Comprehensive Accounting Journal Entries Guide – With Narrations, Examples & Tables

Journal Entries for Revenue Transactions - Revenue (Sales)

A journal entry is a record of all financial transactions of a business. These transactions are entered in the general journal using the double-entry system of accounting.

Under this system, each transaction affects two accounts   one account is debited, and another is credited.

The total of all debit entries must always equal the total of all credit entries, ensuring that the accounting equation remains balanced.

1. Recognition of Unbilled Revenue (Unbilled Receivables)

When revenue is earned but not yet billed to the customer, it is recorded as unbilled revenue.

Journal Entry:

• Debit: Unbilled Revenue
• Credit: Revenue

Narration: Being revenue recognized for services rendered but not yet billed to the customer.

Explanation: This entry records income that has been earned during the accounting period but for which an invoice has not yet been issued. It ensures that the revenue is recognized in the period it is earned, following the accrual concept.

2. Billing of Previously Unbilled Revenue

When the invoice is raised later for the unbilled revenue, the amount is transferred from Unbilled Revenue to Accounts Receivable.

Journal Entry:

• Debit: Accounts Receivable
• Credit: Unbilled Revenue

Narration: Being unbilled revenue now billed and transferred to accounts receivable.

Explanation: This entry removes the amount from unbilled revenue and recognizes it as a receivable from the customer, as the invoice has now been raised.

3. Billed Revenue – Raising of an Invoice (Bills Receivable)

When the invoice is raised at the time of providing goods or services, the transaction is recorded as billed revenue.

Journal Entry:

• Debit: Accounts Receivable
• Credit: Revenue

Narration: Being revenue recognized upon raising the invoice for goods/services supplied.

Explanation: This entry recognizes revenue at the time of billing, indicating that the customer now owes the business the billed amount.

4. Deferred Revenue (Advance Invoicing)

Sometimes, invoices are raised before goods or services are actually delivered. In such cases, the revenue is not yet earned and should be treated as Deferred Revenue (Liability).

Journal Entry:

• Debit: Accounts Receivable
• Credit: Deferred Revenue

Narration: Being invoice raised in advance; revenue deferred until goods/services are delivered.

Explanation: Deferred revenue represents advance payments received for goods or services to be provided in the future. It is recorded as a liability until the revenue is earned.

5. Recognition of Deferred Revenue (When Earned Over Time)

When the related goods or services are delivered in future periods, the deferred revenue is recognized as actual revenue.

Journal Entry:

• Debit: Deferred Revenue
• Credit: Revenue

Narration: Being deferred revenue recognized as earned during the period.

Explanation: This entry transfers the revenue from the liability account (Deferred Revenue) to the income account (Revenue) as the company fulfils its obligations.

Scenario	Debit	Credit	Description
Unbilled Revenue Recognition	Unbilled Revenue	Revenue	Revenue earned but not billed
Billing Unbilled Revenue	Accounts Receivable	Unbilled Revenue	Transfer from unbilled to billed
Billed Revenue (Invoice Raised)	Accounts Receivable	Revenue	Revenue recognized upon billing
Deferred Revenue (Advance Invoice)	Accounts Receivable	Deferred Revenue	Invoice raised in advance
Recognition from Deferred Revenue	Deferred Revenue	Revenue	Revenue earned over time

Journal Entries – Sales and Accounts Receivables

When goods or services are sold on credit, they give rise to Accounts Receivable, representing the amount owed by customers. The following journal entries are used to record various transactions related to sales, receipts, discounts, and returns.

1. Goods or Services Sold on Credit

When goods or services are sold to a customer on credit, revenue is recognized, and a receivable is created.

Journal Entry:

• Debit: Accounts Receivable
• Credit: Sales

Narration: Being goods/services sold on credit to customer and revenue recognized.

Explanation: This entry records the sale transaction and recognizes the amount due from the customer as an asset (Accounts Receivable). It also increases sales revenue in the income statement.

2. Payment Received from Debtor or Customer

When the customer makes payment for the goods or services sold earlier on credit, the receivable is settled.

Journal Entry:

• Debit: Bank
• Credit: Accounts Receivable

Narration: Being payment received from customer against outstanding receivable.

Explanation: This entry records the receipt of cash or bank funds from the customer and reduces the accounts receivable balance.

3. Early Payment Discount Allowed to Customer

Sometimes, customers are offered a discount for making early payments. The business records the discount as an expense.

Journal Entry:

• Debit: Bank (for the net amount received)
• Debit: Early Payment Discount (for the discount allowed)
• Credit: Accounts Receivable (for the total invoice amount)

Narration: Being early payment discount allowed to customer and balance amount received.

Explanation: This entry accounts for the reduction in the amount receivable due to the discount offered for prompt payment. The discount is treated as an expense.

4. Sales Return (Cancellation of Invoice or Credit Note Issued)

When goods are returned by the customer, or an invoice is cancelled, a sales return is recorded to reverse the original sale.

Journal Entry:

• Debit: Sales (Sales Return)
• Credit: Accounts Receivable

Narration: Being sales return/cancellation of invoice recorded and credit note issued to customer.

Explanation: This entry reverses the effect of the earlier sale, reducing both the sales revenue and the amount receivable from the customer.

Transaction	Debit	Credit	Description
Credit Sale	Accounts Receivable	Sales	Records goods/services sold on credit
Payment Received	Bank	Accounts Receivable	Records cash/bank receipt from customer
Early Payment Discount	Bank / Early Payment Discount	Accounts Receivable	Records discount allowed for prompt payment
Sales Return / Credit Note	Sales	Accounts Receivable	Reverses sale or records returned goods

Journal Entries – Accounts Receivables and Bad Debts

When customers fail to pay their dues, it results in bad debts   amounts that are no longer collectible.

Businesses handle these situations using either the Allowance Method (preferred under accrual accounting) or the Direct Write-Off Method.

The following entries explain both approaches and how to account for bad debt recoveries.

1. Creating an Allowance for Doubtful Debts

At the end of an accounting period, businesses estimate the portion of accounts receivable that may become uncollectible and create an Allowance for Doubtful Accounts.

Journal Entry:

• Debit: Bad Debts Expense
• Credit: Allowance for Doubtful Accounts

Narration: Being provision created for estimated uncollectible debts for the period.

Explanation: This entry records an expense to reflect potential future losses from uncollectible accounts. The allowance acts as a contra-asset account, reducing the total accounts receivable balance on the balance sheet.

2. Writing Off a Specific Receivable (Using the Allowance Method)

When a specific debtor is confirmed to be uncollectible, the amount is written off against the existing allowance.

Journal Entry:

• Debit: Allowance for Doubtful Accounts
• Credit: Accounts Receivable

Narration: Being specific debtor’s account written off against the existing allowance for doubtful accounts.

Explanation: This entry removes the specific receivable from the books without affecting the income statement again, as the expense was already recognized earlier through the allowance.

3. Writing Off Bad Debts (Direct Write-Off Method)

In the Direct Method, no prior allowance is created. When a debtor is confirmed to be uncollectible, the loss is directly recorded as an expense.

Journal Entry:

• Debit: Bad Debts Expense
• Credit: Accounts Receivable

Narration: Being amount due from customer written off as bad debt directly.

Explanation: This method records the expense only when the debt is confirmed to be uncollectible. It’s simpler but less accurate in matching expenses to the period of sale.

4. Recovery of Bad Debts (Previously Written Off)

When a previously written-off debt is unexpectedly recovered, the amount is recognized as income.

Journal Entry:

• Debit: Bank
• Credit: Bad Debt Recovered

Narration: Being amount recovered from customer whose debt was previously written off.

Explanation: This entry records the cash received and recognizes it as income, since it had already been expensed earlier.

Transaction	Debit	Credit	Description
Create Allowance for Doubtful Debts	Bad Debts Expense	Allowance for Doubtful Accounts	Provision for expected uncollectible debts
Write-off Using Allowance	Allowance for Doubtful Accounts	Accounts Receivable	Specific debtor written off against provision
Direct Write-off of Bad Debt	Bad Debts Expense	Accounts Receivable	Debtor written off directly, no prior allowance
Recovery of Bad Debt	Bank	Bad Debt Recovered	Cash received from previously written-off account

Journal Entries – Accounts Receivable Factoring

Factoring is a financial arrangement where a business sells its accounts receivable to a factoring company (factor) to obtain immediate cash.

This helps improve liquidity by converting receivables into cash before customers actually pay.

Factoring can be of two types:

1. Without Recourse – The factor bears the risk of non-payment by the customer.
2. With Recourse – The business retains the risk of bad debts; if customers don’t pay, the business must reimburse the factor.

1. Accounts Receivable Sold to Factoring Company (Without Recourse)

In this case, the factoring company purchases the receivables outright. The business is not responsible if the customer fails to pay.

Any difference between the book value and the proceeds received is recognized as a loss on sale. A portion may also be retained by the factor as a security deposit or reserve, which will be released later.

Journal Entry:

• Debit: Bank (for cash received)
• Debit: Loss on Sale of Receivables (for factoring fees or discount)
• Debit: Retention Amount Due from Factor (for the amount held back)
• Credit: Accounts Receivable (for the total value of receivables sold)

Narration: Being accounts receivable sold to factor on a non-recourse basis, cash received, and balance retained by factor recorded.

Explanation: This entry removes the receivables from the books, records the immediate cash inflow, recognizes any loss from factoring, and creates an asset for the retention amount due later.

2. Accounts Receivable Sold to Factoring Company (With Recourse)

Under this arrangement, the business remains liable if the customer defaults. The factor provides cash after deducting charges, but the business must record a recourse liability to reflect its potential obligation.

Journal Entry:

• Debit: Bank (for cash received)
• Debit: Loss on Sale of Receivables (for factoring fees or discount)
• Credit: Recourse Liability (for possible repayment obligation)
• Credit: Accounts Receivable (for the total receivables sold)

Narration: Being accounts receivable sold to factor with recourse, cash received, loss recognized, and liability created for potential default.

Explanation: This entry recognizes the sale of receivables, records the immediate cash inflow, accounts for the factoring loss, and establishes a liability for the potential recourse risk.

Transaction	Debit	Credit	Description
Factoring (Without Recourse)	Bank / Loss on Sale / Retention Due	Accounts Receivable	Receivables sold; no risk retained by seller
Factoring (With Recourse)	Bank / Loss on Sale	Recourse Liability / Accounts Receivable	Receivables sold; seller retains risk of default

Journal Entries – Purchases or Accounts Payables

When a business purchases goods, services, or assets on credit, it creates a liability known as Accounts Payable (Vendor Payable).

The following journal entries explain how such transactions are recorded from purchase to payment, including discounts and advance payments.

1. Purchase of Inventory or Asset on Credit

When goods (inventory) or assets are purchased on credit, the business records the purchase and recognizes a liability toward the vendor.

Journal Entry:

• Debit: Inventory / Asset
• Credit: Vendor Payable

Narration: Being purchase of goods or asset on credit from vendor recorded.

Explanation: This entry increases the value of the inventory or fixed asset and records the amount payable to the vendor.

2. Expense Incurred on Credit (Goods or Services Purchased)

When services or non-inventory goods are purchased on credit, the expense is recorded immediately.

Journal Entry:

• Debit: Expense
• Credit: Vendor Payable

Narration: Being goods/services purchased on credit and liability created toward vendor.

