Fundamentals of Financial and Cost Accounting · Journal and Ledger

Journal Entries and Journalising Transactions Explained

Updated 10 October 2026 · Fact-checked

A journal entry is the first record of a business transaction. You find the two accounts affected, classify each as personal, real or nominal, apply the debit and credit rule, write the date, the Dr account, the To account, the amounts and a short narration. Every entry must have equal debits and credits.

Understand Journal Entries and Journalising Transactions

Every business transaction is first written in a book called the journal. It is the book of original entry. Writing here first means each transaction is recorded in date order with a clear explanation, so you can trace it later.

Each transaction affects at least two accounts. This is the double entry system: for every debit there is an equal credit. In the journal, the account to be debited is written first with Dr, and the account to be credited is written next, starting with the word To.

A journal has columns for date, particulars, ledger folio (L.F.), debit amount and credit amount. Below the entry you write a narration. It is a brief line in brackets explaining the transaction, for example (Being goods sold to Ravi on credit).

A compound entry combines several transactions of the same date and nature, or has more than two accounts. Total debits still equal total credits. An opening entry records the balances of assets and liabilities at the start of a new year. Assets are debited, liabilities are credited, and the capital account is credited with the balancing figure (assets less outside liabilities).

In the MCQ paper you rarely need to draw the format. You are asked which account is debited, what the amount is, or what the correct entry is. So the logic matters more than the layout.

Key formulas to remember

Personal account rule: Debit the receiver; Credit the giver; Applies to accounts of persons, firms, banks and companies, such as Ravi. Capital and Drawings are also treated as personal accounts because they represent the proprietor.
Real account rule: Debit what comes in; Credit what goes out; Applies to assets such as cash, goods, machinery, furniture, land.
Nominal account rule: Debit all expenses and losses; Credit all incomes and gains; Applies to rent, salary, interest, commission, discount and similar items.
Opening entry: Assets A/c Dr (each) ; To Liabilities A/c (each) ; To Capital A/c (balancing figure); Capital = Total assets − Outside liabilities.
Compound entry check: Total of debit amounts = Total of credit amounts; Use this to catch a missing or wrong figure.
Capital in the accounting equation: Capital = Assets − Liabilities; Used to find the capital in an opening entry.

How to solve Journal Entries and Journalising Transactions questions

Use the same routine for every journalising question. It works for simple, compound and opening entries.

1Read the transaction and identify the two (or more) accounts affected.
2Classify each account as personal, real or nominal.
3Apply the matching rule to decide which account is debited and which is credited.
4Check whether the transaction is cash or credit, and whether a discount, expense or other item is involved.
5Write the Dr account first, then the To account(s), with the correct amounts.
6Check that total debits equal total credits.
7Add a short narration beginning with 'Being'.
8For MCQs, compare your entry with the options and pick the one that matches exactly.

Quickest way: Ask what came in and what went out

When to use it: Use this when you have about a minute per question and the options show different debit and credit accounts.

Ask: what did the business receive, or what expense or loss did it bear? That is the debit.
Ask: what did the business give up (asset going out), or what income or liability did it create? That is the credit.
Note the amounts. Check for hidden items such as discount, carriage or cash paid in part.
Eliminate options whose debit and credit totals are unequal.
Eliminate options that debit the giver of a personal account or credit an expense.
Pick the remaining option.

