Journal | ICSE Class 9 Commercial Studies Notes

This note covers the meaning of the journal as the book of original entry, how accounts are classified under the traditional (personal, real, nominal) approach, the rules of debit and credit for each class of account, the step-by-step method of recording simple transactions in the journal, the parts of a journal entry including narration, and the advantages and limitations of keeping a journal.

What is a journal?

A journal is the book in which business transactions are first recorded, in the order in which they occur, before they are transferred to any other book. Each business transaction is an exchange of economic value between two parties, and it affects at least two accounts, one receiving a debit and one receiving a credit. The journal records this two-sided effect for every transaction as a single, dated line of entry called a journal entry.

Because every transaction is written into the journal exactly once, in the order it happens, and nowhere else first, the journal is also called the book of original entry or the book of primary entry. Later, the amounts recorded in the journal are copied (this is called posting) into separate accounts kept in another book called the ledger. The journal therefore comes first in the sequence of recording: transaction, journal, ledger.

Definition: Journal. The journal is the book of original entry in which business transactions are recorded, in chronological order, showing the accounts to be debited and credited for each transaction.

Why is the journal called the book of original entry?

Every recorded fact about a business transaction has to start somewhere, and that starting point is the journal. No transaction is entered directly into the ledger, it must first pass through the journal. This gives the journal two practical uses. First, it is a complete, date-wise diary of every transaction, so anyone can trace a transaction back to when it happened. Second, each entry carries a short explanation called the narration, which states in plain words what the transaction was, so the entry can be understood without referring to any other document.

A source document or voucher, such as a cash memo, an invoice or a receipt, is the proof on which a journal entry is based. The bookkeeper reads the voucher, decides which accounts are affected, and then writes the journal entry. This is why recording always begins with the journal and never with the ledger directly.

What is the format of a journal, and what does each column record?

A journal is ruled with fixed columns so that every entry is recorded in a uniform way. The usual columns are date, particulars (the names of the accounts debited and credited, with the narration), ledger folio (shortened to L.F., which notes the page number of the ledger account to which the entry is later posted), the debit amount column and the credit amount column.

The account to be debited is written first, followed by the abbreviation Dr. (debit). On the next line, the account to be credited is written slightly indented and preceded by the word "To". The amounts are written in the matching debit or credit column on the same line as the account name, and the narration is written in brackets below the entry.

How are accounts classified before applying debit and credit rules?

Before deciding whether to debit or credit an account, the account must first be identified as belonging to one of three classes. This is the traditional classification of accounts.

• A personal account is the account of a person, firm or organisation with whom the business deals, for example the account of a customer or a supplier, or accounts such as capital and drawings that represent the proprietor.
• A real account is the account of an asset owned by the business, whether it can be touched (a tangible real account, such as cash, furniture or stock) or cannot be touched (an intangible real account, such as goodwill).
• A nominal account is the account of an expense, loss, income or gain of the business, for example rent, salary, commission received or interest received. These accounts do not continue from year to year in the same way as personal and real accounts.

Definition: Nominal account. A nominal account records the expenses, losses, incomes and gains of a business for an accounting period, rather than a person or an asset.

What are the rules of debit and credit for each type of account?

Once an account has been classified, a fixed rule tells the bookkeeper whether to put the amount on the debit side or the credit side.

So, when cash is received, the cash account (a real account) is debited because cash is "coming in". When cash is paid to a person, that person's account (a personal account) is debited because he is the "receiver" of the payment, and the cash account is credited because cash is "going out". When rent is paid, the rent account (a nominal account) is debited because it is an expense, and the cash or bank account is credited because cash or bank is going out.

How do you record simple transactions in the journal?

To journalise a transaction, the bookkeeper works through four steps: identify the two accounts affected, classify each account as personal, real or nominal, apply the rule of debit and credit to decide which account is debited and which is credited, and finally write the entry with the amount and narration.

