Cases where Journal Entry is required

Welcome Friends, you are welcome to learnvern. I am Anshu Sachan.

In the last session we saw journal entries.

Also why are journal entries useful?

We also saw some cases where journal entries are required.

Similarly we will see some more cases today. Ok?

Where you need to pass entries through journal entries.

What are those cases?

First is the stock presentation.

Generally what happens is, if we have a business on a large scale and if it is possible to maintain the inventory that is stock which includes purchase and sale, either it can be in numbers, in kg, in liters, in whichever unit / commodity you are doing your business and it has more importance of the unit then what you will do is, you will pass every entry of purchase or sale, from wherever the goods are coming or going, you will record those quantity wise.

What you are doing is maintaining a stock register or stock ledger.

Entries can be done but sometimes what happens is, it is not possible to maintain inventory in some businesses.

It is not possible to make an entry for every purchase or sale.

Like to book an entry as inward for the quantity which came in or to book an entry as outward for the quantity which is sent out.

So what i mean is, not to maintain a stock register.

This doesn’t mean that I don't have any stock in my account or in my business.

Getting me?

Everytime it is not possible.

The accountant maintains the account as per the requirement of the business. Ok?

So what i am doing is, I don’t have much requirement of the stock so i am not maintaining the inventory individual line item wise or day to day wise.

This doesn’t mean I cannot show any stock in my account.

So what to do now?

I have seen that I have this much xyz stock of value abc.

So I have to record the stock in my books of accounts.

So how can i do that?

2:05

Through journal entry right?

What will be the entry?

Closing stock debit and balance sheet item.

Closing stock credit and p&l account.

What is it?

It’s a presentation journal.

So this was a stock presentation journal.

Next is bad debt expense.

Now here you can see two things, bad debts expense and debtors written off.

Never get confused between these two.

These are totally two different things.

Bad debt and debtors write off are two different things.

Generally what happens is, we know the concept but we might not be able to understand what the client is trying to say.

What a business person is trying to say?

Sometimes We might not understand what they are trying to say and we may make some mistakes. Ok?

Let’s see the first case of bad debt expense.

Suppose you made a sale to a customer on credit terms ok?

And imagine you made a sale of 5 lakhs to that customer.

Generally the credit period is of 30 days, but that customer was new to us so the credit period we gave him was of 10 days.

We asked for the payment in 10 days and he agreed to give the payment in 10 days.

I gave him the invoice when i sold him the goods,

So what will be the entry?

Suppose the name of the customer is Mr. Abc.

Mr Abc debit to sales.

Hope you are able to understand me.

When was this entry done?

When I made sales of 5 lakhs. Ok?

Payment should have been received after 10 days.

But the 11th day went, the 12th day, even the 13th day went.

Yet the payment didn’t come.

So what did I do?

I reminded him to pay for the sales that i did of 5 lakhs, credit period of 10 days are completed.

And he started giving excuses of no money, not possible right now, xyz !

And started delaying the payment for 5 more days.

And you waited for more than 5 days and even for 10 days.

Yet he is not paying.

4:00

He didn’t refuse to pay but he is delaying with excuses.

You even ask from other partners in the market.

They said, even they have given the goods on credit to the same customer, the payment is yet to be received.

It looks like this party won’t make the payment.

Party will dissolve.

Getting me?

What is this happening now?

It seems like 5 lakhs are gone.

This normally keeps happening in business.

Whenever you will enter into business, practical life, these things are common to happen.

This is a part of business.

You must be thinking that you will never get that money.

I have taught you a concept of prudence.

Prudence means to provide the loss which is going to occur in the future.

For instance, what has happened in this case?

I feel like my 5 lakhs are gone. Ok?

What I will do is, make a provision.

Provision of what? Of bad debts.

Bad debts means non recoverable money.

What will be the entry?

Bad debt expense debit to provision for bad debts.

See i have not written off the debtors.

I have not closed the ledger of ABC.

What I have done is, I have created a new provision in front of that balance.

Getting me?

What I did is, I made a provision for bad debts expense.

Which means if he might not give us the money in future then we will lose our money. That is an expense.

