D. Only Reason (R) is correct.

1. Assertion: Compound entry is also known as combined entry. 
Reason: Compound entry is an entry in which more than two accounts are affected 

Answer: (A)

2. Assertion: The books in which a transaction is recorded for the first time from source document are called ‘Books of Original Entry.’ 
Reason: Journal means a book which records all monetary transactions on yearly basis.

Answer: (C)

Statement Based Questions

Choose the correct option from the options given below : 

A. Statement I is true and II is false. 
B. Statement II is true and I is false. 
C. Both the statements are false. 
D. Both the statements are true. 

1. Statement I: The form in which a transaction is recorded in the Journal is called a Journal Entry. 
Statement II: The transfer of Journal entry to a Ledger Account is called Posting. 

Answer: (D)

2. Statement I: Every business opens new books of accounts on the first day of the new year. It is called opening entry. 
Statement II: Closing Balances of last year have to be carried forward to the next year it is the first entry in each year’s Journal.

Answer: (D)

Short Answer Type-l Questions

1. What is an account?

Answer : An account is a summarised record of all business transactions at one place relating to a particular head. It records not only the amount of transactions but also their effect and direction.

2. Write the type of accounts according to traditional approach.

Answer : The types of accounts according to the traditional approach are:

(i) Personal Accounts
(ii) Impersonal Accounts, which include:
(a) Real Accounts
(b) Nominal Accounts

3. What is a Real Account?

Answer : A Real Account is an account that relates to assets which can be tangible (such as Land, Plant, Building, Cash, Stock, Furniture) or intangible (such as Goodwill, Trademarks, Patent rights).

4. Write the examples of Artificial Account.

Answer : Examples of Artificial Accounts include accounts of firms, clubs, companies, schools, colleges, universities, hospitals, government offices, municipal corporations, improvement trusts, and banks. These are recognized as artificial persons in the eyes of the law.

5. Under Modern Approach, write the types of accounts.

Answer : Under the Modern Approach, the types of accounts are:

• Assets Accounts
• Liabilities Accounts
• Capital Accounts
• Revenue Accounts
• Expenses Accounts

6. Write the rules of debit and credit under Modern approach.

Answer : The rules of debit and credit under the Modern approach are:

• Assets Account: Increase in assets is debited, and decrease in assets is credited.
• Liabilities Account: Increase in liabilities is credited, and decrease in liabilities is debited.
• Capital Account: Increase in capital is credited, and decrease in capital is debited.
• Revenue or Income Account: Increase in income is credited, and decrease in income is debited.
• Expenses or Losses Account: Increase in expenses or losses is debited, and decrease in expenses or losses is credited.

7. Define Journal.

Answer : A Journal is a book in which transactions are recorded in the order in which they occur, i.e., in chronological order. It is called the book of original entry because all business transactions are entered first in this book.

8. Mention any two features of Journal.

Answer : Two features of Journal are: (i) It is a book of original entry because transactions are recorded first of all in Journal, as and when they take place. (ii) In Journal, all the transactions are recorded in a chronological order, i.e., date-wise.

9. What do you mean by Opening Entry?

Answer : An opening entry is the first entry made in the Journal at the beginning of each accounting year to record the closing balances of assets and liabilities from the previous year. It involves debiting all asset accounts and crediting all liability and capital accounts to carry forward the balances to the new accounting period.

10. What is cash discount?

Answer : Cash discount is a concession allowed to the debtor for payment of the amount due from him before the due date or within a stipulated period. It induces the debtor to settle his accounts at the earliest. Cash discount, received or allowed, is recorded separately in the books.

Short Answer Type-II Questions

1. Explain the terms debit and credit.

Answer : The term debit is derived from the Latin word ‘debitur’, which means due for that, and it represents the benefit-receiving aspect of a transaction. The term credit is derived from the Latin word ‘creder’, which means due to that, and it represents the benefit-giving aspect of a transaction. By convention, the left-hand side of any account is called the debit side, and the right-hand side is called the credit side. An item recorded on the debit side signifies that value has flowed to the named account, while an item recorded on the credit side signifies that value has flown from the source indicated by the name of the account. Debit and credit are essentially additions to or subtractions from an account.

2. What do you mean by an account? Draw the format of an account.

Answer : An account is a summarised record of all business transactions at one place relating to a particular head. It records not only the amount of transactions but also their effect and direction.

3. What are the different types of the Accounts? Give examples.

Answer : The different types of accounts are classified as follows:

(i) Personal Accounts: These represent the accounts related to individuals, firms, societies, clubs, hospitals, etc. Examples include Preeti’s Account, Anil’s Account, Richard’s Account (Natural Personal Accounts); M/s Carter Brothers A/c, Om Mill’s A/c, Bank A/c (Artificial Personal Accounts); and Outstanding Rent A/c, Prepaid Insurance A/c (Representative Personal Accounts).

(ii) Real Accounts: These are tangible or intangible assets that can be touched and seen or measured in terms of money. Examples include Land Account, Plant Account, Building Account, Cash Account, Stock Account, Furniture Account (Tangible Real Accounts); Goodwill A/c, Trademarks A/c, Patent Rights A/c (Intangible Real Accounts).

(iii) Nominal Accounts: These relate to business expenses, losses, gains, and revenues. Examples include Salaries Account, Wages Account, Loss of Goods by Fire Account, Interest Received Account, Sales Account, Repairs Account, Commission Received Account.

4. Explain the types of Personal Accounts.

Answer : Personal Accounts can be classified into three categories:

(i) Natural personal accounts: These accounts relate to human beings. For example: Preeti’s Account, Anil’s Account, Richard’s Account, etc.
(ii) Artificial personal accounts: These relate to corporate bodies or institutions which are recognised as artificial persons in the eyes of law, such as accounts of firms, clubs, companies, schools, colleges, universities, hospitals, government offices, municipal corporations, improvement trust, banks, etc.
(iii) Representative personal accounts: These are accounts which represent a certain person or a group of persons. For example, if rent is due to the landlord, an Outstanding Rent Account will be opened in the books. The Outstanding Rent Account represents the amount of rent payable to the landlord.

5. Write the Rules of Personal Account, Real Account and Nominal Account.

Answer : The rules for Personal Account, Real Account, and Nominal Account are as follows:

(i)  Personal Account :

• Debit the Receiver
• Credit the Giver

(ii) Real Account :

• Debit what comes in
• Credit what goes out

(iii)   Nominal Account :

• Debit all Expenses and Losses
• Credit all Incomes and Gains

6. Explain the Accounts under Modern Approach with examples.

Answer : Under the Modern Approach, accounts are classified into five categories:

• Assets Accounts : These accounts record increases in assets on the debit side and decreases in assets on the credit side. For example, an increase in the amount of cash is recorded on the debit side of the Cash Account.
• Liabilities Accounts : These accounts record increases in liabilities on the credit side and decreases in liabilities on the debit side. For example, if a business takes a loan, the Loan Account is credited.
• Capital Accounts : These accounts record increases in capital on the credit side and decreases in capital on the debit side. For instance, if the proprietor introduces additional capital, the Capital Account is credited.
• Revenue or Income Accounts : These accounts record increases in income on the credit side and reductions in income on the debit side. For example, interest received is credited to the Interest Received Account.
• Expenses or Losses Accounts : These accounts record increases in expenses on the debit side and reductions in expenses on the credit side. For example, salaries paid are debited to the Salaries Account.

7. What is a Journal? Why is it called a book of original entry?

Answer : A Journal is a book in which transactions are recorded in the order in which they occur, i.e., in chronological order. It is called a book of original entry because every transaction is first recorded in the Journal and subsequently transferred to the ledger, which is the principal book of accounts. The word ‘Journal’ has been derived from the French word ‘jour,’ which means ‘a day.’ Trader records his total daily transactions in it. The process of recording the transactions into the Journal is called Journalising.