1. Read the transaction and the source document carefully to find the two accounts involved.
2. Decide the class of each account (personal, real or nominal).
3. Apply the matching rule of debit and credit to each account.
4. Write the debited account first with "Dr." against it, the credited account on the next line preceded by "To", the equal amount in the debit and credit columns, and a short narration in brackets.

Worked example 1. Furniture was purchased for cash, ₹6,000.

Answer: The two accounts affected are Furniture (a real account) and Cash (a real account). Furniture is "coming in", so it is debited; cash is "going out", so it is credited.
Furniture A/c  Dr.  ₹6,000
  To Cash A/c    ₹6,000
(Furniture purchased for cash)

Worked example 2. A loan of ₹25,000 at 6% was taken from a lender and received in cash.

Answer: Cash (a real account) is "coming in", so it is debited. The lender's loan account (a personal account) is the "giver" of the loan, so it is credited.
Cash A/c  Dr.  ₹25,000
  To 6% Loan A/c    ₹25,000
(Loan taken in cash)

Worked example 3. Furniture of ₹8,000 was purchased on credit from a furniture dealer.

Answer: Furniture (a real account) is "coming in", so it is debited. The dealer's account (a personal account) is the "giver" of the furniture on credit, so it is credited.
Furniture A/c  Dr.  ₹8,000
  To Dealer's A/c    ₹8,000
(Purchase of furniture on credit)

Worked example 4. Cash of ₹2,000 was handed to a petty cashier to start a petty cash fund.

Answer: Petty Cash (a real account) is "coming in" to the petty cashier, so it is debited. Cash (a real account) is "going out" of the main cash fund, so it is credited.
Petty Cash A/c  Dr.  ₹2,000
  To Cash A/c    ₹2,000
(Cash paid to petty cashier)

Why is narration written after each entry?

The narration is the short, bracketed sentence written below a journal entry explaining in plain language why the entry has been made, for example "(Furniture purchased for cash)". It is an essential part of the entry, not an optional note, because the debit and credit lines alone only show amounts and account names, not the reason for the transaction.

A narration lets anyone checking the books later, an auditor, an owner or a new accountant, understand the entry without hunting for the original voucher. It also helps to distinguish between two entries that otherwise look similar, for example two separate purchases of furniture on different dates for different reasons. Every journal entry, however simple, must carry its own narration.

What are the advantages of maintaining a journal?

Keeping a journal before posting to the ledger gives several advantages.

• It provides a complete, date-wise record of every transaction in the order it occurred, which makes it easy to trace any transaction later.
• Because both the debited and credited accounts are shown together with the amount, the chance of a transaction being recorded with unequal debit and credit is reduced.
• The narration attached to each entry explains the transaction in words, so the books can be understood without the original voucher.
• It serves as the base from which ledger accounts are posted, giving a single starting point for all later records.

What are the limitations of a journal?

A single journal also has drawbacks, particularly once a business grows.

• As the number of transactions becomes large, it becomes cumbersome to journalise every single one, because each entry still has to name both accounts and carry a narration.
• A journal does not, by itself, show the balance of any one account at a glance, since transactions of the same account are scattered through many pages in date order.
• Recording every transaction, including repetitive ones such as cash receipts or credit sales, in one book makes the division of accounting work among several clerks difficult.

These limitations are the reason larger businesses divide transactions of a similar nature into separate special-purpose books kept alongside the journal, though the journal remains the model on which they are based.

Going beyond the syllabus

In a larger business, transactions of a similar nature, such as all credit purchases or all cash receipts, are grouped into separate subsidiary books instead of being journalised one by one. These subsidiary books work on the same debit-and-credit logic as the journal, but each one deals with only one kind of transaction, which makes the recording quicker and divides the work among more than one person. Whatever book a transaction is first recorded in, it is eventually posted to the individual accounts kept in the ledger.

Glossary

• Journal — the book of original entry in which transactions are recorded in date order with the accounts to be debited and credited.
• Journal entry — the single, dated record in the journal showing the debited account, the credited account, the amount and the narration.
• Transaction — an exchange of economic value between two parties that affects at least two accounts.
• Debit — the left-hand side of an account, and the side on which the account that receives value is recorded.
• Credit — the right-hand side of an account, and the side on which the account that gives value is recorded.
• Narration — the short explanation, written in brackets below an entry, stating the reason for the transaction.
• Ledger folio — the column in the journal, shortened to L.F., that notes the page number of the ledger account to which the entry is posted.
• Personal account — the account of a person, firm or organisation with whom the business deals, including capital and drawings.
• Real account — the account of an asset owned by the business, tangible or intangible.
• Nominal account — the account of an expense, loss, income or gain for the accounting period.
• Posting — the process of copying amounts from the journal into the separate accounts kept in the ledger.
• Ledger — the principal book in which all accounts are kept, to which journal entries are posted.
• Source document — a document, such as a cash memo or invoice, that provides evidence that a transaction took place.
• Voucher — another name for a source document or for an internally prepared slip recording a transaction.
• Book of original entry — a book, such as the journal, in which a transaction is recorded for the first time.

Common errors and misconceptions

• Misconception: The journal and the ledger are the same book. Correct: The journal is the book of original entry where a transaction is first recorded date-wise; the ledger holds separate accounts to which the journal entries are later posted.
• Misconception: Debit always means "an increase" and credit always means "a decrease". Correct: Whether debit or credit means an increase depends on the class of account; for example, debit increases a real account like cash but decreases a personal account that is a creditor.
• Misconception: Any account with a person's name is automatically credited. Correct: A personal account is debited when that person is the receiver and credited only when that person is the giver; the rule depends on the transaction, not the name alone.
• Misconception: Narration is an optional extra that can be left out for simple entries. Correct: Narration explains the reason for every entry and is written for every journal entry, however simple the transaction.
• Misconception: A nominal account behaves exactly like a real account. Correct: A nominal account records expenses, losses, incomes and gains for the period and does not carry forward a running balance from year to year in the way a real account does.
• Misconception: The debit account is written anywhere in the particulars column. Correct: The account debited is always written first with "Dr." against it, and the credited account is written below it preceded by "To".
• Misconception: Goods or furniture purchased on credit do not need a journal entry because no cash has moved. Correct: A credit transaction still involves two accounts, the real account that receives the asset and the personal account of the supplier who gave it, so it must be journalised.

Exam-style questions with model answers

Q1. State the meaning of a journal. [2 marks]

1. The journal is the book of original entry in which business transactions are recorded, as they occur, before any other book.
2. Each entry in the journal shows the account to be debited, the account to be credited and the amount, along with a narration.

Q2. State two advantages of maintaining a journal. [2 marks]

1. It gives a complete, date-wise record of every transaction, making it easy to trace a transaction later.
2. Because the debit and credit accounts are shown together for each transaction, errors of unequal debit and credit are less likely.

Q3. State the rule of debit and credit applicable to a personal account, a real account and a nominal account. [3 marks]

1. Personal account: debit the receiver of value and credit the giver of value.
2. Real account: debit what comes into the business and credit what goes out of the business.
3. Nominal account: debit all expenses and losses and credit all incomes and gains.

Q4. Pass journal entries for the following transactions: (i) Business started with cash ₹50,000. (ii) Furniture purchased for cash ₹6,000. (iii) Rent paid ₹2,500. (iv) Salary paid ₹3,500. [4 marks]

1. Cash A/c Dr. ₹50,000; To Capital A/c ₹50,000 (Cash is coming in, a real account, debited; the proprietor as giver of capital, a personal account, is credited).
2. Furniture A/c Dr. ₹6,000; To Cash A/c ₹6,000 (Furniture coming in is debited; cash going out is credited).
3. Rent A/c Dr. ₹2,500; To Cash A/c ₹2,500 (Rent is an expense, a nominal account, debited; cash going out is credited).
4. Salary A/c Dr. ₹3,500; To Cash A/c ₹3,500 (Salary is an expense, a nominal account, debited; cash going out is credited).

Q5. Classify the following five accounts into Personal, Real or Nominal, and state the rule of debit and credit applicable to each: Cash, Furniture, Rent, Capital, Sales. [5 marks]

1. Cash: a real account; debited when cash comes in, credited when cash goes out.
2. Furniture: a real account; debited when furniture comes into the business, credited when it goes out.
3. Rent: a nominal account; rent paid is an expense, so it is debited (rent received would be an income and credited).
4. Capital: a personal account, since it represents the proprietor; it is credited when the proprietor gives funds to the business and debited when the proprietor withdraws from it.
5. Sales: a nominal account; credited because it is a gain or income of the business from selling goods.

Q6. Journalise the following transactions: (i) Commenced business with cash ₹1,00,000. (ii) Deposited into bank ₹40,000. (iii) Paid cartage ₹80. (iv) Purchased stationery for cash ₹2,300. (v) Paid for advertisement ₹1,200. (vi) Paid insurance by cheque ₹1,600. [6 marks]

1. Cash A/c Dr. ₹1,00,000; To Capital A/c ₹1,00,000 (Cash coming in is debited; the proprietor as giver of capital is credited).
2. Bank A/c Dr. ₹40,000; To Cash A/c ₹40,000 (Bank account receiving cash is debited; cash going out is credited).
3. Cartage A/c Dr. ₹80; To Cash A/c ₹80 (Cartage is an expense, debited; cash going out is credited).
4. Stationery A/c Dr. ₹2,300; To Cash A/c ₹2,300 (Stationery for office use is an expense, a nominal account, so it is debited; cash going out is credited).
5. Advertisement A/c Dr. ₹1,200; To Cash A/c ₹1,200 (Advertisement is an expense, debited; cash going out is credited).
6. Insurance A/c Dr. ₹1,600; To Bank A/c ₹1,600 (Insurance is an expense, debited; bank going out is credited).

Key takeaways

• The journal is the book of original entry; every transaction is recorded there first, before it is posted to the ledger.
• A journal entry shows the account debited, the account credited, the amount and a narration explaining the transaction.
• Accounts are classified into personal, real and nominal accounts before the rule of debit and credit is applied.
• A personal account is debited for the receiver and credited for the giver of value.
• A real account is debited for what comes in and credited for what goes out of the business.
• A nominal account is debited for expenses and losses, and credited for incomes and gains.
• The ledger folio column links a journal entry to the exact page of the ledger account it is posted to.
• A large volume of transactions makes a single journal cumbersome, which is why businesses later split transactions into special-purpose books.

Test yourself

What is written in the narration of a journal entry?

A short, bracketed sentence below the entry explaining in plain words the reason for the transaction, for example why furniture was purchased.

Why is cash debited when it is received?

Cash is a real account, and the rule for a real account is to debit what comes into the business, so receiving cash means debiting the cash account.

Give one example each of a personal account and a nominal account.

A customer's account is a personal account; rent paid is a nominal account, since it is an expense of the business.

What column in the journal shows the page of the ledger account?

The ledger folio column, shortened to L.F., notes the ledger page to which that entry is later posted.

Which account is credited when furniture is bought on credit from a supplier?

The supplier's personal account is credited, because the supplier is the giver of the furniture, while the furniture account (a real account) is debited.

Why can a single journal become cumbersome for a large business?

As the number of transactions grows, journalising each one with both accounts and a narration becomes slow, so similar transactions are later grouped into separate special-purpose books.

What is the rule of debit and credit for a nominal account?

All expenses and losses are debited, and all incomes and gains are credited, in a nominal account.

Does every journal entry need a narration, however simple the transaction?

Yes, every entry, however simple, carries its own narration so the reason for the transaction can be understood without the original voucher.