In simple words, journalizing is an act of recording financial transactions in the journal
book. It is a process of systematic recording of financial transactions in the book of prime or original entry. The following steps are taken while journalizing the transactions in the journal book
- To identify the two aspects of the transaction.
- To identify the appropriate accounts for the two aspects of the transaction.
- 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. Such an entry is called a journal entry.
THINGS TO REMEMBER (TTR)
Journalizing is a process of systematic recording of financial transactions in the book of prime or original entry in chronological order.
RULES OF JOURNALIZING/ RULES OF DEBIT AND CREDIT
Under the double-entry system, every financial transaction of a business has a double effect. That is, each transaction involves at least two accounts. One aspect of the transaction is debited in an account and the other is credited in another account. The debiting and crediting of the accounts are done on the basis of certain rules. These rules are called rules of journalizing i.e. debit and credit. There are two alternative bases for the rules of debit and credit such as follows:
- Rules-based on the types of account
- Rules-based on the accounting equation
RULES-BASED ON THE TYPES OF ACCOUNT
Under the double-entry system, an account is classified into three types. They are personal accounts, real accounts, and nominal accounts. For each of these types of accounts, there are three separate rules of debiting and crediting the financial transactions. The rules of debit and credit under different types of accounts are as follows:
1. Personal Account
A personal account is a record of a person. A person can be a natural person such as people like us, an artificial person such as firms, organizations, and institutions, and a representative person such as debtors and creditors. Since a person, be it a natural, artificial or representative, can be the receiver of benefits or giver of benefits, the rule of debiting and crediting the account of the person is as follows:
Debit the receiver of benefits;
Credit the giver of benefits.
The rule states that whenever a person receives benefits is debited by the amount of the benefits received. On the contrary, whenever the person gives the benefits is credited by the amount of the benefits given. For example, if cash is paid to Ram (Ram is a natural person), his account (Ram’s account) is debited since he is the receiver of benefits (cash). If cash is received from Bishal Enterprises (Bishal Enterprises is an artificial person), its account (Bishal Enterprises account) is credited because it is the giver of benefits (cash). Similarly, if rent is due to pay to a landlady, her account (outstanding rent account) is credited because she is the giver of benefits (Rent). Outstanding rent is the representative personal account of the landlady.
2. Real Account
A real account is a record of an asset. An asset can be a current asset such as cash, a fixed asset such as a building, and an intangible asset such as goodwill. Since an asset, is a current, fixed, or intangible asset, can either come in the business through its purchase or go out of the business through its sale, the rule of debiting and crediting the real (asset) account is as follows:
Debit what comes in;
Credit what goes out.
The rule states that whenever some benefit in the form of an asset comes into the business through its purchase, its (asset) account is debited. Conversely, whenever some benefit in the form of an asset goes out of the business through its sale, its (asset) account is credited. For example, if cash is invested in the business, the cash (current asset) account is debited by the amount of cash. If the furniture is purchased for cash, the furniture (fixed asset) account is debited because it comes into and the cash (current asset) account is credited because it goes out from the business in exchange for furniture.
3. Nominal Account
A nominal account is a record of expense or loss and income or gain. An expense or a loss is the sacrifice of benefits in exchange for service users and an income or a gain is the benefits earned in exchange for service rendered. Since the business makes expenses and earns incomes, the rule of debiting and crediting the expense and income (nominal) account is as follows:
Debit all expenses and losses;
Credit all incomes and gains.
The rule states that whenever some benefit is sacrificed in exchange for service used (expense made or loss suffered), its (expense) account is debited. On the other hand, whenever some benefit is earned in exchange for service rendered, its (income or gain) account is credited. For example, when salary is paid, an expense is made by the business. Therefore, the salary account is debited. On the other hand, when interest is received, an income is earned by the business. Hence, the interest received account is credited.
THINGS TO REMEMBER (TTR)
The rules of debit and credit are:
Types of Account Debit Credit
Personal account The receiver The giver
Real account what comes in what goes out
Nominal account All expenses and losses All incomes and gains
RULES-BASED ON THE ACCOUNTING EQUATION
An accounting equation
is a statement of equality between the three basic elements of accounting. They are assets, capital, and liabilities. Each and every financial transaction affects the three basic elements. However, the total of all assets is always equal to the total of capital and liabilities at any point in time. The rules of debiting and crediting an account based on the accounting equation can be summarized in the following table.
|| Effect of transactions
|| Debit or Credit
|| Increase in assets and expenses / losses
|| Decrease in assets and expenses / losses
|| Increase in Capital, Liabilities, income / gains
|| Decrease in Capital, Liabilities, income / gains