Points to be Noted while Passing Journal Entries:
While Passing the journal entries, the following points should be borne in mind:
1. Though from the legal and practical point of view, the proprietor and the business are regarded as one and the same party, for the purpose of book-keeping (i.e., for the purpose of recording the business transactions in the books of accounts), the business and the proprietor (i.e., owner) of the business must be considered as two distinct (i.e., separate) entities (i.e., parties). In other words, the proprietor of the business must be considered as a distinct or separate party from the business which he owns and controls. In short, the proprietor of the business should be considered as a separate entity or party with whom the business deals.
As the proprietor and the business are regarded as two separate parties, if there are any transactions between the proprietor and the business, those transactions should be recorded in the books of accounts of the business. For instance, if the proprietor invests money in the business, it should be deemed that the proprietor has given money to the business or the business has received money from the proprietor, and it should be recorded accordingly in the books of the business. Similarly, if the proprietor withdraws money from the business for his personal use, it should be deemed that the proprietor has received money from the business or the business has given money to the bus, and it should be recorded accordingly in the books of the business.
2. It must be clearly understood that all business transactions are recorded in the books of the business, and not in the books of the proprietor.
3. It must also be understood that all business transactions are recorded in the books of the business from the point of view of the business, and not from the point of view of the proprietor.
4. Each business transaction must be independently recorded in the books of accounts. In other words, while Passing a journal entry, each transaction must be regarded as an independent activity or transaction, and so each transaction must be recorded in the journal on its own without considering what has already happened or what will happen later.
5. While writing the name of a personal account, we can either add or omit the word 'Account' after the name of the person. But while writing the name of a real account or a nominal account, we have to add the word 'Account' after the name of the asset or expense or income.
6. After passing all the journal entries, the amount columns of the journal should be totalled. The object of totaling the two amount columns is to ensure the arithmetical accuracy, i.e., correctness, if journal entries.
7. Whenever the proprietor of a business brings in cash or any other thing into the business, an account called the 'Capital' Account' should be opened in the name of the proprietor in the books of the business, and the cash or any other thing introduced by the proprietor should be recorded in the capital account opened in his name.
The two accounts that are required to be taken into consideration for recording the cash or any other thing introduced by the proprietor into the business are (1) Cash Account (if cash is brought in) or the account of any other thing, say, stock account or furniture Account (if any other thing is brought in) and (2)Capital Account.
8. Whenever the proprietor invests in the business the sale proceeds if his private assets, say, the sale proceeds if his residential house, the sale proceeds of his private motor car, etc., that transaction should be recorded in the books of the business as additional capital introduced by the proprietor. As such, the two accounts that are required to be taken into account for recording those transactions are (1) Cash Account and (2) Capital Account (and not the account of the private asset sold).
Similarly, whenever the proprietor introduces into the business his private incomes, those incomes should be recorded in the books of the business as additional capital introduced by the proprietor. As such, the two accounts required to be taken into account for recording that transaction are (1) Cash Account and (2) Capital Account (and not the income account).
9. Whenever the proprietor commenced business with loan borrowed from his wife, children or friend, the two accounts that are required to be taken into account for recording the transaction are (1) Cash Account and (2) Wife's Loan Account or Children's Loan Account or Friend's Loan Account (but not his Capital Account).
10. Whenever the proprietor of a business withdraws cash, goods or any other thing from the business for his personal or domestic use, an account called the 'Drawings Account' should be opened in the name of the proprietor in the books of the business, and the cash, goods or any other thing withdrawn by the proprietor from the business for his personal or private use should be recorded in the Drawings Account opened in name.
The two accounts that are required to be taken into consideration recording the cash withdrawn by the proprietor for his personal or private use are (1)Drawings Account and (2) Cash Account.
The two accounts that are required to be taken into account for recording the goods withdrawn by the proprietor from the business for his personal or domestic use are (1) Drawings Account and (2) Purchases Account (if the goods are taken away by the proprietor at the cost price) or Sales Account (if the goods are taken away by the proprietor at the selling price, or if goods are withdrawn by the proprietor at cost price frequently).
The two accounts that are required to be taken into account for recording any asset, say, furniture, taken away by the proprietor from the business for his personal use are (1) Drawings Account and (2) Concerned Asset Account, say, Furniture Account.