If you just imagine virtually, what will the profit and loss account look like?

What entry have I made at the time of sales?

Mr. ABC to sales.

What will go on the credit side of the p & l account?

Sales 5 lakh ok?

After 2 months what entry did i make?

Bad debt expense debit to provision for bad debts.

What will go on the debit side of the profit and loss account?

Bad debts expense 5 lakhs.

So your transaction as of now is nullified.

What you did is, you booked the expense against the income that you booked earlier.

In short the effect on profit was made zero.

Hope you are able to understand me.

6:00

What was the first entry?

Mr ABC to sales.

Which means Income was booked.

What was the next entry?

Bad debt expense to provision for bad debt expense. Ok?

Now what we did is booked expenses.

Expense is nullified against income.

Which means your profit and loss account is corrected.

Getting me?

This is called providing debtors.

Sometimes what will happen is, the client will tell either of you two things.

Provide for debtors or write off debtors.

What does both of these mean?

Providing means to provide provision.

So the entry will be bad debt expense debit to provision for bad debts.

If they ask you to write off debtors.

Suppose if we continue the upper case.

That 2-3 months are gone and you are confirmed that you will not receive the payment and even you filed a case against him.

And the court declared that ABC has no money.

He was bankrupt.

Which means he has no money and we are not going to receive any money.

Now what happened is we are confirmed that we are not going to receive a single penny.

Getting me?

Our money is lost now.

Now you are confirmed that you need to close the ledger of ABC that you created.

Getting me?

And similarly the provision for bad debts that we had kept has turned into actual.

Now the entry that you will do is provision for bad debts to ABC.

Which means the account of ABC and provision is closed.

Hope you understood.

So we passed this entry.

Suppose we have neither booked any expense nor made a provision in the beginning.

We didn’t even pass the entry as bad debt expense to provision.

We thought we would get the money.

So we didn’t make any provision.

What actually happened is after 3-4 months we got the confirmation of not receiving the single penny.

What is the entry that you can pass directly?

Bad debt expense debit to Mr. ABC.

You can directly close the ledger of ABC there itself.

So this is the difference between booking a bad debt expense and writing off bad debt.

Write off means to close the account of debtors.

As we closed the ABC account.

Provide means to create a provision for bad debts.

Like bad debt expense to provision.

Getting me?

8:18

Suppose you did write off and turned it as zero.

But what if after one or one and half years, he gets the money.

And he accepts that he had purchased the material valued 5 lakhs, 2 years ago.

And he gives the payment.

But what you did was, closed the ledger in your books of accounts.

Booked expense against income.

You made everything zero.

Getting me?

Now in such a case what you will do is pass an entry.

If you have received the payment in your account, then what you will do is, try to remember that real account.

Debit what comes in, ok?

you have received the payment so bank account will be debit.

See we cannot open the ledger of ABC again.

As we have already closed it.

We closed it by debit and credit.

Remember we made an entry as a provision for bad debts to mr. ABC.

So it was converted to zero.

Now what will we do after we get the money?

So we will book “bad debt recovery income”.

Getting me?

What will be the entry?

Bad debt recovery.

Which means bad debt recovery will be on the income side.

On the side of profit and loss.

Which means you booked your income.

And on the bottom side, you got your money, so what was the entry that you made?

Cash and bank debit to bad debt recovery.

Bad debt expense is always on the debit side and bad debt recovery on the income side.

Hope you have understood.

So this was bad debt expense, write off debtors, provision for bad debts, book income when bad debts are recovered. Ok?

Bad debt expenses are your business expenses and they are allowed in income tax.

So whenever you will pay your income tax, at that time, bad debt expenses will be allowed.

And when the bad debt expenses will be recovered, at that time it will be increased to your income. Ok?

10:02

So whenever you calculate an income tax return, at that time be careful about bad debt expense and bad debt recovery.

Be careful about not skipping these out. Ok?

Next is provision for taxation.

I have told you in April to march right?

Or January to december.

We can keep either of these two accounting periods. Right?

Taxation period in India is from April to march. ok?

When do you need to file a return for this period of April to march?

Generally in september. Ok?

What happens is, normally when you are creating the account, you close your accounts till March, April or may.

But when do you need to file your return for income tax?

In September, in the next 9 months.

So what will you do now?

You will make provision.

Assumption like last time was my xyz profit so i paid abc amount of tax.

This year I have 123 profit so I might be asked to pay 456 amount of tax.

So what I need to do is give an effect of taxation in my books of accounts.

So what will be the entry?

Taxation expense debit.

What will it be?

Income tax expense debit to provision for taxation.

Which means what I have done is, made a provision for the amount that we have to pay in future.

 Entry will be, taxation account debit to provision for taxation.

What will we use for the same?

This journal posting.

Now let’s move ahead to more cases where journal postings are used.

Presentation journal. Ok?

Suppose a debtor has given us the advance payment.

Hope you know Debtors mean the customers.

Normally Customers cannot be negative.

Generally what happens is, we make a sale on credit.

And we are supposed to take the payment from the customer. Right?

Sometimes what happens is the customer gives the money in advance because of a good relationship with the seller.

Getting me?

And they may ask to write off next year against the sale that the seller will make to them.

“As you sell the goods, keep on making the corresponding entries simultaneously”.

12:02

understood?

Now what will happen is, when you will look at debtors on the cut off date, they will be shown in minus. Why?

Because they have paid in advance.

Generally an accountant and a businessman practice to show him as a creditor if he pays the payment in advance.

Which portraits that we are supposed to pay them.

See if somebody has paid in advance, that is considered as a liability. Ok?

In case if we are closing our business in future, then we are supposed to return the advance.

So what is this?

It is a presentation journal.

Credit the creditors and debit the debtors.

Negative balance will be transferred to creditors.

If you want to pass a presentation journal as debtor to creditor then you can do it through journal posting.

Next is interest income or expense recording.

see we are not talking about banks, we will keep doing bank reconciliation as usual.

Monthly bank reconciliation or maybe in 15 days.

What we will do is, book its entry.

Understood?

Like if i am doing bank reconciliation for the month of january on 31st of jan, and if i have received any interest in the same month or any charges have been deducted then i will book them at the same time. Ok?

What are these journal entries according to?

Normally it happens in the business, suppose you gave money to a party related to you like generally in the companies it happens to give loan to the staff and charge interest of 4 to 5 percent.

Now how to book such interests?

Through journal entry.

Getting me?

Suppose you have given a loan to one of your staff members, and in the return he paid you interest.

So what will be the entry?

You have received the payment so cash & bank account debit to staff loan interest income.

That Interest will be your income.

Similarly you have taken the loan from the supplier or from the customer or from your related party.

14:00

And you have decided to pay 10 percent interest per annum.

I am talking about the interest incomes except the banks.

See the ones related to the bank will be booked in the bank module but except this,

What about the loans given to, like related party or to the staff.

Also, what about the interest on the deposit kept?

Generally what happens is whenever you take a new connection of the electricity, at that time you need to pay the deposit.

 And on that deposit, the electric companies that provide electricity pay a certain percentage of interest annually.

So will we book this interest?

Through a journal.

Hope you are able to understand.

Next is the monthly or periodic discount.

Now what happens is, suppose I do the collection monthly or annually, whatever is decided, from the customers according to the way i perform my business or according to my business style.

For instance Mr. A is my customer and I have raised 50 invoices against him in this month.

And according to those 50 invoices the amount is 5.5 lakhs

Now what happens when we go to him for the collection at the end of the month, to get the payment quicker, we give him the discount of 10% and asked for the rest of the amount.

Now we won’t go for altering every invoice.

We won’t go for altering 50 invoices individually.

That will be time consuming.

So what we will do is, post a single general post for those who are for monthly and periodic discounts.

All these things can be done through journal posting. Ok?

If you have any queries or comments, click the discussion button below the video and post there. This way, you will be able to connect to fellow learners and discuss the course. Also, Our Team will try to solve your query.

In the next topic we will learn about payroll.

What is payroll?

What are the entries for payroll?

What are the parties involved in payroll?

Until then Thank You.