Common mistakes in Journal Entries and Journalising Transactions

Debiting the proprietor's capital account when the owner withdraws goods or cash for personal use.
Students think withdrawal reduces capital, so they debit Capital directly.
Fix: Debit Drawings A/c. Credit Cash or Purchases, whichever went out.
Treating purchase of an asset as Purchases A/c.
The word 'purchased' triggers Purchases.
Fix: Purchases A/c is only for goods meant for resale. Machinery, furniture or a computer bought for use is debited to its own asset account, whether bought for cash or on credit.
Forgetting the capital figure in an opening entry.
Students list assets and liabilities but leave the balancing account out.
Fix: Capital = Total assets − Outside liabilities. Credit it so totals tally.
Ignoring discount in compound entries.
Students record only the cash actually paid or received.
Fix: Record discount allowed as a debit (expense) and discount received as a credit (income). Check that totals tally.
Wrong side for a personal account when a person pays you.
Students debit the person because he is involved.
Fix: When a customer pays you, he is the giver, so credit his account and debit Cash.
Skipping or writing a vague narration.
MCQs seem not to need it.
Fix: Writing a one-line narration helps you re-check the transaction, and descriptive questions may ask for it.

Worked examples

Example 1

Journalise: (a) Started business with cash ₹2,00,000. (b) Purchased goods for cash ₹40,000. (c) Sold goods on credit to Meera ₹30,000.

Show the solution

(a) Cash comes in (real, debit). Capital is the giver (personal, credit). Cash A/c Dr ₹2,00,000 ; To Capital A/c ₹2,00,000. (Being business started with cash)
(b) Goods come in (Purchases, debit). Cash goes out (credit). Purchases A/c Dr ₹40,000 ; To Cash A/c ₹40,000. (Being goods purchased for cash)
(c) Meera receives goods, so debit her. Sales is income, so credit it. Meera A/c Dr ₹30,000 ; To Sales A/c ₹30,000. (Being goods sold to Meera on credit)

Answer: (a) Cash Dr ₹2,00,000 To Capital; (b) Purchases Dr ₹40,000 To Cash; (c) Meera Dr ₹30,000 To Sales.

Example 2

On 1 April, a trader's assets are Cash ₹20,000, Stock ₹60,000, Furniture ₹30,000 and Debtors ₹50,000. Creditors are ₹40,000. Pass the opening entry and find the capital.

Show the solution

Total assets = 20,000 + 60,000 + 30,000 + 50,000 = ₹1,60,000.
Outside liabilities = Creditors ₹40,000.
Capital = 1,60,000 − 40,000 = ₹1,20,000.
Debit each asset: Cash ₹20,000, Stock ₹60,000, Furniture ₹30,000, Debtors ₹50,000. Total debit = ₹1,60,000.
Credit Creditors ₹40,000 and Capital ₹1,20,000. Total credit = ₹1,60,000.
Debits equal credits, so the entry is correct. Narration: (Being opening balances brought forward)

Answer: Capital is ₹1,20,000. Each asset is debited, and Creditors ₹40,000 and Capital ₹1,20,000 are credited, with totals of ₹1,60,000 each.

Exam tips

Most MCQs test the debit or credit account. Classify the account type first and the answer follows.
Watch for traps: goods taken by the owner (Drawings), assets bought on credit (debit the asset account, not Purchases; credit the supplier) and discount.
For opening entry questions, compute capital first. Many options differ only in the capital figure.
In compound entry questions, add the debit side and credit side to find a missing figure.
There is no negative marking, so always mark an answer after eliminating options.

Practice questions from Journal and Ledger

Journal Entries and Journalising Transactions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Journal Entries and Journalising Transactions: frequently asked questions

What is the format of a journal entry?

Write the date, then the Dr account on the first line and 'To' the credit account on the next line, indented. Put the amounts in the debit and credit columns. Add a narration in brackets below.

What is a compound journal entry?

It is one entry with more than two accounts, used when several transactions of the same date or nature are combined. The total of the debit amounts must equal the total of the credit amounts.

What is an opening entry?

It records the closing balances of the last year as opening balances of the new year. Assets are debited, liabilities are credited and capital is credited with the balancing figure.

Is narration compulsory in a journal entry?

Good practice is to write it for every entry because it explains the transaction. In MCQs you may not need to write it, but it helps you re-check what you recorded.

How do I get better at journal entry questions?

Practise classifying accounts as personal, real or nominal until it is automatic. Then solve many short entries with cash, credit, discount and drawings, and check the debit and credit totals every time.