Books of Original Entry

The Purpose of a Book of Original Entry

You now understand debits and credits, and you know how to analyse a transaction and directly record its effect in the relevant accounts. That process is useful for learning the mechanics, but real accounting systems never work that way. No business records a transaction straight into the ledger accounts.

Instead, every transaction is first written down in a book called the journal (also called the book of original entry). The source document — the bill, receipt, or invoice — is the evidence that authorises this first recording. This practice serves a critical purpose: it gathers the complete story of each transaction in one place, showing both the debit and the credit side together. Only after the journal entry is made are the amounts transferred to the individual ledger accounts.

The act of recording a transaction in the journal is called journalising. Once journalised, the entry gives a full and useful description of how the event affected the organisation. The later step of copying the debit and credit amounts from the journal into the separate ledger accounts is called posting.

This sequence is why the journal is called the Book of Original Entry and the ledger is called the Principal Book of Entry.

Subdivision of the Journal

Because most businesses have a very large number of similar transactions, the journal is not kept as a single book. It is subdivided into several specialised books of original entry:

• Journal Proper — for transactions that do not fit into any other specialised book
• Cash Book — for all cash receipts and payments
• Other Day Books:
  • Purchases (Journal) Book — for credit purchases of goods
  • Sales (Journal) Book — for credit sales of goods
  • Purchase Returns (Journal) Book — for goods returned to suppliers
  • Sales Returns (Journal) Book — for goods returned by customers
  • Bills Receivable (Journal) Book — for bills of exchange received
  • Bills Payable (Journal) Book — for bills of exchange accepted

In this chapter, you will learn the process of journalising and posting into the ledger. The cash book and the other day books are dealt with in detail in Chapter 4.

The Journal Format

Every journal entry is recorded in a standard format with five columns. The proforma is as follows:

Date — The date of the transaction is written in the first column. The year and month are written only once, at the top of the page, until they change.

Particulars — In this column, the name of the account to be debited is written first, touching the line. The abbreviation "Dr." is written at the end of this line. On the next line, the name of the account to be credited is written, indented slightly (leaving a small gap from the left margin). The word "To" is placed before the credited account. A brief narration explaining the transaction is written below the credit entry, enclosed in brackets.

L.F. (Ledger Folio) — This column is filled at the time of posting. It records the page number of the ledger where the account appears.

Debit Amount — The amount to be debited is entered in this column, on the same line as the account being debited.

Credit Amount — The amount to be credited is entered in this column, on the same line as the account being credited.

Rules for Journalising

The rules of debit and credit, which you have already learned, are applied here. For each transaction, you must decide:

1. Which two (or more) accounts are affected?
2. What type are those accounts (Asset, Liability, Capital, Revenue, Expense)?
3. Apply the rule: Debit what comes in, Credit what goes out (for real accounts); Debit the receiver, Credit the giver (for personal accounts); Debit expenses and losses, Credit incomes and gains (for nominal accounts).

The journal entry must always balance — the total of the debit column must equal the total of the credit column for each entry.

Simple Journal Entry Illustration

Consider a transaction: Started business with cash ₹1,00,000.

• Accounts affected: Cash (Asset) and Capital (Liability/Equity)
• Cash comes in — Debit Cash Account
• Capital is the giver — Credit Capital Account

The journal entry would be:

Notice the narration explains the event. The word "Being" is conventionally used to begin the narration.

Compound Journal Entry

When a transaction affects more than two accounts, a single compound journal entry is made. For example, if goods worth ₹10,000 are sold, receiving ₹4,000 cash and the balance on credit:

The total debits (₹4,000 + ₹6,000 = ₹10,000) equal the total credits (₹10,000).

Posting from Journal to Ledger

After journalising, each debit and credit is transferred to the respective ledger account. This process is called posting.

The steps for posting are:

1. Locate the ledger account that is debited in the journal entry.
2. Enter the date of the transaction in the date column of that ledger account.
3. In the particulars column, write "To" followed by the name of the account that was credited in the journal entry.
4. Enter the amount in the debit amount column of the ledger.
5. In the L.F. column of the ledger, write the page number of the journal from which the entry is being posted.
6. Go back to the journal and fill in the L.F. column with the page number of the ledger account.

Repeat the same steps for the credit side of the journal entry, but in the ledger account that is credited, write "By" followed by the name of the account that was debited in the journal entry, and enter the amount in the credit column.

Balancing the Ledger Account …