6.7 Special Types of Accounting Journal Entries

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1 5.11 Suggested Readings Grewal, T.B, Double Entry Book Keeping Jain & Narang, Advanced Accountancy R.L. Gupta, Advanced Accountancy Unit 6 Journal 6.1 Introduction 6.2 Objective 6.3 Journal Meaning 6.4 Importance and Objectives of Journal 6.5 Accounting Journal Entries 6.6 Format of Journal Entry 6.7 Special Types of Accounting Journal Entries Reversing entries Recurring Journal Entry 6.8 Unbalanced Journal Entries 6.9 Journal Entry Fraud 6.10 Summing Up 6.11 Model Examination Questions 6.1 Introduction A journal details all the financial transactions of a business and which accounts these transactions affect. All business transactions are initially recorded in a journal using the double-entry method or single-entry method of bookkeeping. Typically, journal entries are entered in chronological order and debits are entered before the credits. In accounting, a "journal" refers to a financial record kept in the form of a book, spreadsheet, or accounting software that contains all the recorded financial transaction information about a business.

2 An accounting journal is created by entering information from receipts, sales tickets, cash register tapes, invoices, and other data sources that show financial transactions. Business transactions should be recorded so that they can be presented in the journal in chronological order. Before computers, an accounting journal was a physical log book with multiple columns to record financial transactions for a company. Today, most businesses use a soft type of financial accounting software to record and manage their business transactions. These transactions are then assigned to a specific ledger class using a Chart of Accounts number to prepare profit and loss statements, financial statements, and other important financial reports. Each listed transaction is referred to as a journal entry. Information is first recorded in journal and then transferred in ledgers. Also Known As: Book of First Entry 6.2 Objective In easy terms, journalizing is a procedure for tracking and recording the transactions related to financial dealings in the journal book. It is a procedure to record the financial transactions systematically in the prime book or book of original entry. The given below steps are followed while journalizing the transactions in the journal book. To recognize both the aspects of the financial transaction. To recognize the suitable accounts for both of the two aspects of the financial transactions. To debit and credit the accounts relevant to the transaction by using the rules of debit and credit. To write the entry in the journal in chronological order. These kinds of entries are known as journal entries. 6.3 Journal Meaning The procedure of accounting begins with the recognition of financial transactions of any kind of business. These kinds of financial transactions are tracked and recorded everlastingly in the books of accounts in chronological order in various specialized books. These books of accounts are called a journal.

3 The journal is an imperative book considered under the system of double-entry. The journal is the very first book of organized record of the transactions which are financial in nature of any business. The journal is also known as the book of original or prime entry, for the reason that the transactions that are financial in nature are at the very first step recorded in this book and only after that are transferred to any other book. The journal is also known as a subsidiary book because it is preserved to assist in the preparation of the main book known as the ledger. The journal is arranged with the aid of the memorandum or waste book, which is a rough and temporary record of the financial transactions of the business. The factual sense of the journal is a track of the day-to-day transactions, financial in nature. Formally, though it might be defined as a book of original entry or subsidiary book wherein all the financial transactions of the business are systematically recorded in order of their occurrence. 6.4 Importance and Objectives of Journal Journal has the following importance: i) Reducing the chances of errors: The double effect of every transaction is recorded in the same journal entry at the same place. It becomes easier to check and compare it. In case, direct posting is made, there is possibility of omission, posting at wrong side and writing wrong amount in the two accounts. ii) Permanent Record: The Journal has permanent record. It has date-wise record of every transaction and can be utilized for auditing, as and when required. iii) Narration: Journal entries have narration, which helps in providing the complete information regarding the transaction. It facilitates us to comprehend the entry better. iv) Convenient distribution of work: Allotment of the Journal entries into the respective subsidiary books assists the administration in the segregation of work amongst the employees. v) Location of errors: Errors can be easily located through Journal.

4 The following are the main objectives of the journal Journal is maintained to have an organized record of financial transactions. Journal is maintained to demonstrate financial transactions in sequential order. Journal is maintained to show essential data regarding the financial transactions. Journal is maintained to utilize it as a legal evidence of financial transactions. Journal is maintained to assist the preparation of ledger book. Journalizing: The transactions, financial in nature are at the very first stage recorded in the journal. The procedure of recording the financial transactions in the books of journal in a chronological order is known as journalizing. The record of the transactions done in the journal is known as the journal entry. Journalizing is the practice of making a journal entry. The given below steps are taken into consideration at the time of journalizing the transactions: 1. Recognizing both the aspects of each of the transaction. 2. Recognizing the suitable accounts of these two facets of each of the transaction. 3. Recording each transaction in the journal book comprising the debit and credit accounts in sequential order. 4. Recognizing the debit and credit accounts of each of the transaction by utilizing the rules of debit and credit. Rules of Journalizing: Depending on the double entry system, every transaction is logged in the involving both aspects. One aspect of transaction shall be debited into an account, and the other side shall be credited into a different account involving the same amount. The vital task while the transaction logging is to determine whether the account is decided and credited. The rules are also known as debit and credit rules. 1. Personal Account: This is the account of an individual or any organization or a debtor or a creditor. Here is the record of any particular individual or an organization. Below him, the person who is loaded the usefulness and the person who credited with the advantage. The rule of journalizing in a personal account is as follows: Debit the receiver

