Table of Contents
Accounting is the language of business, and journal entries are its grammar. Whether you’re a beginner or an experienced accountant, understanding journal entries in a structured manner is crucial. This guide takes you through the entire lifecycle of a company, from setting up the business to handling complex financial transactions like depreciation, accruals, prepaid expenses, and bad debts. Each entry is logically connected, making it easy to follow and understand real-world accounting scenarios.
Category 1: Company Setup & Capital Transactions
1. Initial Capital Investment
📌 Scenario: The owner invests ₹10,00,000 as capital in the business.
Dr. Bank Account ₹10,00,000 (Asset - Increase)
Cr. Owner’s Capital ₹10,00,000 (Equity - Increase)
(Being initial capital introduced into the business)
💡 Explanation: Cash or bank balance increases (Asset ↑), and Owner’s Equity also increases (Equity ↑).
2. Opening a Business Bank Account
📌 Scenario: The company deposits ₹2,00,000 in a newly opened business bank account.
Dr. Bank Account ₹2,00,000 (Asset - Increase)
Cr. Cash Account ₹2,00,000 (Asset - Decrease)
(Being cash deposited into the business bank account)
💡 Explanation: One asset (cash) decreases, while another asset (bank balance) increases.
3. Loan Taken from Bank
📌 Scenario: The business takes a loan of ₹5,00,000 from the bank.
Dr. Bank Account ₹5,00,000 (Asset - Increase)
Cr. Loan Payable ₹5,00,000 (Liability - Increase)
(Being loan received from the bank)
💡 Explanation: Bank balance increases (Asset ↑), and a liability (Loan Payable) is created (Liability ↑).
Category 2: Purchasing & Expense Recognition
4. Purchase of Inventory (Cash & Credit)
📌 Scenario: The company purchases inventory worth ₹1,50,000.
- If paid in cash:
Dr. Inventory ₹1,50,000 (Asset - Increase)
Cr. Cash ₹1,50,000 (Asset - Decrease)
(Being inventory purchased with cash)
💡 Explanation: Inventory (Asset ↑) increases while cash (Asset ↓) decreases.
- If purchased on credit:
Dr. Inventory ₹1,50,000 (Asset - Increase)
Cr. Accounts Payable ₹1,50,000 (Liability - Increase)
(Being inventory purchased on credit)
💡 Explanation: Inventory increases (Asset ↑), and Accounts Payable (Liability ↑) records the amount owed.
5. Office Rent Paid
📌 Scenario: Monthly rent of ₹25,000 is paid.
Dr. Rent Expense ₹25,000 (Expense - Increase)
Cr. Bank ₹25,000 (Asset - Decrease)
(Being office rent paid)
💡 Explanation: Rent is an expense (Expense ↑), reducing bank balance (Asset ↓).
6. Prepaid Expenses (e.g., Insurance) → Entry No. 10
📌 Scenario: The company pays ₹1,20,000 for a 12-month insurance policy in advance.
Dr. Prepaid Insurance ₹1,20,000 (Asset - Increase)
Cr. Bank ₹1,20,000 (Asset - Decrease)
(Being insurance paid in advance for 12 months)
💡 Explanation: Prepaid insurance is an asset (Asset ↑) because it provides future benefits, while the bank balance decreases (Asset ↓).
7. Utility Bill Payment
📌 Scenario: The company pays ₹8,000 for electricity and water.
Dr. Utility Expense ₹8,000 (Expense - Increase)
Cr. Bank ₹8,000 (Asset - Decrease)
(Being utility bill paid)
💡 Explanation: Expense increases (Expense ↑), reducing the bank balance (Asset ↓).
Category 3: Sales & Revenue Recognition
8. Cash Sales
📌 Scenario: The company sells goods worth ₹50,000 in cash.
Dr. Cash ₹50,000 (Asset - Increase)
Cr. Sales Revenue ₹50,000 (Revenue - Increase)
(Being goods sold for cash)
💡 Explanation: Cash increases (Asset ↑) while revenue is recognized (Revenue ↑).
9. Credit Sales (Accounts Receivable Created)
📌 Scenario: The company sells goods worth ₹75,000 on credit.
Dr. Accounts Receivable ₹75,000 (Asset - Increase)
Cr. Sales Revenue ₹75,000 (Revenue - Increase)
(Being goods sold on credit)
💡 Explanation: The company expects to receive cash later, so Accounts Receivable (Asset ↑) increases, while revenue is recognized (Revenue ↑).