8. What is a Compound Entry? Give example.

Answer : A Compound Entry is an entry in which more than two accounts are affected. A compound entry may require that two or more accounts be debited or two or more accounts be credited. For example, a debt of ₹6,000 due from Kevi (Debtor) has been discharged by receipt of ₹5,820 cash and ₹180 allowed as a discount. The transaction affects three accounts as follows: Cash A/c (Asset A/c) increased, Discount Allowed A/c (Expense A/c) debited because it is an expense or loss for the business, and Kevi (Debtor) (Asset A/c) credited because it is an asset.

9. What are the types of discounts? Explain them.

Answer : The types of discounts are: (i) Trade Discount: It is a concession given by a supplier from the list price of goods or services on business considerations other than for prompt payment. Trade discount is not recorded while recording the business transactions. Entry for the purchase or sale of goods at trade discount is recorded with the net amount (i.e., list price – trade discount). It may be allowed on cash or credit transactions.

(ii) Cash Discount: It is a concession allowed to the debtor for payment of the amount due from him before the due date or within a stipulated period. It induces the debtor to settle his accounts at the earliest. Cash discount, whether received or allowed, is recorded separately in the books. Cash discount allowed is debited to the Discount Allowed Account, and cash discount received is credited to the Discount Received Account.

10. What figures is an opening entry? Explain with the help of an example using imaginary figures.

Answer : An opening entry is the first entry in each year’s Journal, made to record the previous year’s closing balances of all the assets and liabilities. In this entry, the accounts of all assets are debited because assets always show debit balances, and the accounts of liabilities and capital are credited because they always show credit balances. If the balance of the capital account is not given in the question, it can be calculated as follows: Total debits – Total credits = Capital.

Long Answer Type Questions

1. Explain the classification of Accounts under traditional and modern approach

Answer :Under the Traditional Approach, accounts are classified into Personal, Impersonal (which includes Real and Nominal accounts).

Personal Accounts relate to individuals, firms, societies, clubs, hospitals, etc. These can be further classified into three categories:

• Natural Personal Accounts: These accounts relate to human beings, for example, Preeti’s Account, Anil’s Account, Richard’s Account, etc.
• Artificial Personal Accounts: These relate to corporate bodies or institutions which are recognized as artificial persons in the eyes of law, such as accounts of firms, clubs, companies, schools, colleges, universities, hospitals, government offices, municipal corporations, improvement trust, banks, etc.
• Representative Personal Accounts: These represent a certain person or a group of persons. For example, if rent is due to the landlord, an Outstanding Rent Account will be opened in the books.

Impersonal Accounts include all accounts that are not personal accounts, such as assets, losses, expenses, incomes, etc. It contains two types of accounts:

• Real Accounts: These may be classified into Tangible Real Accounts (relating to assets that can be touched and seen, e.g., Land Account, Plant Account, Building Account, Cash Account, Stock Account, Furniture Account) and Intangible Real Accounts (relating to assets that cannot be touched physically but can be measured in terms of money, e.g., Goodwill Account, Trademarks Account, Patent Rights Account).
• Nominal Accounts: These relate to business expenses, losses, gains, and revenues, e.g., Salaries Account, Wages Account, Loss of Goods by Fire Account, Interest Received Account, Sales Account, Repairs Account, Commission at Sales Received Account, etc.

Under the Modern Approach, accounts are classified into five categories:

• Assets Accounts
• Liabilities Accounts
• Capital Accounts
• Revenue Accounts
• Expenses Accounts

The rules of debit and credit under both approaches give the same trading results, and the balance sheet reflects the same state of affairs of the business.

2. Define Journal. Explain its needs and advantages.

Answer : A Journal is a book in which transactions are recorded in the order in which they occur, i.e., in chronological order. The word ‘Journal’ has been derived from the French word ‘jour,’ which means ‘a day.’ It is called the book of original entry because all business transactions are entered first in this book.

The needs for a Journal include:

• Providing a permanent record of transactions.
• Ascertaining the true nature of transactions with the help of narration.
• Maintaining the identity of each transaction.
• Facilitating convenient recording of transactions.

The advantages of a Journal are:

• Minimal omission: Each transaction is recorded as soon as it takes place, so there is rarely any possibility of transactions being omitted from the books of account.
• Aversion of errors: For each transaction, the concerned accounts to be debited and credited are clearly stated in the journal, minimizing mistakes in posting transactions into the ledger.
• Provides an explanation of the transaction: From the journal, an adequate explanation of each entry may be obtained as every entry is supported by narration relating to that transaction.
• Provides a chronological record of all transactions: Since each transaction in the journal is recorded in chronological order, the order in which they occur is permanently recorded.

3. Write a note on:

(i) Compound Journal Entry

Answer : A Compound Journal Entry is an entry in which more than two accounts are affected. A compound entry may require that two or more accounts be debited or two or more accounts be credited. The compound entry is also termed as combined entry. For example, a debt of ₹6,000 due from Kevi (Debtor) has been discharged by receipt of ₹5,820 cash and ₹180 allowed as discount. This transaction affects three accounts as follows: Cash A/c (Asset A/c) has increased, Discount Allowed A/c (Expense A/c) is debited because it is an expense or loss for the business, and Kevi (Debtor) (Asset A/c) is credited because it is an asset.

(ii) Opening Journal Entry

Answer : Every business opens new books of accounts on the first day of the new year. Since the closing balances of the last year have to be carried forward to the next year, the first entry in each year’s Journal will be to record the previous year’s closing balances of all the assets and liabilities. This is called the opening entry. In this entry, the accounts of all assets are debited because assets always show debit balances, and the accounts of liabilities and capital are credited because they always show credit balances. If the balance of the capital account is not given in the question, it can be calculated as follows: Total debits – Total credits = Capital. The opening journal entry is written as: Assets A/c Dr. (Individually) To Liabilities A/c (Individually) To Capital A/c (Being the opening entry for balance brought forward). In case the capital is given in the question and the difference comes on the debit side, it is treated as goodwill. If the difference comes on the credit side, it is treated as capital reserve. Normally, this happens when a running business with assets and liabilities is purchased for a certain price. If the price paid is more than the net assets (assets less liabilities), it is a capital loss (non-recurring) and is treated as paid for goodwill. But if the price paid is less than the net assets, it is a capital profit (non-recurring) and is transferred to the capital reserve account.

(iii) Discounts

Answer : A reduction in amount, either to encourage more purchase or prompt payment, is called a Discount. A discount may be classified into: (i) Trade Discount (ii) Cash Discount

Trade Discount is a concession given by a supplier from the List Price of goods or services on business considerations (such as purchase of a specific quantity, trade practices, etc.) other than for prompt payment. Trade discount is not recorded while recording the business transactions. Entry for the purchase or sale of goods at trade discount is recorded with the net amount (i.e., list price – trade discount). It is to be remembered that trade discount may be allowed on cash or credit transactions.

Cash Discount is a concession allowed to the debtor for payment of the amount due from him before the due date or within a stipulated period. It induces the debtor to settle his accounts at the earliest. Cash Discount, received or allowed, is recorded separately in the books. Cash discount is allowed when payment is received and cash discount is received when a payment is made. Cash discount allowed is debited to Discount Allowed Account, and cash discount received is credited to the Discount Received Account. Sometimes, both the discounts are allowed to a customer, i.e., trade discount and cash discount. In such a case, first, trade discount is deducted from the price of the goods, and then, cash discount is calculated on the balance of the amount.

