Note on Journal entries and its preparation

  • Note
  • Things to remember

Preparation of Journal Entries

  1. Assets /Liabilities

For smooth operation of business, it may purchase different types of assets and put into use for tong term. It may purchase in cash or credit. If credit purchase is available, such credit to be discharged by the business in future. Actually, such assets are purchased by business to use and for the same, it may charge certain amount of depreciation following different method of depreciation. But, sometimes, due to different reason likewise obsolescence, useless or replacement or breakdown date to accident such assets need to be disposed off. At that time, business may suffer loss for the transactions or sometimes may earn certain amount of profit. Similarly, to purchase fixed assets or to maintain working capital, business may need some of the financial assistance and may borrow loan from the different financial institute or lender. At that time, it may contains certain rate of interest that should be charged on amount of finance or loan. In future, such amount of loan may be discharged in cash.

  • Purchase of Furniture on cash

Furniture a/c Dr xx

To cash a/c xx

  • Borrowed bank loan

Cash a/c Dr xx

To bank loan a/c xx

  1. Expenses / Income

In business, there are lot of expenses raised and similarly, different type of indirect incomes generated. Such expenses are to be paid in time, otherwise, it may remain outstanding. Similarly, incomes may also receive by the business, otherwise, it may remain outstanding.

  • Salary paid

Salary a/c Dr xx

To cash a/c xx

  • Commission received

Cash a/c Dr xx

To commission a/c xx

  • Wages paid to Ram

Wages a/c Dr xx

To cash a/c xx

  1. Banking transactions

For assist of business transactions and to follow the government rules also, business open the bank account in bank and perform lots of transaction through bank. Among them, some transaction are illustrated below;

  • Opening a bank account with cash

Bank account Dr xx

To cash a/c xx

  • Deposited cash into bank

Bank account Dr xx

To cash a/c xx

  • Withdrawn cash from bank for office use

Cash a/c Dr xx

To bank a/c xx

  1. Bad debts / Bad debts recovered

For the goods sold in credit, certain customers became bad debt and bad debt amount could not be recovered. Such amount is known as bad debt. Due to different reason, certain customer can be declared as insolvent (Bankrupt) and certain portion of debt only could be recovered and that time also unrecovered portion of debt should be written off as "Bad Debt". Similarly, management may assume that certain amount of credit sales could not be recovered and management need to make provision for same. Such amount is known as provision for Bad Debt. Sometimes, the amount already written off as bad debt but received in current accounting year, need to show in account. Such amount can be shown in account as indirect income as "Bad Debt Recovered".

  • Debtor is declared insolvent and received in part

Cash a/c Dr xx

Bad debt a/c Dr xx

To Debtor a/c xx

  • A debt previously written off as bad, recovered now

Cash a/c Dr xx

To bad debts recovered xx

  1. Loss of goods & Insurance claim

Sometimes, particular type of disaster may occurred and caused losses for the business and for the same, business may have take insurance policy. If such disaster occurred in business, it may claim to the insurance company. Insurance company may admitted such claim either in full or in part and sometimes rejects also.

  • Goods lost by fire but was not insured

Lost by fire a/c Dr xx

To purchase a/c xx

  • Goods destroyed by accident and insurance company admitted the full claim

Insurance company a/c Dr xx

To purchase a/c xx

  • Goods were stolen by theft and insurance company admitted claim part only

Insurance company a/c Dr xx

Lost by theft a/c Dr xx

To purchase a/c xx

  1. Goods given as charity or distributed as sample

To promote the business, sometimes business may distribute some of goods as free sample in form of advertisement. Similarly, sometimes some of the goods may be distributed as donation to certain group. Such type of transactions also may take place in business and could be presented in following term

  • Goods were distributed as free sample

Advertisement a/c Dr xx

To purchase a/c xx

  1. Interest on capital / Interest on Drawing

Business may have some of personal transactions of businessman. If businessman invested his personal property into business then such amount is termed as "Capital". In such amount, proprietor may charge certain rate of interest and those interest may burden to it. Similarly, sometimes, proprietor may use business property for his personal use and those are termed as "Drawing". In such amount, business may charge certain rate of Interest . This type of Interest may be income for the .business. Transactions can be illustrated as follows:

  • Interest on capital due

Interest capital a/c Dr xx

To capital a/c xx

  • Interest on drawing

Drawing a/c Dr xx

To interest on drawing a/c xx

  1. Bill of Exchange

The bill of exchange, commonly referred to as the draft or the bill, is an unconditional order in writing signed and addressed by the drawer (the exporter usually) to the drawee (the confirming writing, issuing bank usually), requiring the drawee to pay the drawer a certain sum of money at sight or at a fixed or determinable future time.

Parties to the bill of exchange

Bill of exchange normally is customary where the supplier of goods has sold goods on credit to the buyer of goods. Here is the list of parties to a bill of exchange:

  • Drawer — It is the person who is the maker of the bill of exchange. It is the person who has sold the goods and for receiving the payment from the debtor he draws a bill of exchange.
  • Drawee or Acceptor — It is the person on whom the bill of exchange is drawn and he has to make payment to the supplier of goods.
  • Payee — It is the person to whom the payment has to be made. It may be the drawer himself if he has not discounted the bill with any third party.

Specimen of bills of exchange





Three months after the date pay to Z order the sum of amount only for value received.


B (Drawer ) city

Std X (Drawer)

Importance of bill of exchange

The following are the importance of a bill of exchanges:

  1. It is a legal evidence of debt.
  2. It is a convenient method for the transfer of debt
  3. 3 A creditor can sue on the bill itself.
  4. 4.It is a negotiable instrument and can be transferred for settlement of ones debt without difficulty.
  5. 5 It can be cashed before due date by discounting.
  6. 6 A debtor enjoys the benefit of full period of credit.
  7. It affords an ease means of transmitting money from one place to another.

Terms used in bill of exchange

  1. Acceptance or bill of exchange:It is the rocess by which a buyer (called a 'drawer') accepts the seller's bill of exchange by signing under the words 'accepted' on face of the bill. By this act, the drawer becomes the acceptor and converts the bill into a post-dated check an unconditional obligation to pay it on or before its maturity date.
  2. Payment of bill or Honour of a bill: When the drawer pays the bill on the maturity date, it is called payment of a bill or honour of a bill.
  3. Discounting of bill: If the drawer of the bill does not want to wait till the due date of the bill and is in need of money, he may sell his bill to a bank at a certain rate of discount. The bill will be endorsed by the drawer with a signed and dated order to pay the bank. The bank will become the holder and the owner of the bill. After getting the bill, the bank will pay cash to the drawer equal to the face value less interest or discount at an agreed rate for the number of days it has to run. This process is known as discounting of a bill of exchange.
  4. Endorsement of bill: If the holder of the bill puts his signature on the back of the bill with a view to transfer the property contained in it (right to receive money from the acceptor), then he becomes endorser, and the person to whom the bill of exchange is transferred will become endorsee. This procedure by which a bill is transferred from one person to another person for the settlement of debts is called "endorsement".
  5. Dishonour of bill: If a bill is not accepted or if the bill is not paid on the due date, it is said to have been dishonoured. In such a case notice of Dishonour must be given by the holder to the drawer and each prior endorser whom he seeks to make liable. If this is not done, the holder will lose his right to recover the amount from the prior parties.

(Jogender Goet, Bhesh Raj Banjade, 2012)


goet, J. (2012). Principal of accountinh. kalimati, kathmandu: Dreamland publication.

  1. Expenses / Income

 In business there are lot of expenses raised and similarly different type of Indirect incomes generated. Such expenses are to be paid in time otherwise it may remain outstanding. Similarly incomes may also receive by the business otherwise it may remain outstanding.

Banking transactions

 For assist of business transactions and to follow the government rules also as well, business open the bank account in near by Bank and perform lots of transaction through bank.


Very Short Questions



No discussion on this note yet. Be first to comment on this note