5 Credit the giver 2. Real Account: It is a non-personal account. There the report is about a real property or things. This is the law report on the business assets. Under this when assets are loaded into the store are debited and it s credited when going through the sale of the business. The rule of journalizing in real account is as follows: Debit what comes in Credit what goes out 3. Nominal account: This is yet another non-personal account. This account of expenses, losses, income and earnings. It does not feature a physical condition. It is not in the business in the real form. It is only in books. This is the folder financial sacrifices to the received power and the inclusion of the financial advantage over the work. The rule of journalizing in nominal account is as follows: Debit all expenses and losses Credit all incomes and profits 6.5 Accounting Journal Entries The journal entry is the basic record of a business transaction. Journalizing the business transaction becomes simple once you understand the rules of debit and credit clearly. When we journalize the transaction, one account receives the benefit and the other account gives the benefit. For entering a transaction in the journal, the following steps are performed: 1. Ascertain the accounts are affected by the transaction. 2. Ascertain the nature of the account, which is affected. 3. Ascertain the account to be debited and the account to be credited by applying the rules of debit and credit. 4. Ascertain the amount by which the accounts are to be debited and credited. 5. Record the date and month of the transaction in the date column and the year at the top. 6. Record in the particular column the name of the account to be debited. Along with the name of the account, the abbreviation also should be

6 written in the same line against the name of the account. Write the amount to be debited in the debit amount column. 7. Record in the Particular column the name of the account to be credited. The name of the account to be credited should be written in the next line preceded by the word To. The word To is written towards the right after leaving few spaces. Write the amount to be credited in the credit amount column. 8. Record a brief description of the transaction starting from the next line in the Particulars column. This brief description of the transaction is termed as narration. 9. Draw a line across the Particulars column to separate one journal entry from the other. Compound Journal Entry A compound journal entry refers to two or more transactions of the same nature that occur on the same date. Such transactions are recorded in one journal entry instead of having a separate entry for each transaction. The following three ways can be used to record compound journal entries: Recording two or more accounts to be debited and one account to be credited. For example, on 28 March, Rs. 5,000 is paid for rent and Rs. 3,500 is paid for freight. The transaction is recorded in a journal as follows: Date Particulars L.F. Amount (Rs.) Cr. Amount (Rs.) Mar 28, Rent A /c Freight A /c 5,000 3,500 8,500 (Being rent and freight paid) 8,500 8,500 Recording one account to be debited and two or more accounts to be credited. For example, on 28 March, Rs. 50,000 is paid to Ram & Co. and a

7 discount of Rs. 3,000 is given to the company. The transaction is recorded in a journal as follows: Date Particulars L.F. Amount (Rs.) Cr. Amount (Rs.) Mar 28, Ram & Co. 50,000 47,000 To Discount A /c 3,000 (Being payment made by cash and discount received) 50,000 50,000 Recording two or more accounts to be debited and two or more accounts to be credited. For example, on 30 March, goods of worth Rs.40,000 are purchased from Ram & Co. and Rs.2,000 is paid as cartage. The transaction is recorded in a journal as follows: Date Particulars L.F. Amount (Rs.) Cr. Amount (Rs.) Mar 30, Purchase A /c Cartage A /c 40,000 2,000 To Ram & Co. 40,000 2,000 (Being goods purchased from Ram & Co. and paid cartage) 42,000 42, Format of Journal Entry A journal is a primary book of accounts in which all transactions of a business are recorded in the form of entries. You can also define the journal as a chronological (in order of date) record of the transactions of a business. The process of recording a transaction in a journal is known as journalizing. The format of a journal is as follows:

8 Journal Date Particulars L.F. Amount (Rs.) Cr. Amount (Rs.) Name of the debited account () To Name of the credited account The following is a brief description of the columns used in the preceding journal: Date: Records the date when a transaction is made. Particulars: Records the names of the debit and credit accounts affected by a transaction. The debit account is written at the left side of the Particulars column ( is written at the right side) and the credit account is written in the next line with a prefix To. Narration is a brief description of the transaction. Ledger Folio (L.F.): Records the page number of the ledger on which the debit and credit accounts are posted. Debit Amount: Records the debited amount. Credit Amount: Records the credited amount. Illustration - 1: Journalize the following transactions of B R Books for the month of September : Date Particulars Amount (`) Sep 3 B R Books started business with cash 5,00,000 Sep 4 Paid into bank 2,00,000 Sep 5 Bought goods for cash 1,00,000 Sep 6 Drew cash from bank for office 50,000 Sep 7 Sold goods to Krish on credit 50,000 Sep 8 Bought goods from Ravi on credit 75,000 Sep 9 Received cash from Krish 40,000 Sep 10 Paid cash to Ravi 40,000 Sep 10 Discount allowed by Ravi 1,000 Sep 11 Cash sales for month 60,000

9 Sep 12 Paid rent 10,000 Sep 12 Paid salary to Kabir 5,000 Solution: The following table shows the journal of B R Books for September month: Books of B R Books (Journal) Date Particulars L.F. Amt (Rs.) Cr. Amt (Rs.) Sep 3 Cash A /c To Capital A /c 5,00,000 5,00,000 (Being the amount invested by Oxford in the business as capital) Sep 4 Bank A /c To cash A /c (Being the amount paid into the bank) 2,00,000 2,00,000 Sep 5 Purchase A /c (Being the goods purchased for cash) 1,00,000 1,00,000 Sep 6 Cash A /c To Bank A /c (Being the cash withdrawn from bank) 50,000 50,000 Sep 7 Krish To Sales A /c (Being the goods sold to Krish on credit) 50,000 50,000