Explanation: This entry records the expense in the current period and recognizes the obligation to pay the vendor later.

3. Payment to Vendor

When the business settles its payable by paying the vendor, the liability is cleared.

Journal Entry:

• Debit: Vendor Payable
• Credit: Bank

Narration: Being payment made to vendor against outstanding payable.

Explanation: This entry reduces both the accounts payable balance and cash/bank balance.

4. Payment to Vendor After Discount

If a discount is received for early payment or prompt settlement, the business records the discount as income.

Journal Entry:

• Debit: Vendor Payable (for total payable amount)
• Credit: Bank (for actual payment made)
• Credit: Discount Received (for the discount availed)

Narration: Being payment made to vendor after availing discount for early payment.

Explanation: This entry clears the payable and recognizes the discount received as other income.

5. Advance Payment to Vendor

When an advance is paid to a vendor before goods or services are received, it is treated as an asset until the goods or services are delivered.

Journal Entry:

• Debit: Advance to Vendor
• Credit: Bank

Narration: Being advance paid to vendor against future supply of goods/services.

Explanation: This entry records an asset representing the amount recoverable from the vendor in the form of future deliveries or services.

6. Purchase of Assets Against Advance

When the vendor delivers the goods or assets for which an advance was paid earlier, the advance is adjusted.

Journal Entry:

• Debit: Asset
• Credit: Advance to Vendor

Narration: Being asset purchased and advance paid earlier adjusted against final settlement.

Explanation: This entry capitalizes the asset and eliminates the advance recorded earlier.

Transaction	Debit	Credit	Description
Purchase of Inventory/Asset on Credit	Inventory / Asset	Vendor Payable	Records purchase and liability
Expense Incurred on Credit	Expense	Vendor Payable	Recognizes expense and payable
Payment to Vendor	Vendor Payable	Bank	Clears payable through payment
Payment After Discount	Vendor Payable	Bank / Discount Received	Records payment and discount availed
Advance to Vendor	Advance to Vendor	Bank	Records advance payment as asset
Purchase Against Advance	Asset	Advance to Vendor	Adjusts advance against purchase

Journal Entries – Payroll Accounting

Payroll accounting records all transactions related to employee compensation, including wages, taxes, and advances.

Proper payroll entries ensure accurate expense recognition and compliance with statutory obligations.

1. Payroll Payment

When salaries or wages are paid to employees, the total payroll cost is recorded as an expense. Deductions such as income tax, provident fund, or social security contributions are recognized as liabilities payable to the government or other authorities.

The remaining balance is paid to employees through the bank.

Journal Entry:

• Debit: Payroll Expense
• Credit: Taxes Payable to Government (for statutory deductions)
• Credit: Bank (for net salary paid to employees)

Narration: Being salaries and wages paid to employees with deductions for taxes and other statutory liabilities.

Explanation: This entry records total payroll cost, recognizes statutory liabilities, and records cash or bank outflow for net salaries.

2. Payroll Advance Payment

Sometimes, employees receive an advance salary before the actual payroll date. Such payments are treated as an asset (receivable from employee) until adjusted against the final payroll.

Journal Entry:

• Debit: Payroll Advance
• Credit: Bank

Narration: Being salary advance paid to employee before payroll processing.

Explanation: This entry records the advance payment as a short-term asset to be settled later through payroll.

3. Payroll Advance Adjustment During Payroll Processing

When payroll is finally processed for the month, the earlier advance is adjusted against the employee’s total salary due. Taxes are recognized as liabilities, and the remaining net amount is paid via bank.

Journal Entry:

• Debit: Payroll Expense (for total salary cost)
• Credit: Taxes Payable to Government (for statutory deductions)
• Credit: Payroll Advance (for salary already paid in advance)
• Credit: Bank (for remaining salary payable through bank)

Narration: Being monthly payroll recorded, taxes recognized, and earlier salary advance adjusted.

Explanation: This entry ensures that total payroll cost is recognized while properly adjusting any salary advances and statutory liabilities.

Transaction	Debit	Credit	Description
Payroll Payment	Payroll Expense	Taxes Payable / Bank	Records salaries and deductions
Payroll Advance Payment	Payroll Advance	Bank	Records advance salary paid to employee
Payroll Advance Adjustment	Payroll Expense	Taxes Payable / Payroll Advance / Bank	Adjusts advance during payroll processing

Journal Entries – Accruals

Under the accrual basis of accounting, expenses are recognized when they are incurred, not necessarily when they are paid. Accrual entries ensure that expenses are matched with the period in which they occur, even if the payment happens later.

1. Accrual of Any Expense

When an expense is incurred during the period but has not yet been paid, it must still be recognized in the books. This creates a liability (expense payable) for the amount owed.

Journal Entry:

• Debit: Expense
• Credit: Expense Payable

Narration: Being expense accrued for the period but not yet paid to the vendor.

Explanation: This entry records the expense in the correct accounting period and recognizes a liability to pay it later.

2. Payment to Vendor (Settlement of Accrued Expense)

When the accrued expense is finally paid in the next period, the liability is cleared.

Journal Entry:

• Debit: Expense Payable
• Credit: Bank

Narration: Being payment made to vendor for previously accrued expense.

Explanation: This entry settles the outstanding liability by recording the actual payment made to the vendor.

Transaction	Debit	Credit	Description
Accrual of Expense	Expense	Expense Payable	Records expense incurred but not yet paid
Payment of Accrued Expense	Expense Payable	Bank	Settles previously accrued expense

Journal Entries – Fixed Assets

Fixed Assets are long-term tangible resources such as furniture, machinery, buildings, and equipment used in business operations.

The following entries explain how to record asset purchases, depreciation, and sales (with profit).