Practical Problems

Questions

1. Enter the following transactions in the Journal of Noah:

Date	Particulars	₹
April 1	Noah started business with cash	40,000
April 2	Purchased goods for cash	10,000
April 4	Purchased goods from Grayson	8,000
April 5	Purchased Furniture for cash	7,000
April 7	Sold goods for cash	12,000
April 9	Sold goods to Owen	25,000
April 10	Paid cash to Grayson	5,000
April 12	Received cash from Owen	20,000
April 16	Purchased goods from Ryan for cash	7,000
April 17	Purchased goods from Ryan	4,000
April 19	Sold goods to Henry	8,000
April 20	Bought Machinery for cash	50,000
April 24	Withdrew cash from office for personal use	2,000
April 27	Paid rent	300
April 29	Paid wages	200
April 30	Paid salary to Jackson	1,500
April 30	Received Commission	100

Solution: Check below

2. Record the following transactions in the Journal of Matthew:

Date	Particulars	₹
May 1	Commenced business with cash	7,00,000
May 2	Goods purchased from Avi for cash	60,000
May 3	Goods purchased from Jackson	1,00,000
May 4	Goods returned to Jackson	4,000
May 8	Goods sold to Rahul	45,000
May 12	Rahul returned 10% of goods

Solution: Check below

3. Record the following transactions in the Journal of Kevi:

Date	Particulars	₹
2022
June 1	Paid cash to Maron	9,800
	and discount received from him	200
June 4	Received cash from Adi	4,600
	and discount allowed to him	400
June 10	Goods sold to James	40,000
June 12	James returned goods	1,000
June 14	Received cash from James ₹ 38,500 in full settlement of his account
June 20	Sold goods to Eli at the list price of ₹ 50,000 at 10% trade discount
June 23	Purchased goods from Aiden at the list price of ₹ 10,000 at 15% trade discount

Solution: Check below

4. Give Journal entries for the following transactions in the books of Addison:

Date	Particulars	₹
2021
April 1	Started business with Cash	1,50,000
April 2	Cash purchases	40,000
April 3	Sold goods to Luke	20,000
April 6	Returned defective goods by Luke	2,000
April 8	Received cash from Luke	700
	and Discount allowed	300
April 9	Chander sold goods to us	30,000
April 10	Puneet purchased goods from us	18,000
April 10	Paid insurance premium	400
April 12	Paid for Life Insurance Premium of Addison	1,000
April 15	Paid Cash to Chander	24,750
	and Discount allowed by him	250
April 18	Bought goods from Jacob, list price ₹ 10,000 less 20% trade discount
April 22	Paid to Jacob	6,000
April 26	Received Cash from Puneet	5,000
April 30	Paid wages ₹ 1,000, Advertisement Expenses ₹ 2,000 and Salaries paid ₹ 8,000
April 30	Received Interest	200
April 30	Received Commission	1,000

Solution: Check below

5. Enter the following transactions in the Journal of Henry:

Date	Particulars
2021
April 1	Purchased goods from Daniel at the list price of ₹ 50,000 at 10% trade discount
April 2	Returned goods to Daniel at the list price of ₹ 2,000
April 6	Paid Cash to Daniel ₹ 42,000 in full settlement of his account

Solution: Check below

6. Pass Journal Entries for the following transactions:

Sl. No.	Transactions
(i)	Bought goods from Lily at the list price of ₹ 20,000 at 15% trade discount.
(ii)	Settled the account of Lily by paying cash, under a discount of 4%.
(iii)	Bought goods for cash at the list price of ₹ 60,000 at 20% trade discount and 5% cash discount.
(iv)	Sold goods for cash at the list price of ₹ 10,000 at 10% trade discount and 3% cash discount.

Solution: Check below

7. Pass Journal entries in the books of Ryan from the following transactions:

Date	Particulars	₹
2022
June 1	Ryan started business with cash ₹ 90,000; Goods ₹ 50,000 and furniture ₹ 10,000.
June 2	Sold goods to Paul at the list price of ₹ 15,000 at trade discount of 10%.
June 4	Paul returned goods at the list price of ₹ 2,000.
June 8	Received from Paul ₹ 11,500 in full settlement of his account.
June 10	Purchased goods from Wyatt at the list price of ₹ 20,000 at 15% trade discount.
June 13	Returned goods to Wyatt at the list price of ₹ 2,000.
June 16	Settled the account of Wyatt by paying cash, under a discount of 4%.
June 18	Purchased goods from Adi ₹ 6,000; Jayden ₹ 14,000.
June 19	Paid cash to Adi ₹ 2,800 and discount received ₹ 200.
June 20	Paid ₹ 13,500 to Jayden in full settlement of his account.
June 20	Bought a ‘Table Fan’ for ₹ 1,000 for the domestic use of Ryan.
June 25	Sold goods for cash at the list price of ₹ 10,000 at 10% trade discount and 3% cash discount.
June 30	Paid Rent ₹ 500; Trade Expenses ₹ 600 and Travelling Expenses ₹ 200.

Solution: Check below

8. Pass Journal Entries for the following:

Date	Particulars	₹
2022
March 1	Paid into bank for opening a Current Account	20,000
March 5	Goods purchased and payment made by cheque	12,000
March 8	Cash sales ₹ 50,000, out of this amount ₹ 35,000 deposited in bank.
March 10	Withdrawn for private use	6,000
March 12	Withdrawn from bank for private use	4,000
March 15	Withdrawn from bank	10,000
March 20	Placed on fixed deposit account at bank by transferring from Current Account	30,000

Solution: Check below

9. The following balances appeared in the books of Karan Stores on 1st April 2022:

Assets: Cash ₹ 10,000; Bank balance ₹ 6,000; Stock ₹ 45,000; Furniture ₹ 3,000; Debtors ₹ 22,000 (Harman ₹ 5,000; Kamal ₹ 5,000 and Abhi ₹ 12,000)
Liabilities: Bank Loan ₹ 15,000; Creditors ₹ 13,000 (Anil ₹ 6,000, Viny ₹ 7,000)

Following transactions took place during April 2022:

Date	Particulars
April 2	Bought goods from Mohan for ₹ 30,000 at a trade discount of 10% and cash discount of 2%. Paid 60% amount immediately.
April 4	Sold goods to Harman for ₹ 10,000.
April 5	Received ₹ 14,750 from Harman in full settlement of his account.
April 6	Cash deposited into bank ₹ 15,000.
April 8	Cheque received from Kamal for ₹ 4,800 in full settlement of his account. This cheque was immediately deposited into bank.
April 10	Received a cheque from Abhi ₹ 3,000.
April 12	Cheque received from Abhi deposited into bank.
April 15	Cheque received from Kamal dishonoured.
April 16	Cash sales ₹ 10,000; out of this amount ₹ 8,000 deposited into bank.
April 16	Amount due to Anil paid by cheque.
April 18	Old newspapers sold ₹ 60.
April 18	Old furniture sold ₹ 600.
April 20	Abhi became insolvent and 50 paise in a rupee could be received from his estate.
April 22	Purchased goods from Rajiv and paid by cheque ₹ 5,000.
April 24	Sold half of the above goods to Chetan at a profit of 30% on cost.
April 25	Proprietor withdrew for private use ₹ 1,000 from office and ₹ 2,000 from bank.
April 28	Paid salary to Kishor Lal by cheque ₹ 1,000.
April 30	Paid rent by cheque ₹ 1,000.
April 30	Paid trade expenses ₹ 400.

Solution: Check below

10. Pass Journal Entries for the following:

No.	Particulars
(1)	Received ₹ 10,000 from Subham, which were written off as bad debts in the previous year.
(2)	Salaries due to clerks ₹ 40,000.
(3)	Out of the rent paid this year, ₹ 20,000 is related to next year.
(4)	Provide 10% depreciation on furniture costing ₹ 60,000.
(5)	Provide 12% interest on capital amounting to ₹ 15,00,000.
(6)	Charge interest on drawings ₹ 10,000.

Solution: Check below

11. Journalise the following items in the books of Ravi Krishan giving suitable narrations:

No.	Particulars
(i)	Bought goods from Naresh for Cash ₹ 60,000. Also paid ₹ 1,000 for their carriage.
(ii)	Paid to Saloni ₹ 19,800 in full payment of her dues of ₹ 20,000.
(iii)	Purchased a machinery for Cash ₹ 4,00,000 and paid ₹ 20,000 in Cash as wages on its installation.
(iv)	Bricks for ₹ 10,00,000 and timber for ₹ 8,00,000 purchased for the construction of building. The payment was made by cheque.
(v)	Purchased an old machinery for ₹ 1,20,000 and spent ₹ 4,000 on its carriage and ₹ 21,000 on its immediate repairs.
(vi)	Paid ₹ 2,000 for repairing the office furniture.

Solution: Check below

12. Pass Journal Entries for the following:

No.	Particulars
(1)	Proprietor withdrew for his personal use cash ₹ 30,000 and goods worth ₹ 20,000.
(2)	Goods for ₹ 60,000 were given away as charity. (Sale price ₹ 70,000)
(3)	Goods worth ₹ 15,000 were distributed as free samples.
(4)	Goods worth ₹ 60,000 and cash ₹ 10,000 were stolen by an employee.
(5)	Goods worth ₹ 1,20,000 were destroyed by fire. Insurance Company admitted and paid claim for 60% amount.

Solution: Check below

13. Journalise the following transactions in the books of Kamal Bros:

No.	Particulars
(a)	₹ 15,000 due from Ravi are now bad debts.
(b)	Goods worth ₹ 25,000 were used by the proprietor.
(c)	Charge depreciation @10% p.a. for two months on machine costing ₹ 3,60,000.
(d)	Provide interest on capital of ₹ 12,00,000 at 6% p.a. for 9 months.
(e)	Mohit who owed us ₹ 10,000 becomes insolvent and a final dividend of 60 paise in a rupee is received from his estate.
(f)	Goods costing ₹ 1,20,000 sold to Manish for ₹ 1,50,000.

Solution: Check below

14. Prepare Journal from the transactions given below:

No.	Particulars	₹
(a)	Cash paid for installation of machine	3,000
(b)	Goods given away as charity	25,000
(c)	Interest charged on capital @ 7% p.a. when total capital was	8,00,000
(d)	Received ₹ 10,000 of a bad debt written off last year
(e)	Goods destroyed by fire	25,000
(f)	Rent outstanding	12,000
(g)	Interest on drawing	8,000
(h)	Sushil Kumar who owed me ₹ 60,000 has failed to pay the amount. He pays me a compensation of 45 p. in a rupee.

Solution: Check below

15. Journalise the following transactions in the books of Sh. Gopi:

Date	Particulars
2022
March 5	Purchased furniture worth ₹ 25,000 and tools worth ₹ 5,000.
March 10	Opened bank account with IDBI Bank ₹ 6,000.
March 12	Banked (Cash sent to Bank) ₹ 1,50,000.
March 16	Withdrawn from bank by Gopi for personal use ₹ 12,000.
March 18	Withdrawn from bank ₹ 45,000.
March 22	Bought shares in ‘Colgate Ltd.’ for ₹ 60,000 and brokerage paid @ 2%. All the payment is made by cheque.
March 24	Purchased postage ₹ 120.
March 25	Paid to Anshu out of business funds for the repair of Gopi’s residential house ₹ 5,500.
March 28	Paid electricity bill ₹ 1,000 and miscellaneous expenses ₹ 100.
March 31	Salaries unpaid ₹ 10,000 and rent due to landlord ₹ 2,000.
March 31	Provide interest on Capital (₹ 2,50,000) @ 8% p.a. from 1st April 2013 to 31st March 2014.

Solution: Check below

Solutions

Extras

Additional questions and answers

Q. Define debit.

Answer : Debit refers to the left side of an account, and it is used to record increases in assets or expenses or decreases in liabilities, equity, or revenues.

Q. Define credit.

Answer : Credit refers to the right side of an account, and it is used to record increases in liabilities, equity, or revenues or decreases in assets or expenses.

Q. What do the abbreviations ‘Dr.’ and ‘Cr.’ stand for?

Answer : The abbreviation ‘Dr.’ stands for “Debit Record,” and ‘Cr.’ stands for “Credit Record.”

Q. What is the debit side of an account?

Answer : The debit side of an account is the left-hand side, which records transactions that increase assets or expenses or decrease liabilities, equity, or revenues.

Q. What is the credit side of an account?

Answer : The credit side of an account is the right-hand side of the account, termed as ‘credit,’ and it signifies that value has flown from the source indicated by the name of the account.

Q. Define account.

Answer : An account is a summarised record of all business transactions at one place relating to a particular head. It records not only the amount of transactions but also their effect and direction.

Q. What is Journal Folio (J.F.)?

Answer : Journal Folio (J.F.) is a referencing system used in the column of an account where the original entry was recorded in the Journal Book.

Q. What is Journalising?

Answer : Journalising is the systematic process of recording or entering transactions in a Journal in the order of their happening, i.e., chronological order or date-wise.

Q. Define posting.

Answer : Posting refers to the transfer of a Journal entry to a Ledger Account.

Q. What is a simple journal entry?

Answer : A simple journal entry is an entry in which only two accounts are affected, i.e., one account is debited and another is credited with an equal amount.

Q. What is a compound journal entry?

Answer : A compound journal entry is an entry in which more than two accounts are affected. A compound entry may require that two or more accounts be debited or two or more accounts be credited. The compound entry is also termed as combined entry.

Q. Define opening entry.

Answer : An opening entry is the first entry in each year’s Journal, made to record the previous year’s closing balances of all the assets and liabilities. In this entry, the accounts of all assets are debited because assets always show debit balances, and the accounts of liabilities and capital are credited because they always show credit balances.

Q. What is trade discount?

Answer : Trade discount is a concession given by a supplier from the list price of goods or services on business considerations, such as purchase of a specific quantity, trade practices, etc., other than for prompt payment. Trade discount is not recorded while recording the business transactions. Entry for the purchase or sale of goods at trade discount is recorded with net amount, i.e., list price minus trade discount.

Q. What is cash discount?

Answer : Cash discount is a concession allowed to the debtor for payment of the amount due from him before the due date or within a stipulated period. It induces the debtor to settle his accounts at the earliest. Cash discount, received or allowed, is recorded separately in the books.

Q. Explain the meaning and concept of debit and credit.

Answer : The word debit is derived from the Latin word ‘debitur’ which means due for that. In simple words, the benefit receiving aspect of a transaction is known as debit. The word credit is derived from the Latin word ‘creder’ which means due to that. In simple words, the benefit giving aspect of a transaction is known as credit. By convention, the left-hand side of any account is arbitrarily called the debit side, and the right-hand side of an account is called the credit side. An item recorded on the debit side of an account is said to be debited to the account, signifying that value has flowed to the named account. An item recorded on the credit side of an account is said to be credited to the account, signifying that value has flown from the source indicated by the name of the account.

Q. Mention the layout of an account.

Answer : The layout of an account includes the following points:

• The name of the account is written at the top.
• The account is divided into two equal parts, separated by a thick vertical line.
• The left-hand side is termed as the debit side (‘debit’ is abbreviated as ‘Dr.’).
• The right-hand side is termed as the credit side (‘credit’ is abbreviated as ‘Cr.’).
• On the top of every ledger account, the word ‘Dr.’ and ‘Cr.’ are written on the left and right corners respectively.
• The date of the transaction is entered in the column for ‘Date’.
• In the ‘Particulars’ column, on the debit side, the name of the account is written with the prefix ‘To’, whereas on the credit side, the name of the account is written with the prefix ‘By’.
• The ‘folio’ or Journal Folio (J.F.) column is used as a referencing system where the original entry was recorded in the Journal Book.
• In the last column, the amount transacted is written.

Q. What is the traditional approach to classification of accounts?

Answer : The traditional approach to classification of accounts is based upon the accounting rule that every debit has got its corresponding credit. For this purpose, accounts may be classified as follows:

• Personal Accounts: These represent the accounts related to individuals, firms, societies, clubs, hospitals, etc. Personal Accounts can be classified into three categories:
  • Natural personal accounts: These accounts relate to human beings.
  • Artificial personal accounts: These relate to corporate bodies or institutions which are recognized as artificial persons in the eyes of law.
  • Representative personal accounts: These are accounts which represent a certain person or a group of persons.
• Impersonal Accounts: All those accounts which are not personal accounts are known as Impersonal Accounts. It contains two types of accounts:
  • Real accounts: These may be classified into tangible real accounts (relating to assets which can be touched and seen) and intangible real accounts (relating to assets which are not possible to touch but can be measured in terms of money).
  • Nominal accounts: These relate to business expenses, losses, gains, and revenues.