10 Sep 8 Purchase A /c To Ravi 75,000 (Being the goods bought from Ravi on credit) 75,000 Sep 9 Cash A /c To Krish 40,000 (Being the cash received from Krish) 40,000 Sep 10 Ravi 41,000 To Discount Received A /c 40,000 (Being the discount allowed by Ravi on payment made to him) 1,000 Sep 11 Cash A /c To Sales A /c (Being the goods sold for cash) 60,000 60,000 Sep 12 Rent A /c Salaries A /c (Being the amount paid for rent and salary) 10,000 5,000 15,000 Grand Total 11,31,000 11,31,000 Illustration - 2: Journalize the following transactions of S R Solutions for the month of April : Date Particulars Amount (Rs.) April 1 Commenced business with cash 50,000 April 2 Goods purchased from Pawan for cash 5,000 April 4 Goods purchased from Manoj 12,000

11 April 8 Goods returned to Manoj 500 April 12 Goods sold to Yash 4,000 April 21 Yash returned 10% of goods 400 Solution: The following table shows the journal of S R Solutions for April month: Books of S R Solutions Journal Date Particulars L.F. Amt (Rs.) Cr. Amt (Rs.) April 1 Cash A /c To Capital 50,000 50,000 (Being business started with cash) April 2 Purchase A /c 5,000 5,000 (Being goods purchased from Pawan for cash) April 4 Purchase A /c 12,000 To Manoj 12,000 (Being goods purchased from Manoj) April 8 Manoj 500 To Purchase Return A /c 500 (Being goods returned to Manoj) April 12 Yash 4000 To Sales A /c 4000 (Being goods sold to Yash) Sep 8 Sales Return A /c 400

12 To Yash 400 (Being 10% goods returned by Yash: 10% of 4,000 = 400) Grand Total 71,900 71,900 Illustration - 3: Journalize the following transactions of J B Pvt. Ltd for the month of October : Date Particulars Amount (Rs.) October 1 J D Pvt. Ltd. started business with cash 10,000 October 2 Paid into bank 5,000 October 3 Sold goods to Tom 8,000 October 4 Goods returned by Tom 2,000 October 5 Goods purchased from Mick 5,000 October 6 Goods returned to Mick 3,000 October 7 Sent a peon to collect it who paid as cartage 200 October 8 Paid interest on loan 700 Solution: The following table shows the journal of J D Pvt. Ltd. for October month: Books of J B Pvt. Ltd Journal Date Particulars L.F. Amt (Rs.) Cr. Amt (Rs.) Oct 1 Cash A /c To Capital 10,000 10,000 (Being business started with cash) Oct 2 Bank A /c 5,000 5,000

13 (Being the amount deposited into the bank) Oct 3 Tom 8,000 To Sales A /c 8,000 (Being goods sold to Tom) Oct 4 Sales Return A /c 2,000 To Tom 2,000 (Being goods returned by Tom) Oct 5 Purchase 5,000 To Mick 5,000 (Being goods purchased from Mick) Oct 6 Mick 3,000 To Purchase Returns A /c 3,000 (Being goods returned to Mick) Oct 7 Cartage A /c (Being the cartage paid) Oct 8 Interest on Loan A /c (Being the payment made for interest on loan) Grand Total 33,900 33,900 Illustration - 4: Journalize the following transactions of Learning Ltd. for the month of July : Date Particulars Amount (Rs.)

14 July 1 Learning Ltd. started business with cash 5,00,000 July 2 Purchased goods for cash 2,00,000 July 4 Purchased goods from Raj 1,20,000 July 5 Purchased furniture for cash 60,000 July 7 Sold goods for cash 1,30,000 July 9 Sold goods to Yash 1,50,000 July 10 Paid cash to Raj 80,000 July 12 Received cash from Yash 1,00,000 July 16 Purchased goods from Rajesh for cash 75,000 July 17 Purchased goods from Rajesh 50,000 July 18 Sold goods to Mohan for cash 1,26,000 July 19 Sold goods to Mohan 70,000 July 20 Purchased machinery for cash 80,000 July 24 Withdrew cash for personal use 25,000 July 27 Paid rent 4,000 July 29 Paid wages 4,500 July 30 Paid salary to Manoj 12,000 July 30 Received commission 2,000 Solution: The following table shows the journal of Learning Ltd. for July month: Books of Learning Ltd. Journal Date Particulars L.F. Amt (Rs.) Cr. Amt (Rs.) July 1 Cash A /c To Capital 5,00,000 5,00,000 (Being business started with cash) July 2 Purchase A /c 2,00,000 2,00,000 (Being goods purchased for cash)

15 July 4 Purchase A /c 1,20,000 1,20,000 (Being goods purchased from Raj on credit) July 5 Furniture A /c 60,000 60,000 (Being goods returned by Tom) July 7 Cash A /c 1,30,000 To Sales A /c 1,30,000 (Being goods sold for cash) July 9 Yash 1,50,000 To Sales A /c 1,50,000 (Being goods sold to Yash on credit) July 10 Raj 80,000 80,000 (Being cash paid to Raj) July 12 Cash A /c 1,00,000 To Yash 1,00,000 (Being cash received from Yash) July 16 Purchase A /c 75,000 75,000 (Being goods purchased on cash) July 17 Purchase A /c 50,000

16 To Rajesh 50,000 (Being goods purchased from Rajesh on credit) July 18 Cash A /c 1,26,000 To Sales A /c 1,26,000 (Being goods sold for cash) July 19 Mohan 70,000 To Sales A /c 70,000 (Being goods sold to Mohan on credit) July 20 Machinery A /c 80,000 80,000 (Being machinery purchased for cash) July 24 Drawing A /c 25,000 25,000 (Being cash withdrew for personal use) July 27 Rent A /c 4,000 4,000 (Being rent paid) July 29 Wages A /c 4,500 4,500 (Being wages paid) July 30 Salary A/.c 12,000 12,000 (Being Salary paid)

