Welcome Friends, you are welcome to learnvern. I am Anshu Sachan.
In the last session we learnt how to create a bank reconciliation statement.
Today we will see about journal entry.
What are journal entries?
So Suppose to pass a sales entry, we need an invoice.
To pass a purchase entry, we need a purchase invoice.
To pass a cash entry, we need cash vouchers.
In short, for every type of invoice and for every type of transaction, we have particular ledgers.
- Sales ledger
- Purchase ledger
- Expense ledger
Now here, I have to pass certain adjustment entries.
Which means suppose I have made some mistakes and I want to rectify the account,
then I need to pass adjustment entries.
Come on Let’s have a look.
what if we want to pass depreciation.
Now you will not have any voucher for depreciation,
You will not have any calculation or any evidence proof.
So usually how is depreciation calculated?
Which is called a journal, it can also be known as a general journal. Ok?
When you want to pass an adjustment entry, only then journal posting is required. ok?
At that time journal posting will be useful.
What is the second part?
Whenever we create books of account, there are accounting principles which are generally accepted.
What are these?
Books of account should be made according to Certain principles which are created.
So sometimes when you need to pass adjustment entries in your books of account so that it complies with your accounting principles.
What do generally accepted accounting principles say?
It says to bifurcate Your liabilities, that is, your loan which you are going to pay into two accounts.
- Current assets
- Current liabilities / non current liabilities
Suppose I want to pay a loan of 50 lakhs.
What happens in this is, you need to divide the loan of 50 lakhs into two parts.
What are those?
One is current liabilities.
Second is non current liabilities.
What is the current liability?
The day which you are creating a balance sheet of, suppose I am creating a balance sheet of 31st march 2022 and on the same day i am supposed to pay a loan of 50 lakhs.
So this shows the pending amounts of the next 12 months that I have to pay to the bank, Which means the next 12 months after 31st march 2022.
Suppose out of 50 lakhs we might need to pay 3 lakhs in next 12 months to the bank.
So a portion of that 3 lakhs is considered as current liability and rest is considered as non current liability.
Like I said, a total amount of 50 lakhs is to be paid.
But over a period of time, you need to pay back your loan completely in 20-25 years.
What will we do in this case?
The amounts which we are going to pay in next 1 year, which means, all the payments upto 31st march 2023, will be displayed in the current liabilities.
And rest of the payments will be shown in non current liabilities.
So when can it be bifurcated?
When we will pass an adjustment journal.
What will you need in order to pass this entry?
Journal posting. Ok?
Generally what happens is, like we learned the “reporting period”, what every businessman or every accountant is supposed to do, whoever makes the account is required to decide a reporting period to know for what period he is writing books of accounts.
Ok? As I said calendar year, which means January to december.
Financial year - from April to march.
Also I told you that if we are in india and we are writing the books of accounts of india and it is company formation, no matter if the company is private limited or public listed.
They are always supposed to follow the financial year. Ok?
April to march.
Rest countries may follow January to december.
Generally what is the period of taxation i.e. income tax and central tax ?
April to march.
The major reason to maintain the books of accounts is to file taxation.
And what is period for taxation?
April to march.
Whenever we write books of accounts in India, you will notice that we Generally write books of accounts for April to march.
But I told you the calendar year i.e. January to December can also be followed.
But it should not be any company or institution.
If it's a company then it's compulsory to follow April to march. Ok?
Let’s move ahead to certain cases.
I have given some examples here where you will be required to pass journal entries.
You will be able to pass these adjustments through journal entries.
Most of these journal entries are made at the end of the year.
Which means, once you decide your accounts.
Suppose accounts will be prepared from first april to thirty first march and you wish to close your account on 31st march 2022.
So generally these are account closing entries / Ledger closing entries.
And generally these are also known as year end entries. Ok?
Let’s see the cases ahead.
As you can see here, first is accrued income.
What is this?
What is accrued income?
Suppose I have provided the service but the payment for the same is yet to come.
This happens generally where we do AMC contracts.
Where the type of service is annual.
What happens sometimes is, you give the annual service contract.
Imagine you are in business for an annual maintenance contract.
Where you sell AMC to the customers.
Which means you take the annual maintenance contract of their systems.
suppose if a guy asked for your service for 12 months.
And we accepted, and this thing happened 3 months ago.
Hence service of 9 months is yet to be given.
