Lesson 6 of 33 · Free
Contents
- 1 Journal Entries
- 1.1 What is a journal entry?
- 1.2 The five elements of every entry
- 1.3 Simple entries (two accounts)
- 1.4 Compound entries (three or more accounts)
- 1.5 The three-step recipe for any entry
- 1.6 10 common transactions and their journal entries
- 1.7 Practice
- 1.8 Lesson recap
- 1.9 Deepening the Concept
- 1.10 Indian Application & Regulatory Context
- 1.11 Worked Example (in Rupees)
- 1.12 Common Mistakes to Avoid
- 1.13 Practice Questions with Answers
- 1.14 Key Takeaways
- 1.15 Frequently Asked Questions
Journal Entries
The first place every transaction is recorded. Learn the format, the recipe, and the 10 entries you’ll write most often.
What is a journal entry?
A journal entry is the formal record of a single business transaction. It’s where bookkeeping starts — before the trial balance, before the financial statements, every number on a balance sheet began life as a journal entry. Each entry has a date, the accounts affected (debit first, credit second), the amounts, and a one-line narration explaining the transaction.
The five elements of every entry
- Date — when the transaction happened, not when you recorded it.
- Account(s) to debit — written first, flush left.
- Account(s) to credit — written below, indented, often prefixed with “To”.
- Amounts — debit column on the left, credit on the right. Totals must match.
- Narration — a short sentence in parentheses explaining the transaction.
Simple entries (two accounts)
Most everyday transactions involve just one debit and one credit. These are called simple journal entries.
May 10 Cash A/c Dr. 12,000
To Sales A/c 12,000
(Being cash sales recorded for the day)
May 31 Salary Expense A/c Dr. 50,000
To Bank A/c 50,000
(Being May payroll paid from current account)
Compound entries (three or more accounts)
When one transaction affects more than two accounts, you write a compound entry. The total debits still equal total credits.
You sell ₹10,000 of goods plus 18% GST. The customer pays cash.
May 12 Cash A/c Dr. 11,800
To Sales A/c 10,000
To GST Payable A/c 1,800
(Being sales made plus 18% output GST collected)
You buy ₹50,000 of inventory and the supplier gives you a ₹2,000 trade discount. You pay cash.
May 15 Purchases A/c Dr. 48,000
To Cash A/c 48,000
(Being purchase net of 2,000 trade discount)
Trade discounts are netted directly — they don’t appear as a separate account. Cash discounts (for early payment) are a different story and do get their own account.
The three-step recipe for any entry
- Identify the accounts affected. “Sold goods for cash” → Cash account and Sales account.
- Classify each account. Cash = Asset. Sales = Income (Revenue).
- Apply DEAD CLIC. Asset increasing → Debit. Income increasing → Credit. Done.
This recipe works for every transaction. If you can’t identify the second account, the entry is incomplete — find the missing side.
10 common transactions and their journal entries
| Transaction | Debit | Credit |
|---|---|---|
| Owner invests cash | Cash | Capital |
| Take bank loan | Cash / Bank | Loan payable |
| Cash sale | Cash | Sales |
| Credit sale | Accounts receivable | Sales |
| Cash purchase | Purchases / Inventory | Cash |
| Credit purchase | Purchases / Inventory | Accounts payable |
| Pay rent | Rent expense | Cash |
| Receive interest | Cash / Bank | Interest income |
| Customer pays an invoice | Cash | Accounts receivable |
| Owner withdraws cash | Drawings | Cash |
Practice
- Bought office furniture for ₹35,000 from Pepperfry on credit.
Dr. Furniture 35,000 / Cr. Pepperfry (AP) 35,000. - Paid ₹8,000 cash for one year of Zoho Books subscription.
Dr. Subscription Expense 8,000 / Cr. Cash 8,000. (Strictly, you could prepay and amortise — covered in Lesson 9.) - Received ₹15,000 from customer XYZ for a previously-billed invoice.
Dr. Cash 15,000 / Cr. AR — XYZ 15,000.
Lesson recap
- A journal entry records a transaction with date, debit, credit, amount, and narration.
- Simple entries touch two accounts; compound entries touch three or more.
- Always identify accounts, classify them, apply DEAD CLIC.
- Narrations matter — they’re the audit trail.
Cement what you just learned
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Apply what you’ve learned
Deepening the Concept
A journal entry is the elementary unit of accounting record-keeping — a chronological note that says ‘on date D, the following Dr and Cr were posted, supported by voucher V’. The format is simple but powerful: date on the left, account names with Dr on the first line and ‘To’ before each Cr account on the next lines, amounts in two columns, and a narration in italics describing the business event. Modern accounting software (Tally, Zoho, SAP) auto-generates journal entries behind the scenes when you fill a sales invoice, payment voucher or receipt voucher, but understanding manual journal entries remains the most important diagnostic skill in accounting. Adjustments at year-end — accruals, prepayments, depreciation, deferred tax, ECL provisions — are still posted manually as journals. A clean journal entry, with the right narration and supporting documents, is the simplest form of audit defence; a sloppy one invites notice from auditors and tax officers alike.
Indian Application & Regulatory Context
The Companies (Accounts) Rules 2014 require Indian companies to use accounting software with an audit-trail feature from 1 April 2023, which logs every edit, deletion or reversal of a journal entry. The voucher number must be unique and continuous, and the supporting documents (invoice, GRN, debit note, board resolution) must be cross-referenced in the narration. For GST, every journal entry that affects Output GST or Input GST must reconcile with the corresponding line in GSTR-1/GSTR-2B; mismatches show up in GSTR-9C and may invite scrutiny. For TDS, journal entries booking expenses on which TDS is applicable (rent under 194-I, professional fees under 194-J) must simultaneously credit TDS Payable so the deduction is captured at the time of expense recognition.
Worked Example (in Rupees)
Scenario: Tarini Designs LLP, Mumbai, receives an interior decorator’s invoice of ₹1,00,000 (excluding 18% GST) on 20 May 2026, with TDS at 10% under Section 194-J.
- Dr Professional Fees ₹1,00,000; Dr Input CGST ₹9,000; Dr Input SGST ₹9,000 (assume intra-state).
- Cr Sundry Creditors (Decorator) ₹1,08,000 (net of TDS ₹10,000).
- Cr TDS Payable u/s 194-J ₹10,000.
- Narration: ‘Being interior services billed by Decorator vide invoice INV/2026/057 dt 20.05.2026; TDS @10% deducted u/s 194-J’.
- Trial balance check: Dr ₹1,18,000 = Cr ₹1,18,000. ✓
Takeaway: One journal entry simultaneously captures the expense, the input-tax credit, the supplier liability and the TDS liability — all balanced and audit-ready.
Common Mistakes to Avoid
- Posting gross liability to supplier without netting TDS: the cheque you cut will exceed the invoice value if not corrected.
- Missing GST ledgers: the input tax credit is lost when GSTR-2B reconciliation runs.
- Vague narration like ‘Being expenses booked’: auditors will demand re-narration with invoice number and date.
- Forgetting to specify the TDS section in the payable ledger: Form 26Q filing becomes a nightmare at quarter-end.
- Backdating entries across the audit-trail date: creates compliance red flags and may attract penal action.
Practice Questions with Answers
Q1. What is the structure of a standard journal entry?
Answer: Date, Account to be debited (with Dr), ‘To’ account to be credited, two amount columns (Dr and Cr), and a narration in italics describing the business event.
Q2. A Pune startup pays ₹2,00,000 office rent on 1 May 2026, after deducting TDS @10% under Section 194-I. Pass the entry on the day of payment.
Answer: Dr Rent ₹2,00,000; Cr Bank ₹1,80,000; Cr TDS Payable u/s 194-I ₹20,000. (Assume GST is exempt for residential or netted separately if commercial.)
Q3. Why must the narration in a journal entry be descriptive?
Answer: Because the narration is the only inline evidence of what the entry is for. A descriptive narration with invoice/voucher references survives audit, GST scrutiny, and forensic review years later.
Q4. Explain the role of the audit-trail rule notified by MCA from April 2023.
Answer: Every accounting software used by an Indian company must record every edit, modification and deletion of journal entries with timestamps, user IDs and ‘before/after’ values. Disabling the audit trail attracts penalty under the Companies Act.
Key Takeaways
- A journal entry has date, accounts with Dr and Cr, amounts and narration.
- Modern software auto-generates most entries but year-end adjustments are still manual journals.
- Every entry affecting GST or TDS must capture the corresponding statutory ledger.
- Narrations must reference the source voucher to satisfy audit and statutory scrutiny.
- Audit-trail rules since April 2023 make every edit traceable — no more silent corrections.
Frequently Asked Questions
Can I write ‘Misc Expenses’ in the narration?
Never. Auditors will flag it, and the Income-tax officer may disallow the expense under Section 37(1).
How many lines can a single journal entry have?
Unlimited. Compound journal entries with many Dr and Cr lines are valid as long as totals match and the narration explains the bundle.
Is it acceptable to pass a journal entry without supporting documents?
Only for internal adjustments like provisions — and even then, a working paper supports the calculation.
How are journal entries different from contra entries?
A contra entry involves only cash and bank (e.g., cash deposited in bank). Tally uses a separate Contra voucher type for these to keep them visually distinct from sales/purchase entries.