Q. What are the rules for Personal Accounts?

Answer : The rules for Personal Accounts are: Debit the Receiver and Credit the Giver.

Q. What are the rules for Real Accounts?

Answer : The rules for Real Accounts are: Debit what comes in and Credit what goes out.

Q. What are the rules for Nominal Accounts?

Answer : The rules for Nominal Accounts are: Debit all Expenses and Losses and Credit all Incomes and Gains.

Q. What is the Modern Approach of classifying accounts?

Answer : The Modern Approach classifies accounts into five categories: Assets Accounts, Liabilities Accounts, Capital Accounts, Revenue Accounts, and Expenses Accounts. The rules of debit and credit depend on the nature of the account under this approach.

Q. State the rules of debit and credit under the Modern Approach.

Answer : The rules of debit and credit under the Modern Approach are as follows:

• Assets Accounts: Increase in the amount of assets is recorded on the debit side, and decrease in the amount of assets is recorded on the credit side.
• Liabilities Account: Increase in the amount of liabilities is recorded on the credit side, and decrease in the amount of liabilities is recorded on the debit side.
• Capital Account: Increase in the amount of capital is recorded on the credit side, and decrease in the amount of capital is recorded on the debit side.
• Revenue or Income Account: All increases in incomes are recorded on the credit side, and all reductions in any gain or income are recorded on the debit side.
• Expenses or Losses Accounts: All increases in losses and expenses are recorded on the debit side, and all reductions in losses and expenses are recorded on the credit side.

Q. What is trade discount?

Answer : Trade discount is a concession given by a supplier from the list price of goods or services on business considerations, such as purchase of a specific quantity or trade practices, other than for prompt payment. It is not recorded while recording business transactions, and entries are made with the net amount (i.e., list price minus trade discount).

Q. Explain cash discount.

Answer : Cash discount is a concession allowed to the debtor for payment of the amount due before the due date or within a stipulated period. It induces the debtor to settle accounts at the earliest. Cash discount, whether received or allowed, is recorded separately in the books. Cash discount allowed is debited to Discount Allowed Account, and cash discount received is credited to the Discount Received Account.

Q. Explain briefly the features of a Journal.

Answer : The features of a Journal are: (i) It is a book of original entry because transactions are recorded first of all in the Journal, as and when they take place. (ii) It is also known as a daybook or diary because transactions are recorded in the Journal on the same day they occur. (iii) The Journal is only a subsidiary book, subordinate to the ledger, which is the principal book of accounts. (iv) In the Journal, all transactions are recorded in chronological order, i.e., date-wise. (v) The Journal shows a wholesome image of each transaction and thus maintains the identity of each transaction. (vi) The amount of transactions is recorded on both debit and credit columns side by side, helping in maintaining arithmetical accuracy of the books of account. (vii) In the Journal, both the debit and credit aspects of every transaction are recorded according to the double-entry system of book-keeping. (viii) Every entry in the Journal is followed by a narration which briefly describes the true nature and context of the transaction.

Q. What are the limitations of a Journal?

Answer : The limitations of a Journal are:

• Where the transactions are more in number or the size of the enterprise is large, it will become difficult to operate it in a single book, i.e., Journal.
• It is not possible to ascertain daily cash balances from the Journal. For this purpose, a separate book is to be maintained.
• If the date of the transaction is forgotten or missing, it will become difficult and time-consuming to locate a transaction in the Journal.
• Posting of Journal transactions into the ledger is time-consuming.
• It does not facilitate internal control because, in the Journal, only monetary transactions are recorded in chronological order.
• The Journal does not provide the required information on a prompt basis.

Q. Differentiate between Trade Discount and Cash Discount.

Answer : The differences between Trade Discount and Cash Discount are:

Basis	Trade Discount	Cash Discount
Nature	It is allowed on purchases made in bulk quantity.	It is allowed when payment is made on or before a specified date.
Recording	It is not recorded in the books. The entry is made with the net amount.	It is recorded in the books of accounts, and the entry is passed.
Deduction from Invoice	It is shown by way of deduction in the invoice itself.	It is not shown in the invoice.
Consideration	The consideration for allowance is purchases.	The consideration for allowance is payment.

Q. Why is Journal necessary?

Answer : The Journal is necessary for providing a permanent record of transactions, ascertaining the true nature of transactions with the help of narration, maintaining the identity of each transaction, and enabling convenient recording of the transactions.

Q. What is a compound entry? Give an example.

Answer : A compound entry is an entry in which more than two accounts are affected. It may require that two or more accounts be debited or two or more accounts be credited. An example of a compound entry is when a debt of ₹6,000 due from Kevi (Debtor) is discharged by receipt of ₹5,820 cash and ₹180 allowed as a discount. The entry would be:
Cash A/c ₹5,820 Dr., Discount Allowed A/c ₹180 Dr., To Kevi ₹6,000 (Being the amount received from Kevi and allowed him discount).

Q. What is an opening entry? Explain with an example.

Answer : An opening entry is the first entry made in the Journal at the beginning of a new accounting year to record the closing balances of assets and liabilities from the previous year. In this entry, the accounts of all assets are debited because they always show debit balances, and the accounts of liabilities and capital are credited because they always show credit balances. For example, if the assets include Cash ₹10,000, Bank ₹6,000, Stock ₹45,000, Furniture ₹3,000, and Debtors ₹22,000, and the liabilities include Bank Loan ₹15,000 and Creditors ₹13,000, the opening entry would be:
Cash A/c ₹10,000 Dr., Bank A/c ₹6,000 Dr., Stock A/c ₹45,000 Dr., Furniture A/c ₹3,000 Dr., Debtors A/c ₹22,000 Dr., To Bank Loan A/c ₹15,000, To Creditors A/c ₹13,000, To Capital A/c (Balancing figure) ₹58,000 (Being Assets and Liabilities brought forward).

Q. What are Assets Accounts? State their debit and credit rules.

Answer : Assets Accounts are accounts related to tangible and intangible resources owned by the business. The rule for Assets Accounts under the Modern Approach is: Increase in the amount of assets is recorded on the debit side of the Assets Account, and decrease in the amount of the assets is recorded on the credit side of the Assets Account.

Q. What are Expenses or Losses Accounts? Explain rules for recording transactions in these accounts.

Answer : Expenses or Losses Accounts are accounts that relate to business expenses, losses, gains, and revenues. Examples include Salaries Account, Wages Account, Loss of goods by Fire Account, Interest Received Account, Sales Account, Repairs Account, and Commission on Sales Received Account. The rule for recording transactions in these accounts is: Debit all expenses and losses and credit all incomes and gains.

Q. Distinguish between Personal and Impersonal Accounts.

Answer : Personal Accounts are accounts related to individuals, firms, societies, clubs, hospitals, etc., and can be classified into three categories: (a) Natural personal accounts, which relate to human beings (e.g., Preeti’s Account, Anil’s Account), (b) Artificial personal accounts, which relate to corporate bodies or institutions recognized as artificial persons in the eyes of law (e.g., accounts of firms, clubs, companies, schools, colleges, universities, hospitals, government offices, municipal corporations, improvement trust, banks), and (c) Representative personal accounts, which represent a certain person or a group of persons (e.g., Outstanding Rent Account represents the amount of rent payable to the landlord). Impersonal Accounts, on the other hand, include all accounts that are not personal accounts, such as assets, losses, expenses, incomes, etc. These contain two types of accounts: Real Accounts and Nominal Accounts.

Q. What are Representative Personal Accounts? Give examples.

Answer : Representative Personal Accounts are accounts that represent a certain person or a group of persons. For example, if rent is due to the landlord, an Outstanding Rent Account will be opened in the books, and this account represents the amount of rent payable to the landlord. Other examples include Prepaid Insurance Account and Wages Outstanding Account.