1. Purchase of Furniture on Credit

When furniture or any other fixed asset is purchased on credit, the asset is recorded at its cost, and a liability is created toward the vendor.

Journal Entry:

• Debit: Furniture
• Credit: Vendor Payable

Narration: Being furniture purchased on credit from vendor recorded in books.

Explanation: This entry increases the value of the fixed asset (Furniture) and creates a payable to the vendor until payment is made.

2. Depreciation on Furniture

Depreciation represents the systematic allocation of the asset’s cost over its useful life. It is recorded periodically (monthly or annually) to reflect the reduction in the asset’s value due to usage or wear and tear.

Journal Entry:

• Debit: Depreciation Expense
• Credit: Accumulated Depreciation

Narration: Being depreciation provided on furniture for the accounting period.

Explanation: This entry records depreciation as an expense and accumulates it in a contra-asset account that reduces the asset’s book value.

3. Profit on Sale of Furniture

When furniture is sold, the following are recorded:

• Cash received from the buyer,
• Removal of the asset’s cost and accumulated depreciation from the books, and
• Recognition of gain if the sale value exceeds the asset’s net book value.

Journal Entry:

• Debit: Bank (for sale proceeds received)
• Debit: Accumulated Depreciation (to remove depreciation charged till date)
• Credit: Furniture (at original cost)
• Credit: Gain on Sale of Furniture (for profit earned on sale)

Narration: Being furniture sold, accumulated depreciation adjusted, and profit on sale recognized.

Explanation: This entry removes the asset and its accumulated depreciation from the books and records the gain as income.

Transaction	Debit	Credit	Description
Purchase of Furniture on Credit	Furniture	Vendor Payable	Records asset purchase and liability
Depreciation on Furniture	Depreciation Expense	Accumulated Depreciation	Records depreciation for the period
Profit on Sale of Furniture	Bank / Accumulated Depreciation	Furniture / Gain on Sale of Furniture	Records sale of asset and profit recognition

Journal Entries – Inventory

Inventory accounting tracks the movement of goods through raw materials, work in progress (WIP), and finished goods until they are sold. Proper entries ensure accurate reporting of inventory and cost of goods sold.

1. Purchase of Inventory (Raw Materials / Finished Goods)

When inventory is purchased on credit, the cost of the goods is recorded, and a liability is recognized toward the vendor.

Journal Entry:

• Debit: Inventory
• Credit: Vendor Payable

Narration: Being purchase of inventory (raw materials or finished goods) on credit recorded.

Explanation: This entry increases the inventory balance and records the payable to the vendor.

2. Transfer of Raw Material for Processing

When raw materials are issued to production, they are transferred from raw material inventory to work in progress (WIP).

Journal Entry:

• Debit: Work in Progress (WIP)
• Credit: Raw Materials

Narration: Being raw materials issued to production and transferred to WIP.

Explanation: This entry moves the cost of materials into WIP, reflecting the resources being consumed in the production process.

3. Transfer of WIP to Finished Goods

After production is completed, the cost of goods is transferred from WIP to finished goods inventory.

Journal Entry:

• Debit: Inventory – Finished Goods
• Credit: Work in Progress (WIP)

Narration: Being completed goods transferred from WIP to finished goods inventory.

Explanation: This entry reflects the completion of production and the availability of finished goods for sale.

4. Sale of Finished Goods

When finished goods are sold, two entries are required:

a) Recording Cost of Goods Sold (COGS):

• Debit: Cost of Goods Sold (COGS)
• Credit: Inventory – Finished Goods

Narration: Being cost of goods sold recognized for finished goods sold.

b) Recording Revenue from Sale:

• Debit: Accounts Receivable
• Credit: Revenue

Narration: Being sale of finished goods on credit recorded as revenue.

Explanation: The first entry reduces inventory and recognizes the expense of goods sold. The second entry recognizes revenue and creates a receivable from the customer.

Transaction	Debit	Credit	Description
Purchase of Inventory	Inventory	Vendor Payable	Records inventory purchased on credit
Raw Material Issued to Production	WIP	Raw Materials	Transfers raw materials to WIP for production
WIP Transferred to Finished Goods	Inventory – FG	WIP	Transfers completed goods to finished goods inventory
Sale of Finished Goods (COGS)	COGS	Inventory – FG	Records expense for goods sold
Sale of Finished Goods (Revenue)	Accounts Receivable	Revenue	Records revenue from sale on credit

Journal Entries – Abnormal Loss

Abnormal loss refers to loss of inventory or assets due to events beyond normal operations, such as fire, theft, or natural disasters. These losses are usually not expected in normal business operations and are accounted for separately.

When insurance claims are involved, entries are made to recognize amounts recoverable from the insurance company.

1. Recording Abnormal Loss

When an abnormal loss occurs, the value of the lost inventory or asset is removed from the books and recorded as a loss.

Journal Entry:

• Debit: Abnormal Loss
• Credit: Inventory

Narration: Being abnormal loss of inventory recorded in books.

Explanation: This entry recognizes the financial impact of the abnormal loss and reduces the inventory balance accordingly.

2. Amount Claimed from Insurance Company

If the loss is insured, the business recognizes the insurance claim receivable for the amount expected from the insurer.

Journal Entry:

• Debit: Insurance Receivable
• Credit: Abnormal Loss

Narration: Being amount claimed from insurance company for abnormal loss.

Explanation: This entry reduces the abnormal loss by the amount recoverable from insurance, showing that the company expects reimbursement.

3. Amount Received from Insurance Company

When the insurance company pays the claim, the receivable is settled, and cash or bank balance increases.

Journal Entry:

• Debit: Bank
• Credit: Insurance Receivable

Narration: Being insurance claim received from insurance company.

Explanation: This entry records the actual receipt of cash from the insurance company and clears the receivable.