10. Accrued Revenue (Unbilled Income)
📌 Scenario: The company provides services worth ₹40,000, but the invoice will be sent next month.
Dr. Accrued Revenue ₹40,000 (Asset - Increase)
Cr. Service Revenue ₹40,000 (Revenue - Increase)
(Being revenue recognized but not yet billed)
💡 Explanation: Revenue is earned but not yet billed, so Accrued Revenue (Asset ↑) increases, while revenue is recognized (Revenue ↑).
Category 4: Accounts Receivable & Doubtful Debts
11. Customer Payment Received (Settling A/R)
📌 Scenario: A customer pays ₹50,000 for a past credit sale.
Dr. Bank ₹50,000 (Asset - Increase)
Cr. Accounts Receivable ₹50,000 (Asset - Decrease)
(Being payment received from customer)
💡 Explanation: Bank balance increases (Asset ↑), and Accounts Receivable decreases (Asset ↓) as the debt is settled.
12. Provision for Doubtful Debts (Expected Losses)
📌 Scenario: The company estimates that ₹5,000 of receivables may not be collected.
Dr. Bad Debt Expense ₹5,000 (Expense - Increase)
Cr. Allowance for Doubtful Debts ₹5,000 (Contra-Asset - Increase)
(Being provision made for possible bad debts)
💡 Explanation: The expense (Expense ↑) is recorded, and a contra-asset (Allowance for Doubtful Debts) is increased to adjust A/R.
13. Bad Debt Write-Off (Customer Defaulted)
📌 Scenario: A customer defaults on a ₹3,000 payment, so the company writes it off.
Dr. Allowance for Doubtful Debts ₹3,000 (Contra-Asset - Decrease)
Cr. Accounts Receivable ₹3,000 (Asset - Decrease)
(Being bad debt written off)
💡 Explanation: The bad debt reserve (Contra-Asset ↓) is reduced, and Accounts Receivable (Asset ↓) is removed.
14. Recovery of Bad Debt (Previously Written Off) → Entry No. 18
📌 Scenario: A customer who previously defaulted now pays ₹3,000.
Dr. Bank ₹3,000 (Asset - Increase)
Cr. Bad Debt Recovery Income ₹3,000 (Revenue - Increase)
(Being recovery of previously written-off bad debt)
💡 Explanation: Since the bad debt was already written off, this recovery is recorded as income (Revenue ↑) instead of reversing A/R.
Category 5: Payroll & Employee Benefits
15. Salary Expense Accrued (Month-End Liability)
📌 Scenario: The company owes ₹2,00,000 in salaries but hasn’t paid yet.
Dr. Salary Expense ₹2,00,000 (Expense - Increase)
Cr. Salaries Payable ₹2,00,000 (Liability - Increase)
(Being salaries accrued but not yet paid)
💡 Explanation: The salary expense is recorded (Expense ↑), and a liability (Liability ↑) is created until payment is made.
16. Salary Payment (Clearing the Liability)
📌 Scenario: The company pays the ₹2,00,000 salary to employees.
Dr. Salaries Payable ₹2,00,000 (Liability - Decrease)
Cr. Bank ₹2,00,000 (Asset - Decrease)
(Being salaries paid to employees)
💡 Explanation: The liability (Liability ↓) is cleared as employees are paid, reducing bank balance (Asset ↓).
17. Payroll Deductions (Taxes & Provident Fund Withheld)
📌 Scenario: Employees’ salaries include ₹15,000 withheld for taxes and provident fund.
Dr. Salary Expense ₹15,000 (Expense - Increase)
Cr. Payroll Liabilities ₹15,000 (Liability - Increase)
(Being payroll deductions for taxes and provident fund)
💡 Explanation: The tax and PF amounts are withheld, creating a liability (Liability ↑) that will be paid to the government.
18. Payment of Payroll Liabilities (Taxes & PF)
📌 Scenario: The company submits ₹15,000 payroll deductions to the government.
Dr. Payroll Liabilities ₹15,000 (Liability - Decrease)
Cr. Bank ₹15,000 (Asset - Decrease)
(Being payroll taxes and PF paid to the government)
💡 Explanation: The liability (Liability ↓) is settled as the company pays the government, reducing bank balance (Asset ↓).
Category 6: Prepaid Expenses & Adjustments
19. Recording Prepaid Expenses (e.g., Insurance) → Entry No. 10
📌 Scenario: The company pays ₹1,20,000 in advance for a 12-month insurance policy.