17 July 30 Cash A /c 2,000 To Commission A /c 2,000 (Being commission received) Grand Total 17,88,500 17,88, Special Types of Accounting Journal Entries There are two types of special accounting entries which are i) Reversing Journal Entry and ii) Recurring Journal Entry. Let s understand each of them one by one: Reversing entries Reversing entries or reversing journal entries are the entries done in the books at the starting of an accounting period to overturn or cancel out adjusting journal entries done at the end of the previous accounting year. This is the final step in the accounting cycle. Reversing entries are done for the reason that the previous year accruals and prepayments by these entries would be paid off or utilized in the due course of the new-year and no longer require to be documented as liabilities and assets. Reversing entries are normally done made to make simpler bookkeeping in the new-year. For instance, if an accrued expense was written in the previous year, the bookkeeper or accountant can reverse this entry and account for the expense in the new-year when it is paid. The reversing entry erases the prior year's accrual and the bookkeeper doesn't have to worry about it. It might be helpful to look at the accounting for both situations to see how difficult bookkeeping can be without recording the reversing entries. Illustration: In December, Ramesh accrued 250 of wages payable for the half of his employee's pay period that was in December but wasn't paid until January. This end of the year adjusting journal entry looked like this: Date Particulars L.F. Amt (Rs.) Cr. Amt (Rs.) Dec 31 Wages Expense 250 To Accrued Expenses 250

18 (To record payroll accrual for amount owed to employees) Accounting with reversing entry These accounting entries of wages accrual can easily be reversed by debiting the wages payable account and crediting the wages expense account. This efficiently revokes out the previous year s entry. Date Particulars L.F. Amt (Rs.) Cr. Amt (Rs.) Jan 1 Accrued Expenses 250 To Wages Expenses 250 (To reverse prior year s accrual) Recurring Journal Entry A recurring journal entry is one that repeats in every successive accounting period, until a termination date is reached. This can be done manually, or can be set up to run automatically in an accounting software system. 6.8 Unbalanced Journal Entries If a journal entry is produced wherein the amounts post total for debit and credit are not the same, this is known as an unbalanced journal entry. If you put in your effort to enter an unbalanced journal entry into a computerized system of accounting, the system of error-checking controls in the software is automatically likely to decline the entry. On the other hand, if you construct an unbalanced journal entry in manually maintained books of accounts, the consequences will be an unbalanced trial balance, which consecutively signifies that the balance sheet will not tally for Assets and Liabilities. The given below journal entry is an unbalanced journal entry; note that the debit total is less than the credit total. In these situations, you should correct the underlying unbalanced journal entry prior to the issue of the financial statements. Date Particulars L.F. Amt (Rs.) Cr. Amt (Rs.) Jan 1 Plant Fixed Asset 10,000

19 To Accounts Payable 10,000 (To accounts paid for Plant) The term fee relates to tangible or intangible assets in nature. The assets such as land, buildings, mines, copyright, patents, trademarks, etc. are attracted to royalty. Free is a periodic payment to be paid by the active user of the nature above. It is an amount payable to take advantage of certain rights acquired with the other person. The person making the payment and uses the asset is known as "tenant". And the person who abandons the right and receives the fee is known as the "lessor". The "lessor" is the asset owner. Author of a book, the patent owner, mine land lord, etc. are all examples of the lessor. The tenant becomes eligible to use the property of the lessor. For this, the tenant pays to a certain amount to the landlord, who is appointed as royalty. Editor, the patent, User trademark, holder etc are the examples of tenant. Royalty pay is an ordinary business expense for the tenant and royalties receivable is income for the lessor. It can be paid on the basis of the unit or sold on the basis of production. If it is paid on the basis of unit sold, it is transferred to profit and loss. Royalties paid on the basis whether the output is transferred to the account of production. If nothing is specified, the royalties paid is transferred to profit and loss. A royalty is generally, paid to the owner of the right under the following cases: 1) When a government or a local authority enables a person to collect forestry products such as honey, herbs, etc. clay of the forest, the government or the local authorities owns or lessor and the person who collects is the tenant. 2) When the owner of any mine, such as coal, copper, stone permits other party to extract materials from the earth. 3) Where the right of ownership, such as copyright, patent right, trademark, exclusive design rights are licenses to another party. Meaning Technical Terms Before accounting treatment of royalty, it is best to understand the following terms: 1. Minimum Rent Minimum rent is also known as the dead rent, fixed rent, apartment rental, rent rock and contractual rents. A minimum amount guaranteed to the landlord by the tenant to

20 the owner receives a minimum amount over a given period, it draws no advantage or not, the law is known as the minimum rent. It is a pre-determined rent and disclosed the royalty agreement when both parties consent. But if the production or sale is more than the minimum quantities agreed on beforehand, and the tax will be paid on actual production. In other words, if the load is less than the minimum rent, the tenant pays the minimum rent, but when the tax exceeds the minimum rent, the tax is payable. 2. Redeemable Dead Rent/Short working Short Working is the amount exceeding the minimum rent for the actual license. In other words, if the minimum period is more than the actual royalties, the difference is redeemable dead called rent. Suppose, if a mine owner agreed to allow the mine to a lessee for Rs. 20,000 for the extraction of 1,000 kg. of coal and lessee actually produced 600 kg. coal. Then Rs. 8,000 (ie Rs. 20 X 400 kg.) As a short working known. Short Working is also called "license suspense" by the lessor. 3. Surplus If the actual license minimum rent exceeds, is known as the excess. In the above example that the output signal for a certain period of 1,500 kg. then Rs. 10,000 (Rs. 20 X 500) is called a surplus. 4. Recoupment of Short working Generally, a royalty agreement contains a provision for the postponement of the short working to resolve in the future. In the following years, such short working is adjusted against the excess levy. This adjustment process is called recovery short working. 5. Strike and Lock Out Strike is the result of the acquisition unrest in the work and it is called by the trade unions. On the other hand, terminate the right of the owner of the assets complying with legal requirements, the workers site. But the outcome of the two cases show to close the loss of production. In such a case, the actual production could be severely affected and may not be sufficient to pay the minimum rent. Under these conditions, the lessor can accept license fee based on the actual output. The provision to this effect must be submitted in the license agreement. Royalty A royalty (sometimes, running royalties or private sector taxes) is a payment based on the use made by one party (the "holder") to another (the "Licensor") for the right to continued use of an asset, sometimes intellectual property (IP). Royalties generally

21 agree on a percentage of gross revenue or net from the use of an asset or a fixed price per unit sold an article of such, but there are also other modes and compensation measures. A royalty is the right to collect a stream of payments of future royalties, often used in the petroleum and music to describe a percentage ownership of the production or the future income of a given lease, which may be sold by the original owner of the asset. A royalty (sometimes, running royalties or private sector taxes) is a payment based on the use made by one party (the "holder") to another (the "Licensor") for the right to continued use of an asset, sometimes intellectual property (IP). Royalties generally agree on a percentage of gross revenue or net from the use of an asset or a fixed price per unit sold an article of such, but there are also other modes and compensation measures. A royalty is the right to collect a stream of payments of future royalties, often used in the petroleum and music to describe a percentage ownership of the production or the future income of a given lease, which may be sold by the original owner of the asset. Landlord Tenant "Tenant" means a person who is entitled under a lease agreement for the use and occupancy of residential premises to the exclusion of others. "Landlord" means the owner, lessor or sub-lessor of residential buildings, the representative of the owner, lessor or sub-lessor or any authorized by the owner, lessor or sub-lessor to manage the premises or for rent by the tenant under a lease received person. An association between two persons who are under an agreement by which, one person takes the other person s land with permission, subject to a rent. The term refers to the landlord a person who owns the property and allows another person to use it for a fee. The agreement between landlord and tenant is a lease or rental agreement. The landlord and tenant relationship usually refers to a way of life. In this regard, tenancy law differs from the law on leasing. In a landlord and tenant relationship, the parties are often the lessor (owner) called and lessee (tenant). In fact, A lease a contract which is the same relationship as creates between a landlord and tenant: the landlord owns real estate and allows them lessee to use it for a fee. But the law of the leases do not necessarily have to concern yourself with life forms. A lease may, for example,

22 relate to the use of a product or service. Since life forms are essential for human existence, landlord and tenant relationships are treated differently than leases. Generally, a landlord and tenant relationship, if (1) the owner agrees to occupants of the premises; (2) The tenant acknowledges that the owner has title to the land and a future interest in the property; (3) the owner actually ownership of the property; (4) The tenant receives a limited right to use the premises; (5) the owner transfers the ownership and control of the premises to the tenant; and (6) a contract is to rent between the parties. A lease may be implied by law. That is, Tenancy can live on the property in the absence of a written and signed rental agreement between the owner of the property and the person. Whether a court will imply a relationship depends on the facts of the case. The court is looking at a number of factors, including the consent of the holder of the occupancy of the property, the length of the assignment and the exchange of money, goods or services. A judicial finding that a landlord and tenant relationship exists between two or more people is important because the law sets obligations for both parties in such a relationship. A tenant may give his or her rights as a tenant to another person. This is called an order, and it is permissible if the landlord objects or when not prohibited in the lease. If a tenant assigns his rights, the tenant is still responsible for the payment of rent. In essence, the recipient of the tenancy rights or assignee is a tenant of the original tenants, and there is no legal relationship between the applicant and the owner. Courts often examine leases for unconscionability. Unconscionable agreements are those that unduly favor one party over another. For example, it is assumed that a lease requires the payment of compensation to the landlord if the tenant leaves the apartment to terminate without sufficient justification. If the Court considers the amount of damages is too high, it can reduce the damage to the landlord owed. Some leases allow a party to break the contract, and give you a lot of damage, the party in breach should the other be paid in case of violation. Landlord-tenant relationships are governed by such agreements tenancies called for toleration. Courts examine usually these agreements are to ensure that they do not unconscionable. Minimum Rent. The term "Base Rent" refers to the minimum rent due under the terms of a lease that also requires the tenant to pay additional rent based on a percentage or participation requirement. This type of lease is commonly executed in retail stores in malls.

23 For example. If X has taken a lease of mine with minimum rent of Rs. 10,000 for a year and with a rate of royalty at Rs. 2 per tonne of coal extracted. if coal extracted in the first year is 4000 tonnes then Royalty comes to Rs i.e tonnes X Rs. 2 per tonne but (x) has to pay Rs. 10,000 as it is the minimum rent decided under the Royalty agreement. Thus, Minimum Rent will assure a guaranteed income per year to lessor. For example, Karen Kar Korner, a pet shop, a base rent payable each month of Rs. 1,500. But her lease has a percentage rent requirement that they pay, on top of the basic rental fee, a small percentage of all sales she makes each month over a certain fixed amount. Minimum rent is the amount under the landlord never accepted in a year by the person who has to pay royalty at mines. Minimum rental is also known as fixed rent, dead rent, rent or Contract Rent. If in a year amounting to license less than if the amount of minimum duration, the amount of minimum rent from the person who has to pay the license fee to be paid, but if the amount of the license is more than the amount of minimum rent granted royalty paid be. Importance of Minimum Rent: Fixing the minimum rent is in the interests of the landlords because it guarantees him the receipt of minimum rent, even at low output or sales. In the absence of minimum rent clause only the actual license to the host will pay. In addition, there are also incentives for the lessee to improve production or sale because he required to pay minimum rent. Redeemable Minimum Rent: Generally, if minimum rent is more than appropriate, then minimum rent is due, if no such provision is stated in the agreement, but if it is mentioned in the agreement that if license are more than minimum rent, by laying down minimum rent on license is paid in the previous years are written off from the excess of the license on the minimum rent in the coming years as the minimum rent is Redeemable minimum rent. Short workings The excess of minimum rent over royalty is called Shortworkings. Minimum Rent Royalty = Shortworkings or M. R. R = S. W.

