India, 22 March 2022— Journal entries are the entries to record the financial transactions of the entity. Recording these transactions in the books of accounts helps track down how the business operates (whether there is an increase in income, expenses, profits, or Losses and to assess the entity’s financial position). Now accounting is done in a Cloud-based ERP System instead of traditional software such as Tally, Marg books, etc., which are to be installed within the PC.

What are the features of the Journal entry?

Journal entry features include

– Recording of benefit in and benefit out

– There will be Debit and Credit GLs

– Golden rules of accounting are to be followed for recording journal entry

What are the Golden Rules of Accounting?

Golden accounting rules lay the ground rules to decide which GL Accounts need to be debited and credited to record the transaction. Let’s understand the rules for Personal, Real, and Nominal Accounts.

Personal – Debit the Receiver and Credit the Giver

Real – Debit What comes in and Credit what goes out

Nominal – Debit the Expenses and Losses, Credit the Income and gains

Let’s understand how to record the journal entries with a couple of examples. We tried to add different categories of expenses – Routine expenses like Salary and Non-routine transactions like Loss of goods due to fire.

1. Salary Journal entry

Salary is an expenditure to the business and falls into the nominal account category. So, the expenses are debited.

What about the Credit?

The Second GL in this transaction is Salary Payable Account. This GL is a Liability account and is in the nature of the Personal Account. So, Credit will be a Liability Account (Salary Payable Account) as we need to credit the giver.

2. Loss of goods due to fire journal entry

The two accounts involved in this transaction are Loss and Goods.

Recording a Loss is not a routine transaction, but this is not outside the ordinary course business. Loss being the nominal account is to be debited per the golden accounting rules. The other side of the journal entry will be inventory or purchases. This is to reduce the Asset (goods/inventory) to the extent of goods lost due to fire.

Note: An increase in Asset is done by debiting and reducing the Asset by crediting.

Are we required to add Narration in the Journal entry?

Narration is a brief explanation of the Journal entry context. This Narration helps in clarifying the nature of transactions. So, it’s recommended to have a narration while recording the entry.

For example, let’s see how to add journal entries and Narration for a stationery purchased journal entry.

Journal entry:

Stationery GL is debited with Credit to the Bank Account.

We can add the Narration as 

– Being Stationery purchases made for an administrative department (or)

– Bought Stationery from XYZ Traders

There is no rule laid out for recording the Narration.

Conclusion: A journal entry is to record the entity’s financial transactions. The foundation for recording the entry is to identify the type, and nature of accounts involved in the transactions and decide the debit and Credit GLs based on the golden rules of accounting. It’s recommended to Add Narration to clarify the context of the journal entry.

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