Dr. Prepaid Insurance ₹1,20,000 (Asset - Increase)
Cr. Bank ₹1,20,000 (Asset - Decrease)
(Being insurance paid in advance for 12 months)
💡 Explanation: Prepaid insurance is an asset (Asset ↑) as it provides future benefits, while bank balance decreases (Asset ↓).
20. Monthly Insurance Expense (Adjustment) → Entry No. 22
📌 Scenario: After one month, ₹10,000 of the prepaid insurance is now used.
Dr. Insurance Expense ₹10,000 (Expense - Increase)
Cr. Prepaid Insurance ₹10,000 (Asset - Decrease)
(Being monthly insurance expense recorded)
💡 Explanation: The portion of prepaid insurance used is expensed (Expense ↑), reducing the prepaid balance (Asset ↓).
21. Prepaid Rent (Advance Payment)
📌 Scenario: The company pays ₹60,000 rent in advance for 6 months.
Dr. Prepaid Rent ₹60,000 (Asset - Increase)
Cr. Bank ₹60,000 (Asset - Decrease)
(Being rent paid in advance for 6 months)
💡 Explanation: The prepaid rent is recorded as an asset (Asset ↑), reducing bank balance (Asset ↓).
22. Monthly Rent Expense (Adjustment for Prepaid) → Entry No. 22
📌 Scenario: After one month, ₹10,000 of the prepaid rent is used.
Dr. Rent Expense ₹10,000 (Expense - Increase)
Cr. Prepaid Rent ₹10,000 (Asset - Decrease)
(Being monthly rent expense recorded)
💡 Explanation: The rent for the used period is expensed (Expense ↑), reducing the prepaid rent balance (Asset ↓).
Category 7: Fixed Assets & Depreciation
23. Purchase of Fixed Asset (e.g., Machinery)
📌 Scenario: The company buys machinery for ₹5,00,000, paid via bank transfer.
Dr. Machinery ₹5,00,000 (Asset - Increase)
Cr. Bank ₹5,00,000 (Asset - Decrease)
(Being machinery purchased and paid through bank)
💡 Explanation: Machinery is a fixed asset (Asset ↑), and the bank balance decreases (Asset ↓).
24. Depreciation of Machinery (Straight-Line Method)
📌 Scenario: Machinery depreciates ₹50,000 annually.
Dr. Depreciation Expense ₹50,000 (Expense - Increase)
Cr. Accumulated Depreciation ₹50,000 (Contra-Asset - Increase)
(Being depreciation recorded for the year)
💡 Explanation: Depreciation is an expense (Expense ↑), and accumulated depreciation is a contra-asset (Contra-Asset ↑) that reduces the asset’s book value.
25. Disposal of Fixed Asset (With Gain on Sale)
📌 Scenario: The company sells machinery (original cost ₹5,00,000, accumulated depreciation ₹2,00,000) for ₹3,50,000.
Dr. Bank ₹3,50,000 (Asset - Increase)
Dr. Accumulated Depreciation ₹2,00,000 (Contra-Asset - Decrease)
Cr. Machinery ₹5,00,000 (Asset - Decrease)
Cr. Gain on Sale of Asset ₹50,000 (Revenue - Increase)
(Being machinery sold at a gain)
💡 Explanation: The bank balance increases (Asset ↑), accumulated depreciation is reversed (Contra-Asset ↓), the machinery is removed (Asset ↓), and a gain is recognized (Revenue ↑).
💡 Same Entry can use for Amortization: The term Accumulated Depreciation is used for tangible assets, while Accumulated Amortization is used for intangible assets. Otherwise, the concept remains the same.
Amortization Entry (For Intangible Assets)
📌 Scenario: Amortizing a patent worth ₹1,00,000 over 5 years.
Dr. Amortization Expense ₹20,000 (Expense - Increase)
Cr. Accumulated Amortization ₹20,000 (Contra-Asset - Increase)
(Being amortization recorded for the patent) 26. Disposal of Fixed Asset (With Loss on Sale)
📌 Scenario: The company sells machinery (original cost ₹5,00,000, accumulated depreciation ₹2,00,000) for ₹2,50,000.