Q. Explain the concept and meaning of debit and credit.

Answer : The word debit is derived from the Latin word ‘debitur’ which means due for that. In simple words, the benefit receiving aspect of a transaction is known as debit. The word credit is derived from the Latin word ‘creder’ which means due to that. In simple words, the benefit giving aspect of a transaction is known as credit. The abbreviations ‘Dr.’ for debit and ‘Cr.’ for credit are usually used. By convention, the left hand side of any account is arbitrarily called debit side and right hand side of an account is called credit side. An item recorded on the debit side of an account is said to be debited to the account. A debit entry signifies that value has flowed to the named account, e.g., payment to a creditor signifies that payment has been made for the goods purchased from him. Thus, his account is debited. An item recorded on the credit side of an account is said to be credited to the account. A credit entry signifies that value has flown from the source indicated by the name of the account, e.g., receipt of cash from a debtor signifies that debtor has made payment for the goods purchased by him. Thus, his account is credited. Debit and credit are nothing more than the additions to or subtractions from an account.

Q. What is an account? Mention the key points about the layout of an account.

Answer : An account is a summarised record of all business transactions at one place relating to a particular head. It records not only the amount of transactions but also their effect and direction. All accounts are divided into two sides. The left hand side of an account is called Debit side and the right hand side of an account is called Credit side. In the abbreviated form, Debit is written as ‘Dr.’ and Credit is written as ‘Cr.’ It is usually in a ‘T’ form. The following points about the layout of an account include: The name of the account is written at the top. The account is divided into two equal parts, separated by a thick vertical line. The left hand side is termed as debit side (‘debit’ is abbreviated as ‘Dr.’) and the right hand side is termed as credit side (‘credit’ is abbreviated as ‘Cr.’). On the top of every ledger account, the word ‘Dr.’ and ‘Cr.’ are written on the left and right corners respectively. The date of the transaction is entered in the column for ‘Date’. In the ‘Particulars’ column, on the debit side, the name of the account is written with prefix ‘To’ whereas on the credit side, the name of the account is written with prefix ‘By’. The ‘folio’ or Journal Folio (J.F.) column is used as a referencing system where the original entry was recorded in the Journal Book. In the last column, the amount transacted is written.

Q. Classify the accounts under Traditional Approach with suitable examples.

Answer : Under the Traditional Approach, accounts are classified into Personal Accounts, Real Accounts, and Nominal Accounts. Personal Accounts include Natural Personal Accounts like Ryan A/c, Michael A/c; Artificial Personal Accounts like M/s Carter Brothers A/c, Bank A/c, DAV College’s A/c; and Representative Personal Accounts like Wages Outstanding A/c, Prepaid Insurance A/c. Real Accounts consist of Tangible Real Accounts such as Plant A/c, Building A/c, Cash A/c, and Intangible Real Accounts like Goodwill A/c, Copy Rights A/c. Nominal Accounts cover Expenses like Insurance A/c, Wages A/c; Losses like Loss by Fire A/c; and Profit & Gains like Profit on Sale of Assets A/c.

Q. Discuss the features of a Journal.

Answer : The features of a Journal are: (i) It is a book of original entry because transactions are recorded first of all in the Journal, as and when they take place. (ii) It is also known as a day book or diary because transactions are recorded in the Journal on the same day they occur. (iii) The Journal is only a subsidiary book, subordinate to the ledger, which is the principal book of accounts. (iv) In the Journal, all transactions are recorded in chronological order, i.e., date-wise. (v) The Journal shows a wholesome image of each transaction and thus maintains the identity of each transaction. (vi) The amount of transactions is recorded on both debit and credit columns side by side, helping in maintaining arithmetical accuracy of the books of account. (vii) In the Journal, both the debit and credit aspects of every transaction are recorded according to the double-entry system of book-keeping. (viii) Every entry in the Journal is followed with a narration, which briefly describes the true nature and context of the transaction.

Q. Explain the advantages of maintaining a Journal.

Answer : The advantages of maintaining a Journal are: (i) Minimal Omission: Each transaction is recorded as soon as it takes place, so there is a rare possibility of any transaction being omitted from the books of account. (ii) Aversion of Errors: As for each and every transaction, the concerned accounts to be debited and credited are clearly stated in the journal, there is minimal possibility of committing any mistake in posting the transactions into the ledger. (iii) Provides an Explanation of the Transaction: From the Journal, an adequate explanation of each entry may be obtained as every entry in the Journal is supported by the narration relating to that transaction. (iv) Provides a Chronological Record of All Transactions: As each transaction in the Journal is recorded in chronological order, the order in which they occur enters the record permanently.

Q. Differentiate clearly between Personal, Real and Nominal Accounts.

Answer : Personal Accounts relate to individuals, firms, societies, clubs, hospitals, etc. They can be classified into Natural Personal Accounts (e.g., Preeti’s Account), Artificial Personal Accounts (e.g., M/s Carter Brothers A/c, Bank A/c), and Representative Personal Accounts (e.g., Wages Outstanding A/c). The rule for Personal Accounts is: Debit the Receiver and Credit the Giver.

Real Accounts relate to assets and can be classified into Tangible Real Accounts (e.g., Land A/c, Plant A/c) and Intangible Real Accounts (e.g., Goodwill A/c, Patent Rights A/c). The rule for Real Accounts is: Debit what comes in and Credit what goes out.

Nominal Accounts relate to business expenses, losses, gains, and revenues (e.g., Salaries A/c, Loss by Fire A/c). The rule for Nominal Accounts is: Debit all Expenses and Losses and Credit all Incomes and Gains.

Q. Explain Revenue or Income Accounts and their debit and credit rules.

Answer : Revenue or Income Accounts relate to increases in incomes, which are recorded on the credit side of the concerned Income Account, while reductions in any gain or income are recorded on the debit side of the concerned Income Account. Specifically, all increases in incomes are recorded on the credit side, and all decreases in incomes are recorded on the debit side of the Revenue or Income Account.

Q. What are the limitations of maintaining a Journal?

Answer : The limitations of maintaining a Journal include:

1. When there are numerous transactions or when the size of the enterprise is large, operating it in a single book becomes difficult.
2. It is not possible to ascertain daily cash balances from the Journal; a separate book must be maintained for this purpose.
3. If the date of a transaction is forgotten or missing, locating a transaction in the Journal becomes difficult and time-consuming.
4. Posting Journal transactions into the ledger is time-consuming.
5. It does not facilitate internal control since only monetary transactions are recorded in chronological order.
6. The Journal does not provide the required information promptly.

Q. Write a short note on Trade and Cash Discount, highlighting differences between them.

Answer : A discount may be classified into two types: Trade Discount and Cash Discount. Trade Discount is a concession given by a supplier from the list price of goods or services based on business considerations such as bulk purchases or trade practices, other than for prompt payment. It is not recorded in the books, and entries are made with the net amount after deducting the discount. On the other hand, Cash Discount is a concession allowed to the debtor for payment of the amount due before the due date or within a stipulated period. It induces the debtor to settle accounts early and is recorded separately in the books. Cash Discount received or allowed is entered in the accounts accordingly.

The distinctions between Trade Discount and Cash Discount are as follows:

• Nature: Trade Discount is allowed on purchases made in bulk quantity, while Cash Discount is allowed when payment is made on or before a specified date.
• Recording: Trade Discount is not recorded in the books, whereas Cash Discount is recorded in the books of accounts.
• Deduction: Trade Discount is shown as a deduction in the invoice itself, but Cash Discount is not shown in the invoice.
• Consideration: The consideration for Trade Discount is purchases, whereas the consideration for Cash Discount is payment.

Q. Explain the Traditional Approach of classification of accounts, giving examples.

Answer :
The Traditional Approach classifies accounts based on the accounting rule that every debit has a corresponding credit. Accounts are classified as follows:

• Personal Accounts : These represent accounts related to individuals, firms, societies, clubs, hospitals, etc. Personal Accounts can be further classified into three categories:
  • (a) Natural Personal Accounts : These relate to human beings, for example, Preeti’s Account, Anil’s Account, Richard’s Account, etc.
  • (b) Artificial Personal Accounts : These relate to corporate bodies or institutions recognized as artificial persons in the eyes of law, such as M/s Carter Brothers A/c, Om Mill’s A/c, Bank A/c, DAV College’s A/c, etc.
  • (c) Representative Personal Accounts : These represent a certain person or group of persons, for example, Outstanding Rent Account (if rent is due to the landlord) or Prepaid Insurance Account.
• Impersonal Accounts : All accounts that are not personal accounts fall under this category. Impersonal Accounts are divided into two types:
  • (a) Real Accounts : These may be tangible or intangible.
    • Tangible Real Accounts : These relate to assets that can be touched and seen, for example, Land Account, Plant Account, Building Account, Cash Account, Stock Account, Furniture Account, etc.
    • Intangible Real Accounts : These relate to assets that cannot be touched physically but can be measured in terms of money, for example, Goodwill Account, Trademarks Account, Patent Rights Account, etc.
  • (b) Nominal Accounts : These relate to business expenses, losses, gains, and revenues, for example, Salaries Account, Wages Account, Loss of Goods by Fire Account, Interest Received Account, Sales Account, Repairs Account, Commission Received Account, etc.

The rules for debit and credit under the Traditional Approach are:

• For Personal Accounts : Debit the Receiver and Credit the Giver.
• For Real Accounts : Debit what comes in and Credit what goes out.
• For Nominal Accounts : Debit all Expenses and Losses and Credit all Incomes and Gains.

Q. Discuss the Modern Approach of classifying accounts along with the respective rules of debit and credit.

Answer : Under the Modern Approach, accounts are classified into five categories for determining the rules of debit and credit:

• Assets Accounts : Increase in the amount of assets is recorded on the debit side, and decrease in the amount of assets is recorded on the credit side.
• Liabilities Accounts : Increase in the amount of liabilities is recorded on the credit side, and decrease in the amount of liabilities is recorded on the debit side.
• Capital Accounts : Increase in the amount of capital is recorded on the credit side, and decrease in the amount of capital is recorded on the debit side.
• Revenue or Income Accounts : Increases in incomes are recorded on the credit side, and reductions in any gain or income are recorded on the debit side.
• Expenses or Losses Accounts : Increases in losses and expenses are recorded on the debit side, and reductions in losses and expenses are recorded on the credit side.

The rules of debit and credit under the Modern Approach are summarized as follows:

• Assets Accounts : Debit increase, Credit decrease.
• Liabilities Accounts : Debit decrease, Credit increase.
• Capital Accounts : Debit decrease, Credit increase.
• Revenue Accounts : Debit decrease, Credit increase.
• Expense Accounts : Debit increase, Credit decrease.

Q. Define Journal. Describe its characteristics and advantages.

Answer : Journal is a book in which transactions are recorded in the order in which they occur, i.e., in chronological order. It is called the book of original entry because all business transactions are entered first in this book. :

Characteristics of Journal:

(i) It is a book of original entry because transactions are recorded first of all in Journal, as and when they take place.
(ii) It is also known as day book or diary because transactions are recorded in the Journal on the same day it occurs.
(iii) The Journal is only a subsidiary book, subordinate to the ledger which is the principal book of accounts.
(iv) In Journal, all the transactions are recorded in a chronological order, i.e., date-wise.
(v) The Journal shows a wholesome image of each transaction and thus, maintains the identity of each transaction.
(vi) Amount of transactions is recorded on both debit and credit columns side by side. It helps in maintaining arithmetical accuracy of the books of account.
(vii) In Journal, both the debit and credit aspects of every transaction are recorded according to the double-entry system of book-keeping.
(viii) Every entry in the Journal is followed with narration which describes briefly the true nature and context of the transaction.

Advantages of Journal:

(i) Minimal Omission: Each transaction is recorded as soon as it takes place. So there is a rare possibility of any transaction being omitted from the books of account.
(ii) Aversion of Errors: As for each and every transaction, the concerned accounts to be debited and credited are clearly stated in the journal, there is minimal possibility of committing any mistake in posting the transactions into the ledger.
(iii) Provides an Explanation of the Transaction: From Journal adequate explanation of each entry may be obtained as every entry in Journal is supported by the narration relating to that transaction.
(iv) Provides a Chronological Record of All Transactions: As each transaction in Journal is recorded in chronological order, hence, the order in which they occur enters the record permanently.

Q. What are the steps involved in journalising a transaction?

Answer : Steps involved in Journalising are:

Step 1: Ascertain the accounts that are involved in a transaction.
Step 2: Ascertain the nature of the accounts involved.
Step 3: Ascertain which rule of debit and credit is applicable for each of the accounts involved. Accounts are Personal, Real, and Nominal.
Step 4: Ascertain the amount by which the accounts are to be debited and credited.
Step 5: Write the date and month of the transaction in the ‘Date’ column and the year at the top.
Step 6: Write in the ‘Particulars’ column name of the account to be debited. Along with the name of the account, abbreviation ‘Dr.’ is written in the same line against the name of the account. Write the amount to be debited in the ‘Debit Amount’ column.
Step 7: Write in the ‘Particulars’ column name of the account to be credited in the next line preceded by the word ‘To’ at a few spaces towards right in the ‘Particulars’ column and the amount to be credited in the ‘Credit Amount’ column against the name of the account.
Step 8: Write ‘Narration’ (i.e., a brief description of the transaction) within brackets in the next line in the ‘Particulars’ column.
Step 9: Draw a line across the entire ‘Particulars’ column to separate one Journal entry from the other entry.

Q. Explain the meaning, nature, and concept of debit and credit.

Answer : The word debit is derived from the Latin word ‘debitur’, which means due for that. In simple words, the benefit-receiving aspect of a transaction is known as debit. The word credit is derived from the Latin word ‘creder’, which means due to that. In simple words, the benefit-giving aspect of a transaction is known as credit. The abbreviations ‘Dr.’ for debit and ‘Cr.’ for credit are usually used. By convention, the left-hand side of any account is arbitrarily called the debit side, and the right-hand side of an account is called the credit side. An item recorded on the debit side of an account is said to be debited to the account. A debit entry signifies that value has flowed to the named account, for example, payment to a creditor signifies that payment has been made for the goods purchased from him. Thus, his account is debited. An item recorded on the credit side of an account is said to be credited to the account. A credit entry signifies that value has flown from the source indicated by the name of the account, for example, receipt of cash from a debtor signifies that the debtor has made payment for the goods purchased by him. Thus, his account is credited. Debit and credit are nothing more than additions to or subtractions from an account.

Q. What is Compound Journal Entry? Explain with an illustration.

Answer : A Compound Journal Entry is an entry in which more than two accounts are affected. A compound entry may require that two or more accounts be debited or two or more accounts be credited. The compound entry is also termed as a combined entry. For example, a debt of ₹6,000 due from Kevi (Debtor) has been discharged by receipt of ₹5,820 cash, and ₹180 allowed as a discount. The transaction affects three accounts as follows: Cash A/c ₹5,820 (debited because it is an asset), Discount Allowed A/c ₹180 (debited because it is an expense or loss for the business), and Kevi (Debtor) ₹6,000 (credited because it is an asset). The entry for the transaction is a Compound Entry as follows:
Cash A/c ₹5,820, Discount Allowed A/c ₹180; To Kevi ₹6,000.

Q. Differentiate between Trade Discount and Cash Discount with examples.

Answer : Trade Discount is a concession given by a supplier from the List Price of goods or services on business considerations (such as purchase of a specific quantity, trade practices, etc.) other than for prompt payment. It is not recorded in the books, and the entry is made with the net amount. For example, purchased goods at ₹50,000 with a 10% trade discount results in a net invoice price of ₹45,000.

Cash Discount, on the other hand, is a concession allowed to the debtor for payment of the amount due before the due date or within a stipulated period. It induces the debtor to settle his accounts at the earliest. Cash Discount is recorded in the books of accounts. For example, if ₹45,000 is paid immediately with a 5% cash discount, ₹2,250 is recorded as a discount, and the payment made is ₹42,750.

Q. Describe the importance and need for maintaining Journal.

Answer : The importance and need for maintaining Journal are:

• For providing a permanent record of transactions.
• For ascertaining the true nature of transactions with the help of narration.
• For maintaining the identity of each transaction.
• For convenient recording of the transactions.