While Passing the journal entries, the following points should be borne in mind:
1. Though from the legal and practical point of view, the proprietor and the business are regarded as one and the same party, for the purpose of book-keeping (i.e., for the purpose of recording the business transactions in the books of accounts), the business and the proprietor (i.e., owner) of the business must be considered as two distinct (i.e., separate) entities (i.e., parties). In other words, the proprietor of the business must be considered as a distinct or separate party from the business which he owns and controls. In short, the proprietor of the business should be considered as a separate entity or party with whom the business deals.
As the proprietor and the business are regarded as two separate parties, if there are any transactions between the proprietor and the business, those transactions should be recorded in the books of accounts of the business. For instance, if the proprietor invests money in the business, it should be deemed that the proprietor has given money to the business or the business has received money from the proprietor, and it should be recorded accordingly in the books of the business. Similarly, if the proprietor withdraws money from the business for his personal use, it should be deemed that the proprietor has received money from the business or the business has given money to the bus, and it should be recorded accordingly in the books of the business.
2. It must be clearly understood that all business transactions are recorded in the books of the business, and not in the books of the proprietor.
3. It must also be understood that all business transactions are recorded in the books of the business from the point of view of the business, and not from the point of view of the proprietor.
4. Each business transaction must be independently recorded in the books of accounts. In other words, while Passing a journal entry, each transaction must be regarded as an independent activity or transaction, and so each transaction must be recorded in the journal on its own without considering what has already happened or what will happen later.
5. While writing the name of a personal account, we can either add or omit the word 'Account' after the name of the person. But while writing the name of a real account or a nominal account, we have to add the word 'Account' after the name of the asset or expense or income.
6. After passing all the journal entries, the amount columns of the journal should be totalled. The object of totaling the two amount columns is to ensure the arithmetical accuracy, i.e., correctness, if journal entries.
7. Whenever the proprietor of a business brings in cash or any other thing into the business, an account called the 'Capital' Account' should be opened in the name of the proprietor in the books of the business, and the cash or any other thing introduced by the proprietor should be recorded in the capital account opened in his name.
The two accounts that are required to be taken into consideration for recording the cash or any other thing introduced by the proprietor into the business are (1) Cash Account (if cash is brought in) or the account of any other thing, say, stock account or furniture Account (if any other thing is brought in) and (2)Capital Account.
8. Whenever the proprietor invests in the business the sale proceeds if his private assets, say, the sale proceeds if his residential house, the sale proceeds of his private motor car, etc., that transaction should be recorded in the books of the business as additional capital introduced by the proprietor. As such, the two accounts that are required to be taken into account for recording those transactions are (1) Cash Account and (2) Capital Account (and not the account of the private asset sold).
Similarly, whenever the proprietor introduces into the business his private incomes, those incomes should be recorded in the books of the business as additional capital introduced by the proprietor. As such, the two accounts required to be taken into account for recording that transaction are (1) Cash Account and (2) Capital Account (and not the income account).
9. Whenever the proprietor commenced business with loan borrowed from his wife, children or friend, the two accounts that are required to be taken into account for recording the transaction are (1) Cash Account and (2) Wife's Loan Account or Children's Loan Account or Friend's Loan Account (but not his Capital Account).
10. Whenever the proprietor of a business withdraws cash, goods or any other thing from the business for his personal or domestic use, an account called the 'Drawings Account' should be opened in the name of the proprietor in the books of the business, and the cash, goods or any other thing withdrawn by the proprietor from the business for his personal or private use should be recorded in the Drawings Account opened in name.
The two accounts that are required to be taken into consideration recording the cash withdrawn by the proprietor for his personal or private use are (1)Drawings Account and (2) Cash Account.
The two accounts that are required to be taken into account for recording the goods withdrawn by the proprietor from the business for his personal or domestic use are (1) Drawings Account and (2) Purchases Account (if the goods are taken away by the proprietor at the cost price) or Sales Account (if the goods are taken away by the proprietor at the selling price, or if goods are withdrawn by the proprietor at cost price frequently).
The two accounts that are required to be taken into account for recording any asset, say, furniture, taken away by the proprietor from the business for his personal use are (1) Drawings Account and (2) Concerned Asset Account, say, Furniture Account.
.......... To be Continued in next post with sr.no.11
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