Dr. Bank ₹2,50,000 (Asset - Increase)
Dr. Accumulated Depreciation ₹2,00,000 (Contra-Asset - Decrease)
Dr. Loss on Sale of Asset ₹50,000 (Expense - Increase)
Cr. Machinery ₹5,00,000 (Asset - Decrease)
(Being machinery sold at a loss)
💡 Explanation: The bank balance increases (Asset ↑), accumulated depreciation is reversed (Contra-Asset ↓), the machinery is removed (Asset ↓), and a loss is recorded (Expense ↑).
Category 8: Accruals & Adjustments
27. Accrued Interest Income (Interest Earned but Not Received)
📌 Scenario: The company earns ₹5,000 interest on a fixed deposit but hasn’t received it yet.
Dr. Accrued Interest Receivable ₹5,000 (Asset - Increase)
Cr. Interest Income ₹5,000 (Revenue - Increase)
(Being interest income recorded but not yet received)
💡 Explanation: The accrued interest is recorded as an asset (Asset ↑), while interest income is recognized (Revenue ↑).
28. Receipt of Accrued Interest (Cash Realization)
📌 Scenario: The company receives ₹5,000 interest previously accrued.
Dr. Bank ₹5,000 (Asset - Increase)
Cr. Accrued Interest Receivable ₹5,000 (Asset - Decrease)
(Being interest income received)
💡 Explanation: The bank balance increases (Asset ↑) as cash is received, and the accrued interest receivable is cleared (Asset ↓).
29. Accrued Expenses (e.g., Utility Bill Not Yet Paid)
📌 Scenario: The company has an unpaid electricity bill of ₹8,000 at month-end.
Dr. Utility Expense ₹8,000 (Expense - Increase)
Cr. Accrued Expenses Payable ₹8,000 (Liability - Increase)
(Being electricity expense recorded but not yet paid)
💡 Explanation: The utility expense is recorded (Expense ↑), and an outstanding liability is created (Liability ↑).
30. Payment of Accrued Expenses (Clearing Liability)
📌 Scenario: The company pays ₹8,000 electricity bill recorded earlier.
Dr. Accrued Expenses Payable ₹8,000 (Liability - Decrease)
Cr. Bank ₹8,000 (Asset - Decrease)
(Being accrued electricity bill paid)
💡 Explanation: The liability is cleared (Liability ↓) as the bill is paid, reducing the bank balance (Asset ↓).
Category 9: Loan Transactions & Interest
31. Loan Taken from Bank
📌 Scenario: The company takes a loan of ₹10,00,000 from a bank.
Dr. Bank ₹10,00,000 (Asset - Increase)
Cr. Loan Payable ₹10,00,000 (Liability - Increase)
(Being loan received from bank)
💡 Explanation: The bank balance increases (Asset ↑), and a loan liability is created (Liability ↑).
32. Interest Accrued on Loan (Not Yet Paid)
📌 Scenario: Interest of ₹50,000 is due on the loan but not yet paid.
Dr. Interest Expense ₹50,000 (Expense - Increase)
Cr. Interest Payable ₹50,000 (Liability - Increase)
(Being interest accrued on loan but not yet paid)
💡 Explanation: The interest expense is recognized (Expense ↑), and an outstanding liability is recorded (Liability ↑).
33. Payment of Interest on Loan
📌 Scenario: The company pays ₹50,000 interest that was accrued earlier.
Dr. Interest Payable ₹50,000 (Liability - Decrease)
Cr. Bank ₹50,000 (Asset - Decrease)
(Being accrued interest on loan paid)
💡 Explanation: The liability is cleared (Liability ↓) as interest is paid, reducing the bank balance (Asset ↓).
34. Loan Repayment (Principal Amount)
📌 Scenario: The company repays ₹2,00,000 of the loan principal.
Dr. Loan Payable ₹2,00,000 (Liability - Decrease)
Cr. Bank ₹2,00,000 (Asset - Decrease)
(Being partial loan repayment made)
💡 Explanation: The loan liability decreases (Liability ↓) as repayment is made, reducing the bank balance (Asset ↓).
Category 10: Owner’s Equity & Dividend Transactions
35. Initial Capital Investment by Owner
📌 Scenario: The owner invests ₹5,00,000 in the business.
Dr. Bank ₹5,00,000 (Asset - Increase)
Cr. Owner’s Capital ₹5,00,000 (Equity - Increase)
(Being capital introduced by owner)
💡 Explanation: The bank balance increases (Asset ↑), and the owner’s equity increases (Equity ↑).
36. Additional Capital Introduced by Owner
📌 Scenario: The owner contributes an additional ₹2,00,000 to the business.