Transaction	Debit	Credit	Description
Abnormal Loss	Abnormal Loss	Inventory	Records inventory lost due to abnormal events
Insurance Claim Receivable	Insurance Receivable	Abnormal Loss	Recognizes claim from insurance company
Receipt of Insurance Claim	Bank	Insurance Receivable	Records cash received from insurer

Journal Entries – Prepaid Expenses and Banking

This section covers prepaid expenses and common banking transactions, including cash deposits, bank charges, and loans. Proper recording ensures accurate expense recognition and proper accounting of cash and bank balances.

1. Prepaid Expenses

Prepaid expenses represent payments made in advance for goods or services to be received in the future. They are initially recorded as assets and later expensed over time.

a) Recording Prepaid Expense

When payment is made in advance (e.g., prepaid insurance):

• Debit: Prepaid Insurance
• Credit: Bank

Narration: Being payment made for insurance in advance recorded as prepaid expense.

Explanation: The payment is recorded as an asset since it benefits future periods.

b) Monthly Adjustment to Expense

Each month, a portion of the prepaid expense is recognized as an actual expense:

• Debit: Insurance Expense
• Credit: Prepaid Insurance

Narration: Being monthly portion of prepaid insurance expensed.

Explanation: This entry ensures that the expense is recognized in the period it relates to, following the accrual principle.

2. Banking Transactions

a) Deposit Cash into Bank

When cash is deposited into the bank:

• Debit: Bank
• Credit: Cash

Narration: Being cash deposited into bank account.

Explanation: This entry records the transfer of cash from hand to the bank account.

b) Bank Charges Debited by Bank

When the bank deducts charges for services or fees:

• Debit: Bank Charges
• Credit: Bank

Narration: Being bank charges debited by bank recorded as expense.

Explanation: Bank charges are recorded as an expense and reduce the bank balance.

c) Borrowing Money – Bank Loan

When the business takes a loan from the bank:

• Debit: Bank
• Credit: Bank Loan Payable

Narration: Being loan received from bank recorded as liability.

Explanation: This entry increases the cash/bank balance and recognizes the obligation to repay the bank.

Transaction	Debit	Credit	Description
Prepaid Expense	Prepaid Insurance	Bank	Payment made in advance for insurance
Monthly Expense Adjustment	Insurance Expense	Prepaid Insurance	Recognizes portion of prepaid insurance as expense
Cash Deposit into Bank	Bank	Cash	Records cash deposited into bank
Bank Charges	Bank Charges	Bank	Records fees charged by bank
Borrowing Money	Bank	Bank Loan Payable	Records loan received from bank

Journal Entries – Petty Cash

Petty cash is a small amount of cash kept on hand to pay for minor business expenses such as postage, stationery, or small supplies. Proper recording ensures accountability and tracking of these small payments.

1. Cash Paid to Petty Cash

When cash is transferred from the main cash or bank account to the petty cash fund:

• Debit: Petty Cash
• Credit: Cash

Narration: Being cash transferred to petty cash fund for minor expenses.

Explanation: This entry establishes the petty cash fund as an asset. The cash remains part of the business’s total cash but is now available for small expenditures.

2. Expenses Paid from Petty Cash

When petty cash is used to pay for small expenses:

• Debit: Expense (e.g., Office Supplies, Postage, Travel)
• Credit: Petty Cash

Narration: Being petty cash used to pay for minor expenses.

Explanation: This entry records the expense incurred and reduces the petty cash fund accordingly. Periodically, the petty cash fund is replenished to maintain the set balance.

Transaction	Debit	Credit	Description
Cash Paid to Petty Cash	Petty Cash	Cash	Transfers cash to petty cash fund
Expenses from Petty Cash	Expense	Petty Cash	Records small expenses paid from petty cash

Journal Entries – Intercompany Transactions

Intercompany transactions occur when two entities within the same corporate group conduct business with each other. Proper recording ensures accurate financial reporting and facilitates consolidation at the group level.

1. Expense Booking in Parent Company

When the parent company records an expense on behalf of a subsidiary or for intercompany purposes:

• Debit: Intercompany
• Credit: Intercompany Payable

Narration: Being expense booked in parent company on behalf of subsidiary.

Explanation: This entry recognizes the expense and records the liability (amount payable) to the subsidiary or related entity.

2. Payment to Subsidiary

When the parent company settles the intercompany payable:

• Debit: Intercompany Payable
• Credit: Bank

Narration: Being payment made to subsidiary for intercompany expense.

Explanation: This entry clears the liability and reduces the bank balance.

3. Revenue Booking in Subsidiary

When the subsidiary records revenue arising from an intercompany transaction:

• Debit: Intercompany Receivables
• Credit: Intercompany Revenue

Narration: Being revenue booked in subsidiary from parent company.

Explanation: This entry records the receivable from the parent company and recognizes intercompany revenue in the subsidiary’s books.

4. Collection from Parent Company

When the subsidiary receives payment from the parent company for the intercompany transaction:

• Debit: Bank
• Credit: Intercompany Receivables

Narration: Being cash received from parent company against intercompany receivable.

Explanation: This entry increases cash and clears the intercompany receivable.

5. Intercompany Elimination in Consolidation (Parent Company Books)

During group consolidation, intercompany transactions are eliminated to avoid double counting:

• Debit: Intercompany Payable
• Credit: Intercompany Receivables

Narration: Being intercompany balances eliminated during consolidation.

Explanation: This entry removes intercompany balances from the consolidated financial statements, ensuring only external transactions are reported.

Transaction	Debit	Credit	Description
Expense Booking (Parent)	Intercompany	Intercompany Payable	Records expense in parent for subsidiary
Payment to Subsidiary	Intercompany Payable	Bank	Settles intercompany payable
Revenue Booking (Subsidiary)	Intercompany Receivables	Intercompany Revenue	Records revenue from parent company
Collection from Parent	Bank	Intercompany Receivables	Records payment received from parent
Intercompany Elimination	Intercompany Payable	Intercompany Receivables	Eliminates intercompany balances during consolidation

Journal Entries – Lease Accounting

Leases are agreements where a company obtains the right to use an asset in exchange for periodic payments. Leases are classified as financial leases (capital/finance leases) or operating leases, and the accounting treatment differs accordingly.

1. Fixed Assets on Financial Lease

When a company acquires an asset through a financial (capital) lease, the asset and the corresponding lease liability are recognized on the balance sheet.

Journal Entry:

• Debit: Fixed Asset
• Credit: Lease Payable

Narration: Being asset acquired under financial lease recorded along with lease liability.

Explanation: The leased asset is capitalized at the present value of lease payments, and a liability is created for the obligation to pay the lessor.

2. Payment of Lease Obligation and Interest

When lease payments are made, they typically include both principal repayment (reducing lease liability) and interest expense.

Journal Entry:

• Debit: Lease Payable (for principal portion)
• Debit: Interest Expense (for interest portion)
• Credit: Bank

Narration: Being lease payment made including interest and principal portion.

Explanation: This entry reduces the lease liability and recognizes the interest expense for the period.

3. Rental Payment – Operating Lease

For operating leases, payments are recorded as an expense on a straight-line basis over the lease term. The leased asset is not capitalized.

Journal Entry:

• Debit: Rental Expense
• Credit: Bank

Narration: Being operating lease rental payment recorded as expense.

Explanation: This entry reflects the lease payment as an operating expense in the income statement without affecting the balance sheet asset.

Transaction	Debit	Credit	Description
Asset on Financial Lease	Fixed Asset	Lease Payable	Records asset acquisition and lease liability
Lease Payment (Principal & Interest)	Lease Payable / Interest Expense	Bank	Records payment of financial lease obligation
Operating Lease Payment	Rental Expense	Bank	Records rental expense for operating lease

Journal Entry – Amortization

Amortization is the systematic allocation of the cost of an intangible asset (such as patents, trademarks, or software) over its useful life.

1. Recording Amortization

Journal Entry:

• Debit: Amortization Expense
• Credit: Accumulated Amortization

Narration: Being amortization expense recorded for the period on intangible assets.

Explanation: This entry recognizes the expense associated with the use of intangible assets over time and accumulates it in a contra-asset account, reducing the book value of the asset on the balance sheet.

Transaction	Debit	Credit	Description
Amortization	Amortization Expense	Accumulated Amortization	Records periodic amortization of intangible assets

Journal Entries – Impairment of Assets

Impairment occurs when the carrying amount of an asset exceeds its recoverable amount, indicating that the asset’s value has declined.

Impairment is recognized to ensure that assets are not overstated in the financial statements. Recovery of impairment is possible if the asset’s value increases in future periods.

1. Recording Impairment Loss

When an asset’s carrying amount exceeds its recoverable amount, an impairment loss is recognized.

Journal Entry:

• Debit: Impairment Loss
• Credit: Accumulated Impairment Loss

Narration: Being impairment loss recognized on asset due to decline in recoverable amount.

Explanation: This entry records the decline in asset value as an expense and accumulates it in a contra-asset account to reduce the carrying amount on the balance sheet.

2. Recovery of Asset Impairment

If the value of an impaired asset increases in a later period, the previously recognized impairment can be partially or fully reversed.

Journal Entry:

• Debit: Accumulated Impairment Loss
• Credit: Gain on Revaluation

Narration: Being reversal of previously recognized impairment loss due to increase in asset value.

Explanation: This entry reduces the accumulated impairment loss and recognizes a gain in the financial statements, without exceeding the asset’s original carrying amount.

Transaction	Debit	Credit	Description
Impairment Loss	Impairment Loss	Accumulated Impairment Loss	Records decline in asset value
Recovery of Impairment	Accumulated Impairment Loss	Gain on Revaluation	Records reversal of impairment loss

Journal Entry – Goodwill on Acquisition

Goodwill represents the excess of the purchase price paid for a business over the fair value of its identifiable net assets. It arises during acquisitions and reflects intangible benefits such as brand reputation, customer relationships, or synergies.

1. Recording Goodwill on Acquisition

When a company acquires another business, the journal entry records the purchase of assets, recognition of liabilities, payment made, and any resulting goodwill.

Journal Entry:

• Debit: Assets (for fair value of acquired assets)
• Debit: Goodwill (for excess of purchase price over net assets)
• Credit: Liabilities (for assumed obligations of the acquired company)
• Credit: Bank (for cash paid to acquire the business)

Narration: Being acquisition of business recorded, assets recognized, liabilities assumed, cash paid, and goodwill created.

Explanation: This entry captures the net effect of acquiring a business, ensuring that the acquired assets and liabilities are recorded at fair value, and goodwill is recognized for the premium paid over the net asset value.

Transaction	Debit	Credit	Description
Goodwill on Acquisition	Assets / Goodwill	Liabilities / Bank	Records business acquisition, fair value of assets, liabilities assumed, and goodwill recognized

Journal Entries – Income Tax

Accounting for income tax involves recognizing the tax expense in the income statement and recording the liability until it is paid to the tax authorities.

1. Recording Income Tax Expense

When the company calculates income tax for the period, it recognizes it as an expense and a liability.

Journal Entry:

• Debit: Income Tax Expense
• Credit: Income Tax Payable

Narration: Being income tax expense recognized for the period and liability recorded.

Explanation: This entry records the tax obligation for the period based on taxable profit, creating a payable until payment is made.

2. Payment of Income Tax

When the company pays the income tax to the authorities, the liability is settled.

