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  • Opening Journal Entry

Business according to going concern concept is supposed to be carried on indefinitely. At the end of the accounting year different accounts are closed but the business has to be carried on, so previous year’s assets and liabilities are to be brought into account of the current year. Passing journal entry in the beginning of the current year with the balance of assets and liabilities of the previous year is opening journal entry. In these entry assets accounts are debited because assets always show debit balance. Liabilities and capital accounts are credited because they show credit balance.

Illustration 7. The firm of M!s Pandey and Goyal has the following balances in their different ledger accounts on January 1, 2006.

$

Cash                                                                            40,000

Closing Stock                                                              40,000

Building                                                                      1,20,000

Debtors                                                                       40,000

Creditors                                                                     32,000

Capital                                                                         2,16,000

Pass the opening journal entry.

Solution.

                                                                                                                      Journal Entry

 

Note. Excess of credit over debit has been assumed to be goodwill.

  • Closing Journal Entry

At the end of accounting period, all ledger accounts pertaining to goods i.e., purchases, sales, purchases return, sales return, stock and other accounts concerning expenses, losses, income and gain are closed by transfer to trading and profit and loss accounts. These transfer entries are termed as closing entries. In other words, the closing entries concern all the items of the debit and credit side of Trading, Profit and Loss Ale i.e., Nominal Accounts.

These entries are based upon Trial Balance and can be summarized as under :

(i) For closing items appearing at the debit side of Trading A/c

Trading A/c                                         Dr.

To Opening stock A/c             Dr.

To Purchases A/c                    Dr.

To Sales return A/c

To direct expenses A/c (individually by name)

(ii) For closing items appearing at the credit side of Trading  A/c

SalesA/c                                              Dr.

Purchases Return A/c                          Dr.

Closing stock A/c                                Dr.

To Trading A/c

(iii) For Transfer of Gross Profit ro Profit and Loss A/c

Trading A/c                                         Dr.

To Profit and loss A/c

(iv) For Transfer of Gross Loss to Profit and Loss A/c

Profit & Loss A/c                                Dr.

To Trading A/c

(v) For closing items (indirect expenses and losses) appearing at the debit side of Profit and Loss A/c

Profit & Loss A/c                                Dr.

To Indirect expenses and losses A/c

(Individual expenses A/c by name)

(vi) For transfer of Income and Gains A/c

Individual Income and Gains A/c      Dr.

To Profit and Loss A/c

(vii) For transfer of Net profit

Profit and Loss A/c                             Dr.

To Capital A/c (In case of proprietorship and partnership)

OR

Profit & Loss Appropriation A/c (In case of Company)

(viii) For transfer of Net Loss

Capital A/c or                                      Dr.

Profit & Loss Appropriation A/c        Dr.

To Profit and Loss A/c

It should be noted that closing entries are made for nominal accounts only.

3. Adjusting Entries. Business is going concern. It has to be carried on indefinitely. We cannot wait indefinitely for the assessment of the performance of the business, so we distribute the life of the business in equal and uniform periods, generally a year. At the end of every accounting year, we prepare trading and profit and loss account and measure the performance of the business in terms of Gross profit and Net profit. We also prepare a Balance Sheet at the end of the year to assess the value of assets and liabilities.

While preparing Final Accounts at the end of every accounting period, we come across certain problems. The expenses of the current year are still payable or the expenses of the next year have been paid during the current year. Sometimes, income of the current year remains still receivable and the income of the next year has been received during the current year. Depreciation on assets, interest on capital and provision for bad and doubtful debts of the current year has not been recorded in the books as yet. We are required to adjust these amounts in the final accounts of the current year, so that the correct profit or loss of the business may be ascertained. We will have to pass adjusting journal entries for all these items, errors and omissions, not yet recorded in the books. These items do not appear in the Trial Balance. They are adjusted at two places in the final accounts.

4. Rectifying Entries. “To err is human”. This old statement is also true for accounting. We, as a human being are likely to commit mistake of omission, commission and principles in maintaining books of accounts. We may omit the entire transaction from being recorded wholly or partially. We may commit mistake in calculation, i.e., addition, subtraction, division and multiplication. Mistakes may also be committed in carrying forward total from one page to other page, posting from subsidiary books to ledger accounts. Sometimes capital expenditure may be recorded as revenue expenditure or revenue expenditure may be recorded as capital expenditure. These mistakes are likely to be committed in the books of accounts.

Mistakes committed in the books of accounts must be rectified at the earliest. It should be noted that errors in accounts are not rectified by removing mistakes by ink remover or rubbing it off or by over-writing or cutting or even by tearing off the page. Once errors are committed, we boldly accept it and rectify the mistake by passing a rectifying entry. The rectified entry will neutralise the effect of wrong entry and also bring the correct effect of the transaction. Rectification of errors should be made at the earliest. While passing rectifying entry we will have to take into consideration the nature and type of errors.