And according to our payment terms, we can raise an invoice only after giving service for a complete 12 months.
hence he will pay us after 12 months.
Hope you are able to understand me.
Now what happened is suppose a cut off date has come.
Jan, feb, march, ok?
Service of these three months is provided and now the end of the year has come and I want to pass an adjustment entry for year end. ok?
I have provided service for January, February and March so that income is obviously accrued.
It's a different thing that I have not raised an invoice yet.
Still I have not received the payment is also a different thing.
But we have provided service for three months !
That income has to be shown somewhere.
How am I making accounts?
April to march.
The service that i have provided in jan feb and march has to be recorded. Ok?
Now here comes the role of journal entry.
If we had raised the invoice then there wouldn't be any problem.
Because directly from the sales invoice, through sales we would have booked. Ok?
But what did I tell you here?
We have neither raised any invoice nor we have received the payment but the service is provided.
So what will come in this?
What does accrued income mean?
The service is provided but the payment for the same is remaining.
So what will be the entry for this?
Accrued income debit. Why?
Because this is my income / my asset.
To get the money is yet pending.
To sales right?
Because it's a sale of 3 months.
What will be the entry?
Accrued income debit, to sales. Ok?
What will come in this?
This can be passed through journal entry.
Second is prepayment.
I have made an excel sheet for you. Ok?
You can see this prepayment.
What has happened in this?
My reporting period is from january 21 to december 21.
Are you able to understand?
And what have I done?
Made a payment for insurance.
If you remember, we are supposed to pay the insurance in advance.
Suppose, the year now is 2021.
So whenever you will make the payment in 2021, actually you will be paying for the year 2022.
Getting my point?
And generally this is an annual premium.
People from insurance take money for the next whole year.
Suppose in example what has happened here?
We have paid 12000.
What is my reporting period?
Jan to december.
What is my insurance premium period?
April to march 22 right?
What happened here is that I paid in advance for 3 months.
If i am making a balance sheet today on 31st december 2021.
So I have paid expenses in advance for january 22 to march 22.
So I need to pass the adjustment, only then will my expenses be booked properly.
So what will be the entry here?
Prepayment expense debit. Ok?
It's a prepayment !
I have paid in advance.
“To insurance expense”
What if we don't pass this adjustment?
If we dont pass the adjustment of prepayment, then the insurance expense will be shown as 12000, that is, more than 3000.
Because of this, either my profit will be shown less or my loss will be shown more.
Are you able to understand?
I have over booked the expenses / Over payment.
It would have been Overbooking of expenses. Ok?
Secondly, you can see this accrual.
What does accrual mean?
You must be aware that electricity expenses or telephone expenses are paid after a month.
Suppose the electricity bill for December arrives on the 7th of january. Ok?
What has happened here in my example?
A bill of electricity worth 5000 for the month of december has arrived in january.
Now what will happen if I don't book this expense?
My profit and loss account will not be displayed correctly. Why?
Because I have not booked this electricity expense.
If you remember, I told you that the profit and loss account is for the year.
Which means it is annually.
Hope you are able to understand.
For the whole year !
If i don't book my expenses properly in it then the result for profit and loss will not be correct. Ok?
In short, journal entries are generally made to correct your account.
So that your profit & loss account and balance sheet provide correct position and performance. Ok?
So what will be the entry here in accrual?
We need to book the expense so expenses are always debited.
Remember this rule. Expense is a nominal account. Ok?
So expenses will always be debited to accrual.
Accrual is a liability for us.
December is going on and the payment is yet to be done in january.
So these were two examples of pre-payment and expense. Ok?
Now we will move ahead to a different thing.
We are done with accrued income, prepayment and accrual expense.
Now we will see depreciation.
As we saw in the module of fixed assets, depreciation has two methods.
- Straight Line method
- Written down method
Do you remember that we stated there, if you want to book depreciation expense then you will not have any invoice for that.
You will not have any third party for the same.
Right? Here I myself will pass the adjustment.
So I can properly show its wear and tear in my books of account, that is, the decreasing value of the fixed assets that I have used.
So what do I need to do to book the depreciation entry?
I need to take the help of a journal entry. Ok?
What is in books of accounts?
Account type !
Whenever you pass an entry, you need to mention the type.
For example, a sales invoice.
If you wish to do a sales entry, you need a sales invoice.