Journal Entry:

• Debit: Income Tax Payable
• Credit: Bank

Narration: Being payment of income tax made to tax authorities.

Explanation: This entry reduces the income tax liability and decreases the company’s bank balance.

Transaction	Debit	Credit	Description
Income Tax Expense	Income Tax Expense	Income Tax Payable	Records income tax for the period
Payment of Income Tax	Income Tax Payable	Bank	Settles tax liability by payment

Journal Entries – Goods and Services Tax (GST)

GST is an indirect tax levied on the supply of goods and services. In accounting, GST is not an expense but a liability or input credit, depending on whether it is collected on sales or paid on purchases.

GST is categorized into:

• CGST (Central GST)
• SGST (State GST)
• IGST (Integrated GST – for inter-state transactions)

1. Purchase – Intra-State

When a purchase is made from a vendor within the same state:

Journal Entry:

• Debit: Purchase
• Debit: CGST Input Credit
• Debit: SGST Input Credit
• Credit: Vendor Payable

Narration: Being purchase made intra-state with CGST and SGST input recognized.

Explanation: The company recognizes the cost of purchases and claims input credit for both central and state GST, while creating a liability to pay the vendor.

2. Purchase – Inter-State

When a purchase is made from a vendor in another state:

Journal Entry:

• Debit: Purchase
• Debit: IGST Input Credit
• Credit: Vendor Payable

Narration: Being inter-state purchase recorded with IGST input credit.

Explanation: Input IGST is recognized for credit against future IGST liability, while the total payable is recorded to the vendor.

3. Sales – Intra-State

When goods or services are sold to a customer in the same state:

Journal Entry:

• Debit: Accounts Receivable
• Credit: Sales
• Credit: CGST Payable
• Credit: SGST Payable

Narration: Being intra-state sale recorded with CGST and SGST liability.

Explanation: The sale is recognized as revenue, and the GST collected from the customer is recorded as a liability until remitted to the government.

4. Sales – Inter-State

When goods or services are sold to a customer in another state:

Journal Entry:

• Debit: Accounts Receivable
• Credit: Sales
• Credit: IGST Payable

Narration: Being inter-state sale recorded with IGST liability.

Explanation: Revenue is recognized from the sale, and IGST collected from the customer is recorded as a liability to the government.

Transaction	Debit	Credit	Description
Purchase Intra-State	Purchase / CGST Input / SGST Input	Vendor Payable	Records purchase and GST input on intra-state purchase
Purchase Inter-State	Purchase / IGST Input	Vendor Payable	Records inter-state purchase and IGST input credit
Sales Intra-State	Accounts Receivable	Sales / CGST Payable / SGST Payable	Records intra-state sale and GST liability
Sales Inter-State	Accounts Receivable	Sales / IGST Payable	Records inter-state sale and IGST liability

Journal Entries – Deferred Tax

Deferred tax arises due to temporary differences between accounting profit and taxable profit. It ensures that the tax effect of timing differences is recognized in the period in which they occur.

Deferred tax can be recorded as:

• Deferred Tax Asset (DTA): When taxable income is higher than accounting income, resulting in future tax benefits.
• Deferred Tax Liability (DTL): When accounting income is higher than taxable income, resulting in future tax obligations.

1. Recording Income Tax Expense

When the current period’s income tax is calculated:

Journal Entry:

• Debit: Income Tax Expense
• Credit: Income Tax Payable

Narration: Being current income tax expense recognized for the period.

Explanation: This entry records the income tax liability based on taxable profit for the period.

2. Recording Deferred Tax Asset

When a deferred tax asset is recognized due to deductible temporary differences:

Journal Entry:

• Debit: Income Tax Expense
• Debit: Deferred Tax Asset
• Credit: Income Tax Payable

Narration: Being deferred tax asset recognized along with current tax expense.

Explanation: This entry recognizes the future tax benefit from deductible temporary differences and adjusts current income tax expense accordingly.

3. Recording Deferred Tax Liability

When a deferred tax liability is recognized due to taxable temporary differences:

Journal Entry:

• Debit: Income Tax Expense
• Credit: Income Tax Payable
• Credit: Deferred Tax Liability

Narration: Being deferred tax liability recognized along with current tax expense.

Explanation: This entry accounts for future tax obligations arising from taxable temporary differences and includes them in the total income tax expense for the period.

Transaction	Debit	Credit	Description
Current Income Tax Expense	Income Tax Expense	Income Tax Payable	Records current period’s tax liability
Deferred Tax Asset	Income Tax Expense / Deferred Tax Asset	Income Tax Payable	Recognizes future tax benefit from deductible differences
Deferred Tax Liability	Income Tax Expense	Income Tax Payable / Deferred Tax Liability	Recognizes future tax obligation from taxable differences

Journal Entries – Share Capital

Share capital represents the funds raised by a company by issuing shares to shareholders. Proper recording ensures that both the nominal value of shares and any premium or discount are accurately reflected in the books.

1. Shares Issued and Money Received Subsequently

When shares are allotted and the payment is received in stages:

Step 1 – On Allotment of Shares

• Debit: Share Allotment
• Credit: Share Capital

Narration: Being shares allotted to shareholders recorded at nominal value.

Step 2 – On Receiving Payment

• Debit: Bank
• Credit: Share Allotment

Narration: Being payment received from shareholders against allotted shares.

Explanation: The first entry recognizes the allotment of shares as capital, and the second entry reflects the receipt of cash from shareholders.

2. Shares Issued at a Premium

When shares are issued above their nominal value, the excess is recorded as share premium:

• Debit: Bank
• Credit: Share Capital
• Credit: Share Premium

Narration: Being shares issued at a premium, with capital and premium recognized.

Explanation: The nominal value is credited to share capital, and the excess amount is credited to the share premium account.

3. Shares Issued at a Discount

When shares are issued below their nominal value, the shortfall is recorded as a share discount:

• Debit: Bank
• Debit: Share Discount
• Credit: Share Capital

Narration: Being shares issued at a discount, with discount recorded separately.

Explanation: The discount reduces the amount credited to share capital, and the discount itself is debited to a separate account.

Transaction	Debit	Credit	Description
Share Allotment & Payment	Share Allotment / Bank	Share Capital / Share Allotment	Records allotment and subsequent payment for shares
Shares Issued at Premium	Bank	Share Capital / Share Premium	Records shares issued above nominal value
Shares Issued at Discount	Bank / Share Discount	Share Capital	Records shares issued below nominal value

Journal Entries – Dividend

Dividends represent a portion of the company’s profits distributed to shareholders. Proper accounting ensures that dividend obligations are recorded when declared and settled when paid.

1. Declaration of Dividend

When the board of directors declares a dividend, a liability is created for the amount payable to shareholders:

• Debit: Retained Earnings
• Credit: Dividend Payable

Narration: Being dividend declared by the board and liability recognized.

Explanation: This entry reduces retained earnings (reserves) and creates a liability for the dividend to be paid to shareholders.

2. Payment of Dividend

When the dividend is paid to shareholders:

• Debit: Dividend Payable
• Credit: Bank

Narration: Being dividend paid to shareholders, settling the liability.

Explanation: This entry reduces the dividend liability and records the outflow of cash from the bank.

Transaction	Debit	Credit	Description
Declaration of Dividend	Retained Earnings	Dividend Payable	Records dividend declared and liability created
Payment of Dividend	Dividend Payable	Bank	Settles dividend liability by paying shareholders

Journal Entries – Investment

Investments are financial assets held by a company for generating income, such as dividends, interest, or capital gains. Proper accounting ensures that purchases, sales, and gains or losses are accurately recorded.

1. Purchase of Investment

When an investment is purchased:

• Debit: Investment
• Credit: Bank

Narration: Being investment purchased and payment made through bank.

Explanation: This entry records the acquisition of financial assets and reduces the bank balance accordingly.

2. Sale of Investment at Profit

When an investment is sold for more than its carrying value:

• Debit: Bank
• Credit: Investment
• Credit: Profit and Loss (for gain)

Narration: Being investment sold at a profit, and gain recognized.

Explanation: This entry records cash received, removes the investment from the books, and recognizes the profit in the income statement.

3. Sale of Investment at Loss

When an investment is sold for less than it carrying value:

• Debit: Bank
• Debit: Profit and Loss (for loss)
• Credit: Investment

Narration: Being investment sold at a loss, and loss recognized.

Explanation: This entry records cash received, removes the investment from the books, and recognizes the loss in the income statement.

Transaction	Debit	Credit	Description
Purchase of Investment	Investment	Bank	Records acquisition of investment
Sale of Investment at Profit	Bank	Investment / Profit and Loss	Records sale and gain on investment
Sale of Investment at Loss	Bank / Profit and Loss	Investment	Records sale and loss on investment

Journal Entries – Investment in Associates

Investment in associates represents a company’s ownership in another company where it has significant influence (usually 20–50% of voting rights). Investments are accounted for using the equity method, recognizing the investor’s share of profit or loss.

1. Acquisition of Associate

When an investment in an associate is made:

• Debit: Investment in Associates
• Credit: Bank

Narration: Being investment in associate acquired and payment made through bank.

Explanation: This entry records the purchase of shares in an associate company.

2. Dividend Received from Associate

When the associate company declares a dividend:

• Debit: Bank
• Credit: Investment in Associates

Narration: Being dividend received from associate company, reducing carrying amount of investment.

Explanation: Dividends reduce the carrying amount of the investment under the equity method.

3. Income from Investment in Associates

When the associate reports a profit, the investor recognizes its share:

• Debit: Investment in Associates
• Credit: Income from Investments

Narration: Being share of profit from associate recognized in books.

Explanation: The investor increases the carrying amount of the investment for its share of the associate’s profit.

4. Loss on Investment in Associates

When the associate reports a loss, the investor recognizes its share:

• Debit: Loss on Investments
• Credit: Investment in Associates

Narration: Being share of loss from associate recognized in books.

Explanation: The carrying amount of the investment is reduced to reflect the investor’s share of the associate’s loss.

Transaction	Debit	Credit	Description
Acquisition of Associate	Investment in Associates	Bank	Records purchase of investment in associate
Dividend from Associate	Bank	Investment in Associates	Reduces carrying amount due to dividend received
Share of Profit from Associate	Investment in Associates	Income from Investments	Increases carrying amount for share of profit
Share of Loss from Associate	Loss on Investments	Investment in Associates	Reduces carrying amount for share of loss

Journal Entries – Capital / Owner’s Equity

Owner’s equity represents the owner’s residual interest in the business after liabilities are deducted from assets. Transactions affecting owner’s equity include capital contributions and withdrawals.

1. Investment by Owner

When the owner invests money into the business:

• Debit: Bank
• Credit: Owner’s Equity

Narration: Being capital contribution by owner recorded in books.

Explanation: This entry increases both the bank balance and owner’s equity, reflecting the owner’s investment in the business.

2. Withdrawal by Owner

When the owner withdraws money from the business:

• Debit: Owner’s Equity
• Credit: Bank

Narration: Being cash withdrawn by owner from business.

Explanation: This entry reduces both the bank balance and owner’s equity, reflecting the reduction in the owner’s interest in the business.

Transaction	Debit	Credit	Description
Investment by Owner	Bank	Owner’s Equity	Records owner’s capital contribution
Withdrawal by Owner	Owner’s Equity	Bank	Records cash withdrawn by owner

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