Dr. Bank ₹2,00,000 (Asset - Increase)
Cr. Owner’s Capital ₹2,00,000 (Equity - Increase)
(Being additional capital introduced)
💡 Explanation: The business receives more funds (Asset ↑), and the owner’s capital increases (Equity ↑).
37. Owner’s Withdrawal (Drawings)
📌 Scenario: The owner withdraws ₹50,000 for personal use.
Dr. Drawings ₹50,000 (Equity - Decrease)
Cr. Bank ₹50,000 (Asset - Decrease)
(Being funds withdrawn by owner for personal use)
💡 Explanation: The owner’s capital is reduced (Equity ↓) due to withdrawals, and the bank balance decreases (Asset ↓).
38. Declaring Dividend (Liability Created)
📌 Scenario: The company declares ₹1,00,000 in dividends to shareholders.
Dr. Retained Earnings ₹1,00,000 (Equity - Decrease)
Cr. Dividend Payable ₹1,00,000 (Liability - Increase)
(Being dividend declared to shareholders)
💡 Explanation: Retained earnings decrease (Equity ↓), and a liability is recorded (Liability ↑) until payment is made.
39. Payment of Dividend to Shareholders
📌 Scenario: The company pays ₹1,00,000 in dividends declared earlier.
Dr. Dividend Payable ₹1,00,000 (Liability - Decrease)
Cr. Bank ₹1,00,000 (Asset - Decrease)
(Being declared dividends paid to shareholders)
💡 Explanation: The liability is cleared (Liability ↓), and the bank balance decreases (Asset ↓) upon payment.
Category 11: Taxes & Provisions
40. Income Tax Accrued (Tax Liability Created)
📌 Scenario: The company calculates income tax payable as ₹1,50,000 but hasn’t paid it yet.
Dr. Income Tax Expense ₹1,50,000 (Expense - Increase)
Cr. Income Tax Payable ₹1,50,000 (Liability - Increase)
(Being income tax liability recorded)
💡 Explanation: The tax expense is recognized (Expense ↑), and a tax liability is created (Liability ↑).
41. Payment of Income Tax
📌 Scenario: The company pays ₹1,50,000 income tax to the government.
Dr. Income Tax Payable ₹1,50,000 (Liability - Decrease)
Cr. Bank ₹1,50,000 (Asset - Decrease)
(Being income tax paid to the government)
💡 Explanation: The liability is settled (Liability ↓), and the bank balance decreases (Asset ↓) upon payment.
42. Provision for Bad Debts (Expected Unrecoverable Amounts)
📌 Scenario: The company estimates that ₹10,000 of accounts receivable may not be recovered.
Dr. Bad Debt Expense ₹10,000 (Expense - Increase)
Cr. Provision for Bad Debts ₹10,000 (Contra-Asset - Increase)
(Being provision for doubtful debts recorded)
💡 Explanation: A provision is recorded as an expense (Expense ↑), and a contra-asset account is increased (reduces Accounts Receivable).
43. Actual Bad Debt Written Off (Customer Defaulted)
📌 Scenario: A customer fails to pay ₹8,000, and the company writes it off.
Dr. Provision for Bad Debts ₹8,000 (Contra-Asset - Decrease)
Cr. Accounts Receivable ₹8,000 (Asset - Decrease)
(Being bad debt written off from accounts)
💡 Explanation: The provision is reduced (Contra-Asset ↓), and accounts receivable decrease (Asset ↓).
44. Recovery of Bad Debt (Previously Written-Off Amount Collected)
📌 Scenario: The company recovers ₹5,000 from a customer whose debt was earlier written off.
Dr. Bank ₹5,000 (Asset - Increase)
Cr. Bad Debt Recovery ₹5,000 (Revenue - Increase)
(Being bad debt recovered from customer)
💡 Explanation: The bank balance increases (Asset ↑) upon receiving payment, and bad debt recovery is recorded as revenue (Revenue ↑).
📌 Reference: Check Entry 18 for Bad Debt Recovery.
Category 12: Foreign Exchange Transactions
45. Purchase of Goods in Foreign Currency
📌 Scenario: The company purchases raw materials from a U.S. supplier for $5,000 when the exchange rate is ₹80 per USD.
Dr. Purchases ₹4,00,000 (Expense - Increase)
Cr. Accounts Payable ₹4,00,000 (Liability - Increase)
(Being raw materials purchased from a foreign supplier)
💡 Explanation: The purchase is recorded in INR (Expense ↑), and a liability is created (Liability ↑).
46. Payment to Foreign Supplier (Exchange Rate Difference – Loss)
📌 Scenario: At the time of payment, the exchange rate rises to ₹82 per USD, making the total payment ₹4,10,000.
Dr. Accounts Payable ₹4,00,000 (Liability - Decrease)
Dr. Foreign Exchange Loss ₹10,000 (Expense - Increase)
Cr. Bank ₹4,10,000 (Asset - Decrease)
(Being foreign supplier paid with an exchange loss)
💡 Explanation: The liability is cleared (Liability ↓), but the company incurs an exchange loss (Expense ↑) due to currency fluctuations, reducing the bank balance (Asset ↓).
47. Sale of Goods in Foreign Currency (Revenue Recognition)
📌 Scenario: The company sells products to a U.K. customer for £3,000 when the exchange rate is ₹100 per GBP.
Dr. Accounts Receivable ₹3,00,000 (Asset - Increase)
Cr. Sales ₹3,00,000 (Revenue - Increase)
(Being goods sold to a foreign customer)
💡 Explanation: The receivable is recorded at the prevailing exchange rate (Asset ↑), and revenue is recognized (Revenue ↑).
48. Receipt from Foreign Customer (Exchange Rate Difference – Gain)
📌 Scenario: When the customer makes the payment, the exchange rate increases to ₹102 per GBP, making the total receipt ₹3,06,000.
Dr. Bank ₹3,06,000 (Asset - Increase)
Cr. Accounts Receivable ₹3,00,000 (Asset - Decrease)
Cr. Foreign Exchange Gain ₹6,000 (Revenue - Increase)
(Being foreign customer payment received with exchange gain)
💡 Explanation: The receivable is cleared (Asset ↓), but due to a favorable exchange rate, the company earns an exchange gain (Revenue ↑), increasing the bank balance (Asset ↑).
49. Revaluation of Foreign Currency Liability at Period-End
📌 Scenario: The company has an outstanding foreign liability of $10,000 at an initial rate of ₹80 per USD, but at the period-end, the rate changes to ₹83 per USD.
Dr. Foreign Exchange Loss ₹30,000 (Expense - Increase)
Cr. Accounts Payable ₹30,000 (Liability - Increase)
(Being foreign liability revalued at a higher exchange rate)
💡 Explanation: Since the liability is now more expensive in INR terms (Liability ↑), an exchange loss is recorded (Expense ↑).
50. Revaluation of Foreign Currency Asset at Period-End
📌 Scenario: The company has a foreign receivable of €5,000 initially recorded at ₹90 per EUR, but at the period-end, the rate rises to ₹92 per EUR.
Dr. Accounts Receivable ₹10,000 (Asset - Increase)
Cr. Foreign Exchange Gain ₹10,000 (Revenue - Increase)
(Being foreign receivable revalued at a higher exchange rate)
💡 Explanation: The company gains from the exchange rate fluctuation (Revenue ↑), increasing the receivable value (Asset ↑).
Category 13: Year-End Adjustments
51. Accrued Salary (Salary Payable but Unpaid at Year-End)
📌 Scenario: Employees have earned ₹2,00,000 in salaries, but the company hasn’t paid them yet.
Dr. Salary Expense ₹2,00,000 (Expense - Increase)
Cr. Salary Payable ₹2,00,000 (Liability - Increase)
(Being salary accrued but unpaid at year-end)
💡 Explanation: Salary expense is recognized (Expense ↑), and a liability is created (Liability ↑).
52. Payment of Accrued Salary (Next Year’s Payment)
📌 Scenario: The company pays the ₹2,00,000 salary in the next financial year.
Dr. Salary Payable ₹2,00,000 (Liability - Decrease)
Cr. Bank ₹2,00,000 (Asset - Decrease)
(Being salary paid for the previous year’s accrual)
💡 Explanation: The liability is settled (Liability ↓), and bank balance decreases (Asset ↓).
53. Interest Accrued on Loan (Unpaid Interest at Year-End)
📌 Scenario: ₹30,000 interest is due on a bank loan but remains unpaid at year-end.
Dr. Interest Expense ₹30,000 (Expense - Increase)
Cr. Interest Payable ₹30,000 (Liability - Increase)
(Being interest accrued on a loan but unpaid)
💡 Explanation: The expense is recognized (Expense ↑), and a liability is created (Liability ↑).
54. