Journal

Accounting for Managers Introduction to Accounting Journal

The study of this chapter would enable you to understand:
Significance of Debit and Credit
Meaning of Journal
Process or Rule of Journalising
Simple and Compound Journal Entries

Introduction

Transactions are recorded in the books of account on the basis of evidence such as bills of purchases, invoices for sales, debit and credit notes, etc. These evidences being the basis of recording entry are also known as ‘source documents’. Rules of debit and credit are applied to each transaction and recorded in the books of original entry, i.e., Journal and Special Purpose Books in a chronological order. The entries recorded in these books of accounts are transferred to the specific accounts maintained in the Ledger.

Double Entry System of Accounting

Under the Double Entry System of accounting, every transaction has two aspects—Debit and Credit. At the time of recording a transaction, it is recorded once on the debit side and again on the credit side. For example, at the time of cash purchases, goods are acquired and in return cash is paid. In the transaction, two aspects are involved, i.e., receiving goods and paying cash. Both these aspects shall be recorded under the Double Entry System. One part, i.e., the receipt of goods is debited and the second part, i.e., payment of cash is credited. In other words, if only two accounts are affected by atransaction (as in the purchase of furniture for cash), one account, furniture is debited and the other account, cash is credited for the same amount. If more than two accounts are affected by a transaction, the sum of the debit entries must be equal to the sum of the credit entries. Thus, on any day, total amount debited is equal to the total amount credited.

Thus, we can define Double Entry System as: “The system which recognises and records both aspects of a transaction.”

Features (Advantages) of the Double Entry System

A complete record of each transaction is maintained under the system, which establishes that the accounting record is accurate.

It recognises the two-fold aspect of every transaction, viz., the aspect of receiving (value in) and the aspect of giving (value out).

In this system, one aspect is debited and other aspect is credited following the rules of debit and credit.

Since, one aspect of a transaction is debited and the other is credited, the total of all debits is always equal to total of all credits. It helps in establishing arithmetical accuracy by preparing a Trial Balance.
Financial performance and financial position can be ascertained with at any time.
Financial information can be compared with that of previous year.

Stages of Double Entry System

The following are the three different stages of a complete system of a double entry book keeping:

Recording the transactions in the Journal.

Classifying the transactions in the Journal by posting them to the appropriate ledger accounts and then prepare a trial balance.

Closing the books and prepare the final accounts.

All these stages shall be discussed one by one in succeeding chapters.

Meaning of Debit and Credit

In simple words, debit refers to the left side of an account and credit refers to the right side of an account. In the abbreviated form Dr. stands for debit and Cr. stands for credit. An item recorded on the debit side of an account is said to be debited to the account and a balance resting on this side is said to be a debit balance. A debit entry signifies that value has flowed to the named account, e.g., payment to a creditor signifies that payment has been made for the goods purchased from him. Thus, his account is debited.

An item recorded on the credit side of an account is said to be credited to the account and the balance resting on this side is said to be a credit balance. A credit entry signifies that value has flown from the source indicated by the name of the account, e.g., receipt of cash from a debtor signifies that debtor has made payment for thegoods purchased by him. Thus, his account is credited. Debit and credit are simply additions to or subtractions from an account.

Under double entry system of book keeping each transaction has two aspects, debit and credit. Debit and credit aspects of a transaction form the basis of double entry system.

Meaning

The first book of account in which the transactions are recorded is called a Journal Book. A Journal is that book of accounts in which transactions are originally recorded in a chronological order, i.e., as they occur. An entry made in the Journal is called a ‘Journal Entry’.

JOURNAL
Form of a Journal: The form of a Journal is given below:
Date	Particulars	L.F.	Dr. (Rs.)	Cr. (Rs.)
(1)	(2)	(3)	(4)	(5)

(L.F. Stands for Ledger Folio)

Date. In this column, the transaction date is written.`
Particulars. In this column, the names of the accounts are written in which thedebit amounts and credit amounts are to be written. Narration, i.e., a brief description of the transaction is also written.
Ledger Folio. In this column, the number of the Ledger page is written to whichthe account is posted.
Debit Amount. In this column, the amount debited is written.
Credit Amount. In this column, the amount credited is written.

Note: All the columns, except the Ledger Folio column, are completed at the time of journalizing. The ledger folio column is filled in at the time of posting.

Process or Steps or Rules of Journalising

The steps involved in Journalising are:

1. Ascertain what accounts are affected by a transaction.

2. Ascertain the nature of the account affected.

3. Ascertain which account is to be debited and which account is to be credited byapplying the rules of debit and credit.

Let us recapitulate the rules of debit and credit.

RULES FOR DEBIT AND CREDIT

#	Types of Account	Accounts to be Debited	Accounts to be Credited
1.	Assets A/c	Increase	Decrease
2.	Liabilities A/c	Decrease	Increase
3.	Capital A/c	Decrease	Increase
4.	Revenue A/c	Decrease	Increase
5.	Expense A/c	Increase	Decrease

Illustration 1. From the following transactions prepare the Journal entry:

Dinesh started business with cash Rs. 5,00,000.
Borrowed from Naresh Rs. 1,00,000.
Purchased furniture for Rs. 20,000 in cash from Raj Furniture House.
Purchased furniture from Delhi Safe for Rs. 40,000.
Purchased goods for cash Rs. 15,000.
Purchased goods from Mahesh Rs. 30,000.
Sold goods for cash to Karim Rs. 25,000.
Sold goods to Shyam on credit Rs. 30,000.
Cash received from Shyam Rs. 20,000.
Cash paid to Mahesh Rs. 10,000.
Deposited cash into bank Rs. 50,000 for opening an account.
Withdrew cash for personal use Rs. 5,000.
Withdrew cash from bank for office use Rs. 10,000.
Received a cheque from Shyam Rs. 5,000.
Deposited Shyam’s cheque next day.
Paid Mahesh by cheque Rs. 10,000.
Paid salary to staff Rs. 20,000.
Paid rent by cheque Rs. 6,000.
Paid interest on loan Rs. 5,000.

Date	Particulars	Dr. (Rs.)	Cr. (Rs.)
1	Cash A/c	5,00,000
	To Capital A/c		5,00,000
	(Being capital introduced by Mr. Dinesh to start the Business)
2	Cash A/c	1,00,000
	To Loan from Naresh A/c		1,00,000
	(Being loan taken from Naresh)
3	Furniture A/c	20,000
	To Cash A/c		20,000
	(Being furniture purchased on cash)
4	Furniture A/c	40,000
	To Delhi Safe A/c		40,000
	(Being furniture purchased on credit from Delhi Safe)
5	Purchases A/c	15,000
	To Cash A/c		15,000
	(Being goods purchased on cash basis)
6	Purchases A/c	30,000
	To Mahesh A/c		30,000
	(Being goods purchased on credit)
7	Cash A/c	25,000
	To Sales A/c		25,000
	(Being goods sold on cash)
8	Shyam A/c	30,000
	To Sales A/c		30,000
	(Being goods sold to Shyan on credit)
9	Cash A/c	20,000
	To Shyam A/c		20,000
	(Cash received from Shyam)
10	Mahesh A/c	10,000
	To Cash A/c		10,000
	(Being cash paid to Mahesh)
11	Bank A/c	50,000
	To Cash A/c		50,000
	(Being cash deposited to bank)
12	Drawings A/c	5,000
	To Cash A/c		5,000
	(Being cash withdrawn for personal use)
13	Cash A/c	10,000
	To Bank A/c		10,000
	(Being cash withdrawn from bank)
14	Cheque in Hand A/c	5,000
	To Shyam A/c		5,000
	(Being cheque received from Shyan)
15	Bank A/c	5,000
	To Cheque in Hand A/c		5,000
	(Being check deposited into bank)
16	Mahesh A/c	10,000
	To Bank A/c		10,000
	(Being cheque issue to Mahesh)
17	Salary A/c	20,000
	To Cash A/c		20,000
	(Being salary paid by cash)
18	Rent A/c	6,000
	To Bank A/c		6,000
	(Being rent paid by bank)
19	Interest on Loan A/c	5,000
	To Cash A/c		5,000
	(Being interest paid on loan)

Simple and Compound Journal Entries

Entries in a Journal may be divided into two groups: 1. Simple Entry and 2. Compound Entry.

Simple Entry. A simple entry is one in which only two accounts are affected,viz.,one account is debited and another is credited with an equal amount. The entries in Illustration 1 above are examples of Single Entry.

Compound Entry. A compound entry is one in which two or more accounts aredebited and one or more accounts are credited or vice versa. For example, a debt of Rs. 5,000 due from Satish has been discharged by receipt of Rs. 4,850 cash and by Rs. 150 allowed as discount. The combined entry passed will be:

In this example, the debt owed by Satish is settled in two parts:

Cash Received: Rs. 4,850 is received in cash, which increases the cash balance in the business.
Discount Allowed: Rs. 150 is given as a discount, which is treated as an expense or a loss to the business.

Transaction Analysis:

Cash Account:
- Type: Asset
- Rule: Increase in asset = Debit
- Action: Cash A/c is debited by Rs. 4,850.
Discount Allowed Account:
- Type: Expense
- Rule: Increase in expense = Debit
- Action: Discount Allowed A/c is debited by Rs. 150.
Satish Account:
- Type: Asset (Receivable)
- Rule: Decrease in asset = Credit
- Action: Satish A/c is credited by Rs. 5,000.

Journal Entry

Account	Debit (Rs.)	Credit (Rs.)
Cash A/c …Dr	4,850
Discount Allowed A/c …Dr	150
To Satish A/c		5,000
(Being the amount due from Satish Rs. 5,000 settled by receiving cash of Rs. 4,850 and allowing a discount of Rs. 150)

Illustration 2: Record the following transactions in a Journal

Date	Transaction Description	Amount (Rs.)
2010 Jan. 1	Paid to Mohan in full settlement of his account of Rs. 10,000	9,500
Jan. 5	Received from Ram in cash and allowed him discount	12,000
Jan. 7	Paid Salaries	5,000
Jan. 7	Paid Rent	3,000
Jan. 7	Paid Wages	1,000
Jan. 10	Purchased goods worth Rs. 20,000, of which goods worth Rs. 12,000 were on credit from Shyam Lal	20,000

Solution

Date	Particulars	Debit (Rs.)	Credit (Rs.)
2010 Jan. 1	Cash A/c	9,500
	Discount Received A/c	500
	To Mohan’s A/c		10,000
	(Being Rs. 9,500 paid to Mohan in full settlement of his account of Rs. 10,000, with a discount received of Rs. 500)
Jan. 5	Cash A/c	12,000
	Discount Allowed A/c	100
	To Ram’s A/c		12,100
	(Being Rs. 12,000 received from Ram and a discount of Rs. 100 allowed)
Jan. 7	Salaries A/c	5,000
	To Cash A/c		5,000
	(Being salaries paid in cash)
Jan. 7	Rent A/c	3,000
	To Cash A/c		3,000
	(Being rent paid in cash)
Jan. 7	Wages A/c	1,000
	To Cash A/c		1,000
	(Being wages paid in cash)
Jan. 10	Purchases A/c	20,000
	To Cash A/c		8,000
	To Shyam Lal A/c		12,000
	(Being goods purchased for cash and on credit from Shyam Lal)

Entries of Some Specific Transactions

1. Bad Debts. In a business, if an amount say on account of credit sales, is notrealised or is partially realised then the amount not realised is treated as a Bad Debt, i.e., loss. The following Journal entries are passed in such a case:

(i) When the amount is irrecoverable:

Bad Debts A/c …Dr.

To Debtor’s Personal A/c

(ii) When a part of the bad debt is recoverable: When a debtor becomes bankrupt, i.e., he is unable to pay his total debt, the unrealised amount becomes a loss to the business. The Journal entry passed is:

Cash/Bank A/c	…Dr.	[With the amount received]
Bad Debts A/c	…Dr.	[With the amount which is not recovered]
To Debtor’s Personal A/c		[Total amount of debtor]

2. Bad Debts Recovered. Sometimes a debtor whose account had been earlierwritten off as ‘Bad Debts’ pays some amount. The amount so received is a gain to the business because the debtor’s account was earlier written off as a bad debt, i.e., loss. The entry of bad debts recovered is:

Cash/Bank A/c …Dr.

To Bad Debts Recovered A/c

Do it yourself. Journalise the following transactions:
(i)	Sohan is declared insolvent. Received from his Official Receiver 60 paise in the rupee on a debt of Rs. 1,000.
(ii)	Mohan who owed Rs. 2,000 has become insolvent. He pays a compensation of 50 paise in the rupee.

3. Cash Withdrawn or Goods Taken by Proprietor for Personal Use.

The following entry is passed:
	Drawings A/c	…Dr.
	To Cash A/c (if cash is withdrawn)
	To Purchases A/c (if goods are taken by proprietor for personal use)
Note:	If the proprietor withdraws cash or takes goods from the business for his personal use; it is called drawings. The amount or cost of goods so withdrawn is debited to the Drawings Account and credited to the Cash/Purchase Account. It is treated as a decrease in purchase and not increase in sales as no profit is earned on such goods.

4. Banking Transactions. Businesses normally make and receive paymentsthrough a banking account. Payment by cheque, cheque received, withdrawal of cash from bank, deposit into bank, bank charges charged by bank and interest charged on overdraft by bank, etc., are examples of banking transactions. If the books of accounts show a debit balance in the bank account, it means that much amount is lying deposited in the bank. And if the books of accounts show a credit balance in the bank account, it means that much amount is overdrawn and is payable to the bank.

At the time of recording banking transactions, the following important considerations should be noted:

A Bank Account is a personal account and rule of debit and credit for a personal account, i.e., debit the receiver and credit the giver will apply. Whenever a deposit is made in a bank, the Bank Account is debited and whenever a withdrawal is made, the Bank Account is credited.

For example, cash deposit into the bank increases the bank balance. Thus, the Bank Account is debited. Cash withdrawal from the bank reduces the bank balance. Thus, the bank balance is credited.

If a cheque is received and is not deposited in the bank on the same day, it is debited to the Cash Account taking it to be cash. When the cheque is deposited, the Bank Account is debited and the Cash Account credited. If the cheque is deposited on the same day, the Bank Account is debited.

Let us understand the Journal entries relating to banking transactions:

S. No.	Transaction	Entry	Type	Traditional Rule	Modern Rule
1	Cash deposited for opening an account	Bank A/c Dr.	Debit	Debit the receiver.	Increase in Asset
		To Cash A/c	Credit	Credit what goes out.	Decrease in Assets
2	Cash withdrawn	Cash A/c Dr.	Debit	Debit what comes in.	Increase in Assets
		To Bank A/c	Credit	Credit the giver.	Decrease in Assets
3	Cash withdrawn for personal use	Drawings A/c Dr.	Debit	Debit the receiver (proprietor).	Decrease in Capital
		To Bank A/c	Credit	Credit the giver. Drawings reduce capital.	Decrease in Assets
4	Payment by cheque to a creditor (e.g., Rakesh)	Rakesh A/c Dr.	Debit	Debit the receiver.	Decrease in Liability
		To Bank A/c	Credit	Credit the giver.	Decrease in Assets
5	Payment by draft to a creditor (e.g., Vikas)	Vikas A/c Dr. Bank Charges A/c Dr.	Debit	Debit the receiver and expenses.	Decrease in Liability and Increase in Expense
		To Bank A/c	Credit	Credit the giver.	Decrease in Assets
6	Payment of expenses (e.g., Rent)	Rent A/c Dr.	Debit	Debit all expenses and losses.	Increase in Expense
		To Bank A/c	Credit	Credit the giver.	Decrease in Assets
7	Charges paid to or charged by Bank	Bank Charges A/c Dr.	Debit	Debit all expenses and losses.	Increase in Expense
		To Bank A/c	Credit	Credit the giver.	Decrease in Assets
8	Cheque or draft received from a debtor (e.g., Rahul) and deposited into bank the same day	Bank A/c Dr.	Debit	Debit the receiver.	Increase in Assets
		To Rahul	Credit	Credit the giver.	Decrease in Assets
9	Cheque/draft received from a debtor (e.g., Ankur) and not deposited into bank the same day	Cash A/c Dr.	Debit	Debit what comes in.	Increase in Assets (Here we will assume that the cash increased)
		To Ankur	Credit	Credit the giver.	Decrease in Assets
10	Above cheque/draft deposited into the bank	Bank A/c Dr.	Debit	Debit the receiver.	Increase in Assets
		To Cash A/c	Credit	Credit what goes out.	Decrease in Assets
11	Deposited cheque dishonoured (e.g., Ankur)	Ankur Dr.	Debit	Debit the debtor again.	Again the Ankur will become Debtors so Increase in Assets
		To Bank A/c	Credit	Credit the bank account.	Decrease in Assets
12	Interest charged by the bank	Interest A/c Dr.	Debit	Debit all expenses and losses.	Increase in Expenses
		To Bank A/c	Credit	Credit the giver.	Decrease in Assets
13	Interest allowed by the bank	Bank A/c Dr.	Debit	Debit the receiver.	Increase in Assets
		To Interest Received A/c	Credit	Credit all incomes and gains.	Increase in Revenue
14	Bank makes payment on firm’s behalf (e.g., insurance premium)	Insurance Premium A/c Dr.	Debit	Debit all expenses and losses.	Increase in Expenses
		To Bank A/c	Credit	Credit the giver.	Decrease in Assets
15	Bank collection by bank on our behalf (e.g., dividend)	Bank A/c Dr.	Debit	Debit the receiver.	Increase in Assets
		To Dividend A/c	Credit	Credit all incomes and gains.	Increase in Revenue
16	Repayment of bank loan in cash	Bank Loan A/c Dr.	Debit	Debit the liability (loan).	Increase in Liability
		To Cash A/c	Credit	Credit what goes out.	Decrease in Assets
17	Repayment of bank loan by issue of cheque	Bank Loan A/c Dr. To Bank A/c	Debit	Liability has decreased.	Decrease in Liability
		To Bank A/c	Credit	Bank balance has reduced.	Decrease in Assets
18	Transfer of funds from one account to another (e.g., from Current A/c No. 2 to Current A/c No. 1)	Bank A/c (Current A/c No. 1) Dr.	Debit	Account No. 1 balance increased.	Increase in Assets
		To Bank A/c (Current A/c No. 2)	Credit	Account No. 2 balance decreased.	Decrease in Assets

5. Goods Given as Charity. The amount of purchases is reduced with the value ofgoods given as charity. It is so because if goods are used for purposes other than sale, the amount of such goods is reduced from purchases, i.e., credited to the Purchases Account. The following entry is passed:

Charity A/c …Dr.

To Purchases A/c

6. Discount

Discount is a deduction or allowance out of the selling price (catalogue, list or marked price) of goods or a deduction or allowance out of amount payable. Discount may be either Trade Discount or Cash Discount.

Trade Discount

Trade Discount is allowed when goods are purchased in bulk, i.e., large quantity. It is usually allowed by one business to another business which is making a purchase for resale to an ultimate customer. Trade Discount is allowed as a deduction from the invoice, and hence not recorded in the books of accounts. In the Purchase Day Book or Sales Day Book, the net amount of the invoices is shown in the total column. Trade Discount availed by retailer allows him improved profit margin by selling the product at the list price while purchasing goods at lesser price. Trade Discount is associated with purchases and therefore, is allowed on both, cash purchases and credit purchases.

Cash Discount

Cash Discount is an allowance or deduction allowed to encourage prompt or early cash payment. The usual method to encourage payment within the specific time, the seller allows cash discount say @ 2% of invoice value to the buyer. The amount of cash discount is calculated after deducting trade discount from the invoice price. In otherwords, cash discount is calculated always on net amount. It is always allowed at the time of receipt of amount in cash or by cheque. It is an expense for the business allowing it and a profit for the business availing it, it is therefore, recorded in the books of account under separate heads. Discount received and discount allowed are transactions of income and expense respectively. Thus, two separate accounts are operated, i.e., Discount Received Account and Discount Allowed Account. Discount received or discount allowed is related to payment and thus, they are recorded in the books of account alongwith the entry recorded for payment and receipt of amount, in cash or by cheque. The accounting entries regarding cash discount are as follows:

(i) When Cash Discount is received:

Creditors’ A/c …Dr.

To Cash or Bank A/c

To Discount Received A/c

(ii) When Cash Discount is allowed:

Cash or Bank A/c …Dr.

Discount Allowed A/c …Dr.

To Debtors’ A/c

Illustration 3: Accounting Treatment for Bina Watch Co.

Scenario: Bina Watch Co. purchased 50 pieces of the “Time Star” brand wristwatch from “Pioneer Watches,” a wholesale dealer, at a list price of Rs. 1,000 per piece. The purchase is subject to a Trade Discount of 10% and a Cash Discount of 3% for payment made within 15 days from the date of the transaction. Let’s explore how this transaction is treated in the accounts.

Solution:

Accounting Treatment

For Bina Watch Co.:

(i) On Purchase

Entry:
- Purchase A/c …Dr. 45,000
- To Pioneer Watches A/c 45,000
(Being purchases of 50 watches “Time Star” @ Rs. 1,000 each with a Trade Discount of 10%)

For Pioneer Watches:

(i) On Sale

Entry:
- Bina Watch Co. A/c …Dr. 45,000
- To Sales A/c 45,000
(Being sale of 50 watches “Time Star” @ Rs. 1,000 each with a Trade Discount of 10%)

(ii) On Making Cash Payment (Within 15 Days)

For Bina Watch Co.:

Entry:
- Pioneer Watches A/c …Dr. 45,000
- To Cash A/c 43,650
- To Discount Received A/c 1,350
(Being cash paid in full settlement of dues of Rs. 45,000 at a Cash Discount of 3%)

For Pioneer Watches:

(ii) On Receiving Cash Payment (Within 15 Days)

Entry:
- Cash A/c …Dr. 43,650Discount Allowed A/c …Dr. 1,350To Bina Watch Co. A/c 45,000
(Being cash received in full settlement of a bill of Rs. 45,000 at a Discount of 3%)

Distinction Between Trade Discount and Cash Discount

Basis	Trade Discount	Cash Discount
Nature	It is allowed on a certain quantity being purchased.	It is allowed on payment being made on or before a certain date.
Nature of Transaction	It is allowed both on cash and credit purchases.	It is allowed only on payment.
Recording	Trade discount is not recorded separately in the books of account.	Cash discount is recorded separately in the books of account.
Deduction from Invoice	The amount of the trade discount is deducted from the invoice.	It is not deducted from the invoice.
Consideration	The consideration for allowance is purchases.	The consideration for allowance is payment.
Relation	It is related to the sale and purchase of goods.	It is related to payment.

Distribution of Goods as Free Samples. To increase sales sometimes goods aredistributed as free samples. It is a part of the advertisement expense, hence, it is debited to the Advertisement Account and deducted from purchases:

Advertisement A/c …Dr.

To Purchases A/c

8. Loss by Theft or Fire. In both the cases, it is loss of goods and loss to business.

The following entry is passed:

Loss by Theft or Fire A/c …Dr.

To Purchases A/c

Note: Loss by Fire Account is debited because the loss incurred represents an increase in expense and the Purchase Account is credited because the purchase decreases.

(i) In case goods were insured:

Insurance Co. …Dr.

To Loss by Theft or Fire A/c

(ii) When the full amount of claim is received from the Insurance Company:

Bank A/c …Dr.

To Insurance Co.

(iii) When the Insurance Company does not accept full claim:

Bank A/c …Dr. [Amount received as claim admitted]

Profit and Loss A/c …Dr. [Loss – claim not admitted]

To Insurance Co. [Total claim]

Expenditure on the Installation of Machinery and on the Construction of Building. Machinery and Building are the assets of a business. Any expenditureincurred on carriage and installation of machinery, e.g., freight, wages paid for the installation, etc., is treated as ‘capital expenditure’ and is debited to the Machinery Account. In other words, all expenses incurred on the purchases of an asset (except goods) increases the ultimate cost of the asset for the buyer. These should, therefore, be debited to the particular asset account and not to any expense account. Similarly, any expenditure incurred for the construction of buildings such as purchase of construction materials and payment of wages should also be treated as capital expenditure and are debited to the Building Account.

Example: Installation of Machinery and Construction of Building

Scenario:

ABC Manufacturing Co. has recently purchased machinery and is constructing a new factory building. The following expenses were incurred:

Machinery:
- Purchase Price of Machinery: Rs. 500,000
- Freight Charges: Rs. 15,000
- Wages for Installation: Rs. 10,000
Building Construction:
- Purchase of Construction Materials: Rs. 200,000
- Wages Paid to Construction Workers: Rs. 50,000

These expenses are treated as capital expenditures and are debited to their respective asset accounts.

Journal Entries

Let’s see how these transactions are recorded in the journal.

Date	Particulars	Debit (Rs.)	Credit (Rs.)
2024-08-06	Machinery A/c	525,000
	To Cash/Bank A/c		525,000
	(Being the purchase of machinery and installation expenses)
2024-08-06	Building A/c	250,000
	To Cash/Bank A/c		250,000
	(Being expenses on construction materials and wages for building)

Explanation:

Machinery Purchase and Installation:
- Machinery A/c is debited with the total cost of Rs. 525,000, which includes the purchase price, freight, and installation wages. This treatment ensures that all costs associated with getting the machinery ready for use are capitalized.
- To Cash/Bank A/c is credited with the same amount, indicating the cash outflow for these expenditures.
Building Construction:
- Building A/c is debited with Rs. 250,000, covering the cost of construction materials and wages paid to workers. This reflects the capitalization of all expenses that contribute to the asset’s construction.
- To Cash/Bank A/c is credited, signifying the payment for these expenses.

Key Points:

Capital Expenditure: Both machinery installation and building construction are considered capital expenditures because they add value to the company’s fixed assets.
Asset Accounts: All related costs are debited to asset accounts, not to expense accounts, as they increase the value of the assets.
Narration: Each entry includes a narration explaining the nature of the transaction for clarity.

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