24 Recoupment or Writing off Shortworkings: Balancing the short working refers to the recovery of the short work of a year, the surplus license fee of the following years. The additional payment may for a specified period of time (fixed fee) or for a certain period after the year of short-time work will be admitted (Floating post pay) or within the lifetime of the lease (additional payment within life of the lease). All conditions relating to loss compensation or writing short operation of the mutual agreement between the tenant and landlord based. Short Workings can in all future years again be recouped, or it can be recouped during the entire lease again. For example, if you recouped during the first four years of the lease, then recoupment place only during the first four years to complete, and not after, unwritten in the fourth year balance short working will be transferred to the profit and loss account and the future Short workings years will also be passed to the profit and loss account of the year in question. Accounting entries in the books of lessee. a) Without minimum rent account is not opened S.No. Circumstances Royalties are less than the minimum rent Royalties are more than the minimum rent 01 For Royalty payable Royalties A /c Royalties A /c Short - working A /c To Land lord A /c To Short - working A /c To Land lord A /c 02 For payment of royalty Land lord A /c To Bank A /c 03 For transfer of royalty Profit and loss A /c To Royalty A /c In case short - working is not completely recovered (non recovery of short working) 04 For transfer of short - working Profit and loss A /c To Short - working A /c b) With minimum rent account is opened

25 S.No. Circumstances Royalties are less than the minimum rent Royalties are more than the minimum rent 01 For minimum rent payable Minimum rent A /c No entry To Land lord A /c 02 For Royalty payable Royalties A /c Short - working A /c To minimum rent A /c 03 For payment of royalty Land lord A /c To Bank A /c 04 For transfer of royalty Profit and loss A /c To Royalty A /c In case short - working is not completely recovered (non recovery of short working) 05 For transfer of short - working Profit and loss A /c To Short - working A /c Accounting entries in the books of lessor. S. No Circumstances Royalties are less than the minimum rent Royalties are more than the minimum rent 01 For Royalty receivable Lessee s A /c Lessee s A /c To Short working suspense A /c To Royalties receivable A /c Short working suspense A /c To Royalties receivable A /c 02 For receipt of royalty Bank A /c To Lessee s A /c 03 For transfer of royalty Royalty receivable A /c To Profit and loss A /c In case short - working is not completely recovered (non recovery of short - working) 04 For transfer of short - working Short - working suspense A /c To Profit and loss A /c Table analysis Year Output Minimum Royalty Short Short working Short working not Amount paid to

26 rent working recovered recovered landlord (3 4 = 5) (4 3 = 6) (5 6 = 7) (4 5 = 8) Sub-Lease: Sometimes a lessee is granted sublet to another person either for the country or for part of it. The person, to whom a sublease is granted, will be as a lodger. In such a case, whatever will yield by the tenant and sub-tenant and added to this total yield tenant has license is taken to pay to the landlord. As a lessee paying royalty he claimed A /C, Short Workings A /c and landlord s A /c and the lessor for lodger he maintains license the demand A /c, short working voltage A /C and under - lessee A /c.the items in the book to all parties is the same as above. To the original owner license should be paid based on the overall performance of both the lessee and subletting. Important Points Royalty is a general ledger account. Royalty is either on the basis of production or revenue. Licensing sales is paid to P/L account debited and royalty paid on production, debited the production account. Short Working represents the excess of the minimum rent over royalties. Surplus is the excess of royalty on minimum rent. Short Workings recoverable in future be shown in the balance sheet on the asset side. Short Working is not recouped to P/L account debited. If short working recovered debit is either given to royalties account or owner account. If no provision for recoupment of short working, then short working each of the years, it is, as uncollectible short working and thus be treated in the income statement. Recoupment short working restricted or impaired. Lump sum for the acquisition of patents, pit book is as nazrana, lease premium or goodwill known.

27 Lump sum for the acquisition of patents, pit book is no license fee, it is advantageous, which is reported in the balance sheet. Ground rent or rent surfaces in rent from tenants pay in addition to the minimum rent. Recoupment of Short working under Fixed Period Floating Period If the license agreement the clause, the short already includes one year from the surplus of Royalty recover lessee as in the coming years compared to minimum rent, he is known as balance of short-time working. However, the right of recoupment can be of two types; 1. Fixed Right 2. Floating Right (1) Fixed Right of Recoupment: If the landlord promises to the lessee to compensate for the loss (short-time work) only for a specified period. The right to be fixed. For example, If landlord promises to compensate for the loss only during the first 4 years, the law is said to be established and any un-recouped balance of short-time work is to P & LA /C Each short work arises not recouped in some future years be transferred. (2) Floating Right of Recoupment: If the landlord to the tenant promises short work to compensate for each year over the next two or three years. Then the right to float. For example, if the owner promises that (short-time working) compensate each year in the next 2 years. Then amortize short work of the 3 rd year in the 4 th and 5 th year and short-time working of the 8 th year in 9 th and 10 th year. 6.9 Journal Entry Fraud It is far more frequent for accountants to entrust fraud throughout the utilization of journal entries than through the utilization of these ordinary transactions as recording contractor statements and preparing client invoices. The cause is that these far more frequent and common transactions have a system of controls developed around them that is premeditated to become aware of a number of issues. On the other hand, there are fewer controls over journal entries, which make it easier for someone to create a

28 fraudulent transaction. These transactions are particularly difficult to spot if the amount recorded is considered immaterial, in which case auditors are unlikely to spot the transgressions Summing Up Summarized Presentation of Journal Entries S.No. Transactions Journal Entry Rule Applicable 1. Commenced Business Cash A /c - Increase in assets is debited To Capital A /c - Increase in capital is credited 2. Cash Purchases or Purchases A /c - Increase in expense or assets Goods purchased for VAT Paid is debited cash - Decrease in assets is credited 3. Purchased Goods on Purchases A /c - Increase in expense or assets Credit or Credit VAT Paid is debited Purchases To Supplier s A /c - Increase in liability is credited 4. Cash Sales Cash A /c - Increase in assets is debited To Sales A /c - Decrease in revenue or assets To VAT collected A /c is credited 5. Credit sales Debtors A /c To Sales A /c To VAT collected A /c 6. Purchases return Supplier s A /c To Purchases Return A /c or Return Outwards A /c To VAT Paid A /c 7. Sales Return Sales Return A /c VAT Collected A /c or Returns Inward A /c To Debtors A /c 8. Purchase of Assets Assets A /c 9. Sales of Assets Cash A /c To Assets A /c 10. Payment of Expenses Expense A /c 11. Receipt of Income Cash A /c To Income A /c 12. Collection from Debtors (Discount Allowed) 13. Payment to Creditors (Discount Received) Cash A /c Discount Account To Debtors A /c Supplier s A /c To Discount A /c - Increase in assets is debited - Decrease in revenue or assets is credited - Decrease in liability is debited - Decrease in expense or assets is credited - Decrease in revenue is debited - Decrease in assets is credited - Increase in assets is debited - Increase in capital is credited - Increase in assets is debited - Increase in capital is credited - Increase in assets is debited - Increase in capital is credited - Increase in assets is debited - Increase in revenue is credited - Increase in assets is debited - Increase in expense is debited - Decrease in assets is credited - Decrease in Liability is debited - Decrease in assets is credited - Increase in revenue in credited

29 14. Depreciation in Assets Depreciation A /c To Assets A /c 15. Interest on Capital Interest on Capital A /c To Capital A /c 16. Outstanding Expenses Expense A /c To Outstanding Expenses A /c 17. Prepaid Expenses Prepaid Expenses A /c To Expenses A /c 18. Withdrawal of cash for personal Use 19. Withdrawal of goods for personal use 20. Goods given as Charity Drawings A /c To cash A /c Drawings A /c To Purchases A /c Charity A /c To Purchases A /c 21. Insolvency of Debtors Cash A /c Bad Debts A /c To Debtors A /c 22. Bad Debts Recovered Cash A /c To Bad Debts Recovered A /c 23. Distribution of goods as free samples Free Samples OR Advertising A /c To Purchases A /c 24. Loss of goods by theft Loss by theft A /c / fire OR Loss by Fire A /c To Purchases A /c 25. Loss if cash by theft / Loss by theft A /c fire OR Loss by Fire A /c 26. Income Tax Paid Capital A /c To Bank / Cash A /c 27. Refund of income Tax Cash A /c To Capital A /c 28. Interest Received on Cash A /c (Income Tax Surplus) To Capital A /c 29. Bills Drawn Bills Receivable A /c To Drawee s A /c - Increase in expense id debited - Decrease in assets is credited - Increase in expense is debited - Increase in capital is credited - Increase in expense is debited - Increase in liability is credited - Increase in assets is debited - Decrease in expenses is credited - Decrease in Capital is debited - Decrease in assets is credited - Decrease in Capital is debited - Decrease in expenses or assets is credited - Increase in expenses is debited - Decrease in expenses or assets is credited - Increase in assets is debited - Increase in expenses is debited - Decrease in assets is credited - Increase in assets is debited - Increase in revenue is credited - Increase in expense is debited - Decrease in expense or assets is credited - Increase in expense is debited - Decrease in expense or assets is credited - Increase in expense is debited - Decrease in assets is credited - Decrease in capital is debited - Decrease in assets is credited - Increase in assets is debited - Increase in capital is credited - Increase in assets is debited - Increase in capital is credited - Increase in assets is debited - Decrease in assets (debtors) is credited