53 What are the terms associated with Journal entries? Explain each briefly.

Answer : The terms associated with Journal entries are:

(i) Book of Original Entry : Journal is called a Book of Original Entry (also called Book of Prime Entry) because every transaction is first recorded in the Journal and subsequently transferred to the ledger, which is the principal book of accounts.
(ii) Journal Entry : The form in which a transaction is recorded in the Journal is called a Journal Entry.
(iii) Journalising : Journalising is the act of recording or entering transactions in a Journal. It is a systematic process of entering the transactions in a Journal in chronological order, i.e., date-wise.
(iv) Posting : The transfer of a Journal entry to a Ledger Account is called Posting.

Additional MCQs

1. Which of the following is an example of a source document used in business transactions?

A. Invoice
B. Journal
C. Ledger
D. Account Statement

Answer: A. Invoice

Q. The term “debit” is derived from which Latin word?

A. debitur
B. debere
C. debitum
D. creder

Answer: A. debitur

Q. The term “credit” is derived from which Latin word?

A. creder
B. creditum
C. credere
D. debitor

Answer: A. creder

Q. In a T‐account format, which side is designated as the debit side?

A. Left
B. Right
C. Top
D. Bottom

Answer: A. Left

Q. In a T‐account format, which side is designated as the credit side?

A. Right
B. Left
C. Top
D. Bottom

Answer: A. Right

Q. What abbreviation is used to denote “debit” in accounting?

A. Dr.
B. Cr.
C. Db.
D. Dt.

Answer: A. Dr.

Q. What abbreviation is used to denote “credit” in accounting?

A. Cr.
B. Dr.
C. Ct.
D. Cd.

Answer: A. Cr.

Q. An account is best described as a summarised record of what?

A. All transactions
B. Cash transactions
C. Credit transactions
D. Sales transactions

Answer: A. All transactions

Q. Under the traditional approach, which of the following is classified as a personal account?

A. Bank A/c
B. Furniture A/c
C. Stock A/c
D. Sales A/c

Answer: A. Bank A/c

Q. Under the traditional approach, which account is an example of a real account?

A. Land A/c
B. Drawings A/c
C. Creditors A/c
D. Debtors A/c

Answer: A. Land A/c

Q. Under the traditional approach, which of the following is a nominal account?

A. Sales A/c
B. Bank A/c
C. Cash A/c
D. Land A/c

Answer: A. Sales A/c

Q. What is the rule for personal accounts under the traditional approach?

A. Debit the receiver and credit the giver
B. Debit the giver and credit the receiver
C. Debit what comes in and credit what goes out
D. Debit all expenses and credit all incomes

Answer: A. Debit the receiver and credit the giver

Q. What is the rule for real accounts under the traditional approach?

A. Debit what comes in and credit what goes out
B. Debit the receiver and credit the giver
C. Debit all expenses and credit all incomes
D. Debit all losses and credit all gains

Answer: A. Debit what comes in and credit what goes out

Q. What is the rule for nominal accounts under the traditional approach?

A. Debit all expenses and losses and credit all incomes and gains
B. Debit what comes in and credit what goes out
C. Debit the receiver and credit the giver
D. Debit all incomes and credit all expenses

Answer: A. Debit all expenses and losses and credit all incomes and gains

Q. Under the modern approach, which type of account increases on the debit side when its balance increases?

A. Assets
B. Liabilities
C. Capital
D. Revenue

Answer: A. Assets

Q. Under the modern approach, an increase in which type of account is recorded on the credit side?

A. Assets
B. Liabilities
C. Expenses
D. Capital

Answer: B. Liabilities

Q. Under the modern approach, a decrease in the capital account is recorded on which side?

A. Debit
B. Credit
C. Both
D. Neither

Answer: A. Debit

Q. Under the modern approach, increases in revenue (or income) accounts are recorded on which side?

A. Credit
B. Debit
C. Both
D. Neither

Answer: A. Credit

Q. Under the modern approach, increases in expense accounts are recorded on which side?

A. Debit
B. Credit
C. Both
D. Neither

Answer: A. Debit

Q. A Journal is best described as which of the following?

A. Book of original entry
B. Book of final entry
C. Book of secondary entry
D. Book of adjustment

Answer: A. Book of original entry

Q. In the Journal format, which column is used to record the transaction date?

A. Date
B. Particulars
C. Ledger Folio
D. Amount

Answer: A. Date

Q. In a journal entry, the brief explanation of the transaction is known as:

A. Narration
B. Ledger
C. Folio
D. Note

Answer: A. Narration

Q. The process of transferring entries from the Journal to the Ledger is called:

A. Posting
B. Balancing
C. Journalising
D. Reconciliation

Answer: A. Posting

Q. A journal entry that affects more than two accounts is called a:

A. Compound entry
B. Simple entry
C. Opening entry
D. Adjusting entry

Answer: A. Compound entry

Q. The first entry in a new accounting period that brings forward the previous balances is known as the:

A. Opening entry
B. Closing entry
C. Adjusting entry
D. Compound entry

Answer: A. Opening entry

Q. Trade discount is defined as a discount that is:

A. Not recorded in the books
B. Recorded separately
C. Added to the invoice
D. Deducted after cash discount

Answer: A. Not recorded in the books

Q. Cash discount is defined as a discount that is:

A. Recorded separately in the books
B. Not recorded in the books
C. Ignored in transactions
D. The same as a trade discount

Answer: A. Recorded separately in the books

Q. One key characteristic of a Journal is that it records transactions in:

A. Chronological order
B. Random order
C. Grouped by amount
D. Alphabetical order

Answer: A. Chronological order

Q. A limitation of using a Journal is that it can make it difficult to:

A. Locate a transaction
B. Record narration
C. Enter dates
D. Use ledger folios

Answer: A. Locate a transaction

Q. In a journal entry, the account to be credited is typically preceded by which word?
A. By
B. To
C. With
D. For

Answer: A. By

Q. In a journal entry, the account to be debited is typically preceded by which word?

A. To
B. By
C. For
D. With

Answer: A. To

Q. The double entry system in accounting requires that:

A. Debits equal credits
B. Debits exceed credits
C. Credits exceed debits
D. Only debits are recorded

Answer: A. Debits equal credits

Q. In a cash sale transaction, the cash account is:

A. Debited
B. Credited
C. Not affected
D. Balanced

Answer: A. Debited

Q. In a credit sale transaction, the sales account is:

A. Credited
B. Debited
C. Not recorded
D. Balanced

Answer: A. Credited

Q. In traditional journal entries in India, the narration often begins with which word?

A. Being
B. For
C. Since
D. As

Answer: A. Being

Q. Which of the following is NOT a component of the standard Journal format?

A. Ledger Folio
B. Date
C. Narration
D. Price

Answer: D. Price

Q. Which of the following accounts is classified as a real account?

A. Real accounts
B. Personal accounts
C. Nominal accounts
D. Representative accounts

Answer: A. Real accounts

Q. Which of the following accounts is classified as a nominal account?

A. Nominal accounts
B. Real accounts
C. Personal accounts
D. Asset accounts

Answer: A. Nominal accounts

Q. Under the modern approach, an increase in an asset account is recorded on the:

A. Debit side
B. Credit side
C. Both sides
D. Neither side

Answer: A. Debit side

Q. Under the modern approach, a decrease in a liability account is recorded on the:

A. Debit side
B. Credit side
C. Both sides
D. Neither side

Answer: A. Debit side

Q. The primary purpose of a Journal is to:

A. Provide a permanent record of transactions
B. Generate financial reports
C. Calculate taxes
D. Determine profit

Answer: A. Provide a permanent record of transactions

Q. Which of the following is an example of a representative personal account?

A. Outstanding Rent A/c
B. Cash A/c
C. Land A/c
D. Sales A/c

Answer: A. Outstanding Rent A/c

43. The process of “journalising” refers to:

A. Recording transactions in the Journal
B. Posting entries to the Ledger
C. Balancing accounts
D. Preparing financial statements

Answer: A. Recording transactions in the Journal