5. Transfer Entries. At the end of accounting period, all ledger accounts pertaining to goods. i.e., purchases, sales, purchases return, sales return, stock and other accounts concerning expenses, losses, income and gain are closed by transfer to Trading and Profit and Loss Account. These journal entries are termed as transfer entries. 

For transfer of gross profit to Profit and Loss Account

Trading A/c                                         Dr.

To Profit and Loss A/c 

For Transfer of Net Profit

Profit and Loss A/c                             Dr.

To Capital A/c

6. Special items, which do not find a place in any subsidiary book

(a) Purchases of assets on credit. We know that credit purchases of goods are recorded in the purchases book. Cash purchases of goods are recorded in the cash book. Goods here, means the articles in which the firm deals. Stationery will be goods for stationery dealer and furniture will be goods for furnishers. In case assets are purchased on credit they can neither be recorded in the purchases book nor in the cash book. We have to pass a separate journal entry for this transaction. It is recorded in the journal proper.

(b) Sales of assets on credit. This item also does not belong to any of the subsidiary book. It can neither be shown in the cash book nor in the sales book, because it is neither cash transaction nor credit sale of the goods. It is therefore, recorded in the journal proper or general journal and a separate journal entry is passed for it.

(c) Interest on capital. It is an item which does not find a place in any of the subsidiary book. It is credited to proprietors’ capital accounts at the end of the accounting period. It is recorded in the journal proper.

(d) Goods taken by the proprietor for personal use. If gods are taken by the proprietor for personal use, it is neither purchases nor the sales of the firm. As such it cannot be recorded in the purchases or sales book. That is why; we have to pass a separate journal entry in the journal proper.

(e) Goods given as charity or free sample. If goods are distributed as free sample or given as charity,  it cannot be treated as purchases or sales. That is why, it is also recorded in the journal proper as a separate journal entry.

(j) Loss of goods. If goods are lost by theft, fire, and storm or by any natural disaster or accident, it cannot be treated as purchases or sales. It must be recorded as a separate journal entry in journal proper.

(g) Endorsement and dishonor of bills. These items do not concern with any of the subsidiary book. So, they do not find a place in the subsidiary books. A separate journal entry is also required for these items in the journal proper.

DEBIT NOTE AND CREDIT NOTE

In case of purchases return and sales return, adjustment is required in the amount payable or receivable. These adjustments are made through notes, known as debit note and credit note.

Debit Note. In case of purchases return, the purchases will reduce the amount payable to seller. When goods are purchased, the purchaser credits the seller’s account. If certain part of goods is returned to the seller, the value of goods returned will not be paid to the seller or will be deducted from the amount payable to seller or technically seller’s account will be debited with the value of goods returned to him. In this case the purchaser will send a ‘Debit Note’ to the seller meaning that the seller’s account is being debited for the value of goods returned to him. The seller after receiving the goods returned to him and the enclosed debit note will send a credit note to the purchaser, which will mean that the seller has credited purchaser’s account with the value of goods returned to him. Debit note can be sent by the seller to the purchaser also, if the total of the invoice is cast short or the price of certain goods is not included ·by mistake or price calculated at lesser rates. In all these cases, the seller will charge amount over and above the invoice value from the purchaser, so he will send a debit note to the purchaser, who will send a credit note to the seller in return.

We have got a separate column for Debit Note Numbers in our Purchases Return Book indicating the details of goods returned to supplier.

Credit Note. In case of sales return, goods are received back, so allowance is to be given to the purchaser for the value of goods returned by him. At the time of sales, purchaser Ale is debited for the value of invoice sent to him. As certain part of goods is being returned by the purchaser, so the value of goods returned by him should be deducted from the invoice value of goods or technically credited to the purchaser’s A/c. The seller in this case will send a credit note. So to adjust the amount debited in excess at the time of recording sales. The purchaser will send debit note against the credit note sent by the seller. The seller will also send credit note to the purchaser to rectify mistakes in the following cases:

1. If the total of the invoice has been wrongly added more.

2. If the price of certain goods has been charged, which was not sent?

3. If goods have been charged at more than their price.

4. If certain part of goods prove to be defective.

The purchaser will send debit note on receiving credit note from the seller. The debit and credit notes are exchanged between purchaser and seller for adjustments of amount payable or receivable. If one party sends debit note, the other party sends credit note and vice versa.

We have got a separate column for Credit Note Number in our Sales Return Book indicating the details of goods returned by customer.

A specimen of debit and credit note is given below :