Journal Entries - Part 2
"Beyond simple transactions - opening, closing, and adjustments."
In Part 1, we learned basic journal entries. Now we'll cover special types of entries that complete the accounting cycle.
Types of Special Entries
1. Opening Entries
When: At the start of a new accounting period.
Purpose: Transfer balances from previous year's Balance Sheet to current year's books.
Rule:
- Assets (Dr. balance) → Debit
- Liabilities (Cr. balance) → Credit
Example: Opening Entry
Previous Year's Balance Sheet (Closing):
- Cash: ₹50,000
- Furniture: ₹30,000
- Debtors: ₹20,000
- Capital: ₹70,000
- Creditors: ₹30,000
Opening Entry for New Year:
Cash A/c Dr. ₹50,000
Furniture A/c Dr. ₹30,000
Debtors A/c Dr. ₹20,000
To Capital A/c ₹70,000
To Creditors A/c ₹30,000
(Being opening balances brought forward from previous year)
2. Closing Entries
When: At the end of the accounting period.
Purpose: Transfer nominal account balances (revenues and expenses) to Trading & Profit & Loss Account.
Steps for Closing
Step 1: Close all revenue accounts to Trading/P&L Step 2: Close all expense accounts to Trading/P&L Step 3: Transfer final profit/loss to Capital Account
Example: Closing Entries
Accounts to close:
- Sales: ₹3,00,000 (Cr.)
- Purchases: ₹2,00,000 (Dr.)
- Salary: ₹30,000 (Dr.)
- Rent: ₹20,000 (Dr.)
Closing Entries:
Entry 1: Close Revenue
Sales A/c Dr. ₹3,00,000
To Trading A/c ₹3,00,000
Entry 2: Close Expenses
Trading A/c Dr. ₹2,00,000
To Purchases A/c ₹2,00,000
Profit & Loss A/c Dr. ₹50,000
To Salary A/c ₹30,000
To Rent A/c ₹20,000
Entry 3: Transfer Net Profit
Profit & Loss A/c Dr. ₹50,000
To Capital A/c ₹50,000
(Being net profit transferred to capital)
3. Adjusting Entries
Purpose: Record transactions that have occurred but not yet been recorded, or correct accounting to match the Accrual Basis.
Types of Adjustments
| Type | Situation | Adjustment Entry |
|---|---|---|
| Outstanding Expenses | Expense incurred but not paid | Dr. Expense, Cr. Outstanding Expense |
| Prepaid Expenses | Expense paid in advance | Dr. Prepaid Expense, Cr. Expense |
| Accrued Income | Income earned but not received | Dr. Accrued Income, Cr. Income |
| Income Received in Advance | Income received but not yet earned | Dr. Income, Cr. Unearned Income |
| Depreciation | Asset value reduction | Dr. Depreciation, Cr. Asset/Provision |
| Bad Debts | Debtors who won't pay | Dr. Bad Debts, Cr. Debtors |
a) Outstanding Expenses
Situation: Salary for December ₹20,000 will be paid in January.
Adjusting Entry (31st Dec):
Salary A/c Dr. ₹20,000
To Outstanding Salary A/c ₹20,000
(Being salary for December outstanding)
Effect:
- P&L shows full year's salary expense
- Balance Sheet shows Outstanding Salary as liability
b) Prepaid Expenses
Situation: Paid annual insurance ₹12,000 on 1st October (covers Oct-Sep next year). Year ends 31st March.
Calculation: 6 months (Apr-Sep) are for next year = ₹6,000
Adjusting Entry (31st March):
Prepaid Insurance A/c Dr. ₹6,000
To Insurance A/c ₹6,000
(Being insurance prepaid for 6 months)
Effect:
- P&L shows only ₹6,000 expense (current year)
- Balance Sheet shows ₹6,000 prepaid as asset
c) Accrued Income
Situation: Interest on FD ₹5,000 earned but bank hasn't credited yet.
Adjusting Entry:
Accrued Interest A/c Dr. ₹5,000
To Interest Income A/c ₹5,000
(Being interest accrued but not received)
d) Depreciation
Situation: Machinery cost ₹1,00,000, depreciation @ 10%.
Adjusting Entry:
Depreciation A/c Dr. ₹10,000
To Machinery A/c ₹10,000
(Being depreciation charged on machinery)
4. Compound Journal Entries
Definition: An entry with more than one debit or more than one credit (but total Dr. = total Cr.).
Example 1: Multiple Debits
Transaction: Purchased furniture ₹20,000 and machinery ₹30,000, paid cash.
Furniture A/c Dr. ₹20,000
Machinery A/c Dr. ₹30,000
To Cash A/c ₹50,000
(Being furniture and machinery purchased for cash)
Example 2: Multiple Credits
Transaction: Sold goods to Ram ₹10,000 and Shyam ₹15,000 on credit.
Ram A/c Dr. ₹10,000
Shyam A/c Dr. ₹15,000
To Sales A/c ₹25,000
(Being goods sold on credit)
Real-World Application
Flipkart - Year-End Adjustments
- Outstanding Expenses: Vendor payments pending ₹500 Crores
- Prepaid Expenses: AWS cloud services paid for next 6 months ₹100 Crores
- Accrued Income: Advertising revenue earned ₹50 Crores (payment pending)
- Depreciation: Warehouses, servers, equipment ₹200 Crores
All these adjustments ensure Flipkart's financial statements reflect true and fair view of its performance.
Quiz: Journal Entries Part 2
Test Your Knowledge
Question 1 of 5
1. Opening entries are passed: