Journal Entries

CIMA-BA3 · Chapter 11

Journal Entries

A journal entry is a double entry written in words: the debit first, the credit underneath it (indented), the amounts in two columns, and a short narrative saying why. The journal itself is the book of prime entry for transactions that fit no other book — opening entries, year-end adjustments, non-current assets bought on credit, write-offs and the correction of errors. In the examination, any entry described in words is called a journal entry.

1 Introduction

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We mentioned in the last chapter that one of the books of prime entry is known as the journal, and is used to list unusual transactions.

A journal entry is an entry in this book. However, it is also used in the examination to refer to any entry that is written down in words (as opposed to actually entered in t-accounts).

In this chapter we will explain how journal entries are written in the examination.

The word journal means diary. When double entry was first developed, every entry was also written out in words in a journal before it was posted. Today that would be far too slow for everyday transactions, which go through the day books and the cash book (Chapter 10), so the journal is kept for the unusual ones.

2 The format of journal entries

A journal entry is the name given to an entry that is written in words.

The format is always as follows:

write the debit entry first, followed by the credit entry on the next line (traditionally indented a little).
write below the entry a brief description of why the entry is to be made. This is known as the narrative.

In a journal book each entry is also dated and given a reference number, and a line is drawn under the narrative before the next entry. An entry may have more than one debit or more than one credit (a compound entry), but the total of the debits must always equal the total of the credits.

The business purchases goods for resale from Mike for $2,500 on credit.

You are required to write down the journal entry for this transaction.

Account	Debit $	Credit $
Dr Purchases	2,500
Cr Payables		2,500
being the purchase of goods on credit from Mike

The debit comes first and the credit second. In practice this purchase would be listed in the purchase day book rather than the journal — but whenever an entry is written in words, this is the layout.

3 What the journal is used for

Any transaction that does not belong in one of the other books of prime entry is recorded in the journal. The most common are:

Use	Typical entry	Chapter
Opening entries — bringing the assets, liabilities and capital of an existing business into a new set of books	Dr each asset; Cr each liability and Capital	2, 3
Depreciation for the year	Dr Depreciation expense; Cr Accumulated depreciation	5
Accruals and prepayments	Dr Expense, Cr Accruals; Dr Prepayments, Cr Expense	4
Irrecoverable debts and the allowance for receivables	Dr Irrecoverable debts expense; Cr Receivables (or Cr Allowance for receivables)	8
Closing inventory	Dr Inventory; Cr Statement of profit or loss	9
Buying or selling a non-current asset on credit	Dr Non-current asset; Cr Payables (the supplier)	5, 6
Correcting errors	Whatever entry puts the accounts right (section 4)	13

Ravi Traders in Colombo makes its year-end adjustments for the year ended 31 December 2018 in the journal. Each entry has its narrative:

Date / account	Debit $	Credit $
31 December 2018
Depreciation expense	4,000
Accumulated depreciation — vans		4,000
being depreciation of vans for the year (20% × $20,000)
Electricity	350
Accruals		350
being electricity used in December, not yet billed
Prepayments	600
Insurance		600
being insurance paid for January to June 2019
Irrecoverable debts expense	250
Receivables		250
being the debt of Nimal Perera written off — customer bankrupt
Inventory	7,800
Statement of profit or loss		7,800
being closing inventory at the lower of cost and net realisable value

Each entry is posted to the ledger accounts in the usual way. The journal gives a permanent written record of what was done and why — which is exactly what an auditor, or the accountant next year, needs to see.

Amina Yusuf has run a small shop in Kano for some years without proper books. On 1 January 2018 she starts a double-entry system. The business has premises worth $50,000, a van worth $8,000, inventory of $3,000 and $2,000 in the bank. It owes $15,000 on a bank loan.

Required: Write the opening journal entry.

Assets are debit balances; liabilities and capital are credit balances. Capital is the balancing figure: assets $63,000 − liabilities $15,000 = $48,000 (the accounting equation).

Account	Debit $	Credit $
Dr Premises	50,000
Dr Van	8,000
Dr Inventory	3,000
Dr Cash at bank	2,000
Cr Bank loan		15,000
Cr Capital		48,000
	63,000	63,000
being the assets, liabilities and capital of the business at 1 January 2018

4 Correcting errors with a journal

When an error is found in the ledger accounts it is put right with a journal entry, never by crossing out. Work out three things: what entry was made, what entry should have been made, and therefore what entry is needed to get from one to the other.

An error of commission (the right type of account but the wrong one — for example rent posted to the repairs account) is corrected by moving the amount: Dr the correct account, Cr the wrong one.
An error of principle (the wrong type of account — for example a new machine debited to repairs) is corrected the same way: Dr Machinery, Cr Repairs.
An error of omission (the transaction left out completely) is corrected by making the entry that was missed.
A transposition error (two digits swapped, such as $560 entered as $650) is corrected by the difference between the two figures, in whichever accounts are wrong.
An amount posted to the wrong side of an account (for example a $340 payment for electricity credited to the Electricity account instead of debited) needs twice the amount to correct it: $340 to cancel the wrong entry and $340 to make the right one — Dr Electricity $680. If the other half of the entry was right, the trial balance will not have agreed, so the credit goes to a suspense account (Chapter 13).

These errors were introduced in Chapter 3. Where an error has made the trial balance fail to agree, the other side of the correcting journal goes to a suspense account — Chapter 13 shows how.

Write the journal entries, with narratives, for the following transactions and adjustments of Chukwu Enterprises:

A delivery van is bought on credit from Lagos Motors for $12,000.
Depreciation on equipment for the year is $2,400.
The debt of $180 owed by a customer, Peter, is to be written off as irrecoverable.
Rent of $800, paid and correctly entered in the cash book, was debited to the Repairs account by mistake.
A sale on credit of $560 to Ama Owusu was entered in both the Sales account and the Receivables account as $650.

Account	Debit $	Credit $
(a) Van	12,000
Payables — Lagos Motors		12,000
being the purchase of a delivery van on credit
(b) Depreciation expense	2,400
Accumulated depreciation — equipment		2,400
being depreciation of equipment for the year
(c) Irrecoverable debts expense	180
Receivables		180
being the debt of Peter written off as irrecoverable
(d) Rent	800
Repairs		800
being rent wrongly debited to the repairs account, now corrected
(e) Sales	90
Receivables		90
being correction of a credit sale to Ama Owusu recorded as $650 instead of $560

In (d) the cash book was right, so only the debit was in the wrong place: moving $800 from Repairs to Rent puts it right. In (e) both accounts were overstated by 650 − 560 = $90, so both are reduced by $90; the trial balance was not affected, because the error was the same on both sides.

5 Test your knowledge

Two quick checks before you move on: work through the flashcards to fix this chapter’s terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.

Answer the questions one at a time. Your progress is saved so you can leave and come back.

Open chapter practice