30 30. Bills Accepted Drawer s A /c To Bills Payable A /c 31. Payment of Bills Received Cash A /c To Bills Receivable A /c 32. Payment of bill made Bills Payable A /c 33. Bills Receivable dishonored 34. Bills Payable dishonored 35. Sale of assets for more than book value 36. Sale of assets for lesser than the book value 37. Amount deposited into Bank / opened a Bank Account 38. Amount withdrawn from Bank 39. Cheque received and retained 40. Cheque received previously deposited and into Bank Drawee s A/s To Bill receivable A /c OR Bank A /c OR Endorsee s A /c Bills Payable A /c To drawee s A /c Cash A /c To Assets A /c To Profit on sale of assets A /c Cash A /c P&L A /c To Assets A /c Bank A /c Cash A /c To Bank A /c Cash A /c To Debtor s A /c Bank A /c - Decrease in liability is debited - Increase in liability is credited - Increase in assets (cash) debited - Decrease in assets (B / R) credited - Decrease in liability (B / P) debited - Decrease in assets (cash) credited - Increase in asset is debited - Decrease in asset is credited - Increase in liability is credited - Decrease in liability is debited - Increase in liability is credited - Increase in assets (cash) debited - Decrease in asset is credited - Increase in revenue is credited - Increase in asset is debited - Increase in expenses is debited - Decrease in assets is credited - Increase in assets is debited - Decrease in assets is credited - Increase in assets is debited - Decrease in assets is credited - Increase is assets is debited - Decrease in assets is credited - Increase in assets is debited - Decrease in assets is credited 6.11 Model Examination Questions 1. Define the terms Debit and Credit. 2. What is a Journal? Give a specimen of Journal showing at least five entries. 3. Explain the rule of debit and credit in case of the following: i) Revenue ii) Expense iii) Real Account

31 iv) Capital v) Nominal Account 4. Recording of transactions in the journal is called as: i) Posting ii) Journalizing iii) Tallying iv) Casting 5. The journal is a book of: i) Only cash transactions ii) Original Entry iii) Credit Sales and purchases iv) Secondary entry Practical Questions 1. Gyan Prakash started his business with the following assets and liabilities: 2008 Rs. Jan 1 Cash in hand 20,000 Stock in hand 25,000 Debtors: Khanna Bros. Nirmal & Co. 20,000 15,000 Creditors: Kripal Bros. Mitra Sen & Co. 10,000 5,000 His transactions for the month were Jan 2 Sold goods to Karmakar, subject to a trade discount of 10% plus 12.5% 10,000 Jan 4 Jan 8 Received from Nirmal & Co. Discount Allowed Settled Mitra Sen and Co s account deducting 5% for cash discount 14, Jan 10 Purchased stationary articles 100 Jan 12 Paid rent for the month 250 Jan 13 Bought goods from S. K. & Co. 30,000 Jan 16 Paid Kirpal Bros., in full settlement of discount 9,500 Jan 20 Withdrew cash for personal expenses 500

32 Jan 24 Issued a Credit Note to Mr. Karmakar for goods damaged in transit 1,000 Jan 26 Returned goods to S.K. & Co. on account 5,000 Jan 29 Paid S. K. & Co. on account Discount allowed 10, Record the above transactions in Journal. 2. Give journal Entries for the following transactions: i) Goods worth 500 given as free samples. ii) Received 9,975 from Sarika in full settlement of her account for 10,000 iii) Received a first and final dividend of 70 paise in a rupee from the Official Receiver of Mr. Karim who owed us 10, Journalize the following: i) Goods worth 400 were given as charity out of business. ii) Received cash 500 of a bad debts written off last year. iii) Interest charged on 5%, when total drawings were 10, Pass the necessary journal entries in the following cases: i) Admitted a claim of 350 made by Basu for goods damaged in transit against earlier sales made to him. ii) Bank charges 600 iii) Interest charged by the bank on its overdraft balance 300 iv) Received claim from Bhattacharya for defects in the goods supplied to them. Claim admitted worth Journalize the following transactions i) Goods worth 56,000 destroyed by fire. ii) Paid to Sita 96,500 in full settlement of her dues of 1,00,000 iii) Outstanding salary at the end of the year 2, Suggested Readings Gupta R. L. Advanced Accountancy Grewal T. B. Double Entry Book Keeping

33 Unit 7 Ledger 7.1 Introduction 7.2 Objective 7.3 Ledger Meaning Features of Ledger Format of Ledger Sheet 7.4 Importance of Ledger 7.5 Types of Ledger Assets Ledger Liabilities Ledger Revenue Ledger Expenses Ledger Debtor Ledger Creditor Ledger General Ledger 7.6 Posting of Journal Proper into Ledger 7.7 Difference between Ledger and Journal 7.8 Advantages of Ledger 7.9 Balancing an Account 7.10 Opening of Accounts in Ledger, without Journalizing Summing Up 7.12 Model Examinations Questions 7.13 Suggested Readings 7.1 Introduction Ledger is a main book of account in which various accounts of personal, real and nominal nature, are opened and maintained. In journal, as all the business transactions are recorded chronologically, it is very difficult to obtain all the transactions pertaining to one head of account together at one place. But, the preparation of different ledger accounts helps to get a consolidated picture of the transactions pertaining to one ledger account at a time.

34 7.2 Objective In this unit we will focus on: Meaning and features of Ledger Importance and its Format Various kinds of ledger Posting of Journal into ledger and its scheme Advantages and balancing an account 7.3 Ledger Meaning A ledger account may be defined as a summary statement of all the transactions relating to a person, asset, expense, or income or gain or loss which have taken place during a specified period and shows their net effect ultimately. From the above definition, it is clear that when transactions take place, they are first entered in the journal and subsequently posted to the concerned accounts in the ledger. Posting refers to the process of entering in the ledger the information given in the journal. In the past, the ledgers were kept in bound books. But with the passage of time, they became loose-leaf ones and the advantages of the same lie in the removal of completed accounts, insertion of new accounts and arrangement of accounts in any required manner Features of Ledger Ledger is a powerful, double-entry accounting system. Given below are some features of Ledger which make it different from various accounting systems: Ledger does not create or edit your data. Your inputs will be stored in a text file that you hold, and you can be rest assured, no automated tool will ever change that data. The amount of data that is needed by Ledger is minimal. It finds out from looking at your data, what you mean and how you would like it to be reported back to you. Accounts can be created as they appear. Currencies they are created as directed. Anyplace where a value can be computed, you can omit it.