Journal entry examples

The transactions, journalized. Each one gets its narration, then the entry. Cover the entries and try each one yourself first. That's working agreement #3: write before you peek.

(1) Apr 1: The founders invest ₹10,00,000 cash as share capital. Cash (asset) goes up, so debit it. Share Capital (equity) goes up, so credit it.

Dr  Cash                    10,00,000
    Cr  Share Capital                10,00,000

(2) Apr 1: Bank term loan of ₹4,00,000 received at 12% per annum interest, principal repayable after two years. Cash goes up, so debit. Bank Loan (liability) goes up, so credit. You don't record any interest today, because none has been incurred yet. Interest accrues with time, and no time has passed.

Dr  Cash                     4,00,000
    Cr  Bank Loan                     4,00,000

Which purchases become assets?

(3) Apr 1: Paid ₹1,80,000 rent in advance for 12 months of shop space (₹15,000/month). This is the subtle one. Is it rent expense? Not yet. On 1 April Meridian has used zero months of space. What it has bought is a right to occupy for 12 months, which is a future benefit, so it's an asset called Prepaid Rent. Each month that passes turns 1/12 of it into expense, through the adjusting entries you'll meet shortly.

Dr  Prepaid Rent             1,80,000
    Cr  Cash                          1,80,000

(4) Apr 2: Bought shop fittings and packing equipment for ₹2,40,000 cash. Expected life 5 years (60 months), no salvage value. Again it's an asset, because the equipment serves for years. Its cost reaches the income statement a bit at a time as depreciation: ₹2,40,000 ÷ 60 = ₹4,000/month.

Dr  Equipment                2,40,000
    Cr  Cash                          2,40,000

(5) Apr 3: Purchased 2,000 kg of tea on credit from an Assam supplier at ₹250/kg = ₹5,00,000, payable in 30 days.

Dr  Inventory                5,00,000
    Cr  Accounts Payable              5,00,000

How are sales and payments recorded?

(6) Apr 8: Cash sale of 600 kg at ₹400/kg = ₹2,40,000 to walk-in and café customers. Under the perpetual system every sale takes two entries. One records the revenue at selling price. The other moves the cost out of inventory at cost price (600 kg × ₹250 = ₹1,50,000).

Dr  Cash                     2,40,000
    Cr  Sales Revenue                 2,40,000

Dr  Cost of Goods Sold       1,50,000
    Cr  Inventory                     1,50,000

(7) Apr 12: Credit sale of 800 kg at ₹400/kg = ₹3,20,000 to a hotel chain, payable in 30 days. The cost is 800 × ₹250 = ₹2,00,000. Revenue is earned on delivery, even though the cash comes later. That's the accrual principle at work.

Dr  Accounts Receivable      3,20,000
    Cr  Sales Revenue                 3,20,000

Dr  Cost of Goods Sold       2,00,000
    Cr  Inventory                     2,00,000

(8) Apr 15: Paid the Assam supplier ₹3,00,000 on account. This settles a liability, so there's no expense here. That cost was captured when the inventory was bought, and it'll hit profit through COGS. The liability goes down, so debit it. Cash goes down, so credit it.

Dr  Accounts Payable         3,00,000
    Cr  Cash                          3,00,000

(9) Apr 18: Collected ₹2,00,000 from the hotel chain. No revenue here, because it was earned on 12 April. This just swaps one asset, the receivable, for another, cash.

Dr  Cash                     2,00,000
    Cr  Accounts Receivable           2,00,000

How are customer advances and cash payments recorded?

(10) Apr 20: A caterer paid ₹60,000 in advance for tea to be delivered in May. Cash came in and nothing was earned. Meridian now owes the caterer tea. That obligation is booked as Unearned (Deferred) Revenue, a liability, and the revenue will be recognized in May on delivery.

Dr  Cash                        60,000
    Cr  Unearned Revenue                60,000

(11) Apr 28: Paid April salaries of ₹36,000 cash to the shop staff.

Dr  Salaries Expense            36,000
    Cr  Cash                            36,000

(12) Apr 26: Paid electricity and sundry shop expenses, ₹8,000 cash.

Dr  Utilities Expense            8,000
    Cr  Cash                             8,000

(13) Apr 29: Bought 400 kg more tea for cash at ₹260/kg = ₹1,04,000, since prices had firmed up.

Dr  Inventory                1,04,000
    Cr  Cash                          1,04,000

Flag this for later. Meridian's inventory now holds tea bought at two different prices, 600 kg at ₹250 and 400 kg at ₹260. Nothing more is sold this month, so no costing question comes up. When batches at different costs are sold together, though, you need a costing rule such as FIFO, weighted average or LIFO. You'll learn those in the revenue and inventory module ahead.

Where does a dividend go?

(14) Apr 30: Declared and paid a dividend of ₹20,000 to the founders. We're taking a teaching liberty here. A real one-month-old private company would rarely pay a dividend, and Indian companies-law formalities apply. But you need to see where dividends go, and it isn't the income statement. Dividends, a temporary equity-reduction account, go up, so debit.

Dr  Dividends                   20,000
    Cr  Cash                            20,000