PI for purchase invoice.
BP for bank payment.
CP for Cash payment.
VP for voucher payment.
What are all these?
These are all invoice types. Ok?
Whenever you will pass an entry in books of accounts, it will ask you for a type.
Is it a “SI”?
Or a Pi, BP, CP, VP right?
These are different types of accounts.
Similarly when you will pass an entry for depreciation, it will ask you for a type.
So what you need to write is Journal type.
Also you need to pass its adjustment. Ok?
So the adjustment passed will be depreciation expense account debit to provision for depreciation.
I have told you that depreciation is an expense for your business.
Hence we will always follow nominal accounting rules for this.
Expense will be debited and provision for depreciation will be credited. Ok?
And what will we write in narration?
“Depreciation provided for the year”
Because writing narration is very important in journal entries.
Now what is narration?
Once you pass the narration, you will have a small column below, where you need to write the description to justify why did you pass this entry.
See you will have an invoice for Sales invoice, purchase invoice.
In case, if you don’t remember the transaction in future, that invoice will help you.
But in journal entries, you don’t have any trail or any hard copy invoices. Ok?
These are adjustment entries.
So make sure to write narration properly whenever you pass journal entries.
Like you must be having 4 - 5 assets, for particular which asset you have passed a depreciation?
So always write there that we have passed a depreciation for the whole year and for motor vehicle. Ok?
Like we saw in accrued income, we did book accrued income.
What did I tell you in example?
Jan , feb, march.
Service for these three months is provided, income for the same is booked.
Suppose I have not written any narration for this, and did the entry as accrued income to sales.
So After 6 months or after 1 - 2 years, how will i get to know for which months, for which period i have booked the income.
Are you able to understand?
Because generally what happens is, we write the books of accounts from January to december.
But the Audit and tax return file will be after next 9 months.
You might forget in those 9 months about adjustment entries.
It can be a problem for you to explain why you passed that entry.
So always remember to write a description properly whenever you pass journal entries.
This was the reason for writing the narration.
Same thing goes for the pre-payment as well.
Mention the period of insurance in pre-payment suppose first april to thirty first march.
Which means we paid in advance of 3 months.
That is why we passed an entry of prepayment.
As I told you, depreciation.
If you have many assets, keep writing asset wise.
Like I have passed this depreciation for a motor vehicle.
If you have more than one car then, there you can write the numbers of the cars.
That XYZ car has 123 number, and I have provided depreciation for this particular car.
You will get transparency and clarity through this and also a track for the future.
Also if someone asks then, you will be able to answer that this was the particular car for the value ABC, and this was the depreciation policy.
And On basis of this I have passed this depreciation entry.
Next is deferred revenue, now what is deferred revenue?
This is totally opposite to accrued income.
What did we do in accrued income?
We provided the service in advance but the invoice is yet to be raised.
Or the payment is yet to be received. Ok?
What did I do?
I have just provided the service.
Now this is the case of deferred income.
Which is totally opposite.
Which means I have taken the payment in advance for next one year.
So which entry did I do when I received the payment?
Bank account debit to sales.
What did I do?
I booked the sales for all the 12 months.
If I don't pass the entry of deferred revenue, then what will happen?
There the income of the 12 months will be shown.
Which is not possible because the service of 3 months is yet to be given.
Which means incorrect data will be shown.
So what do I need to do?
I need to reduce that sales.
So sales will be debited and deferred income will be credited.
What will it be?
Sales debit to deferred income credit.
Deferred is always for the future.
It is always a liability.
That is why it will always be a liability. Ok?
This will be totally opposite to accrued income.
These cases also need to be passed from the journal entries only. Ok?
See if we will not pass these entries then you may get your profit as more or less, also loss as more or less, value of asset more or less, liability value more or less.
Anything is possible.
That is why journal posting is very difficult.
You need to pass them very precisely and carefully according to the case.
I might have told you while showing you the trial balance that trial balance will help your accounts to be mathematically correct.
Like ledgers are made and summary of the trial balance are made after closing the ledgers.
Which means you corrected the accounts mathematically.
But the true and fair view.
This is the word for your accounts which confirms the value to be really true and fair.
What do you need to do for that is pass certain adjustments at the year end.
How can those be passed?
Through these journal postings. 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 session we will see some more cases where you need to pass journal entries.
Until then Thank You.
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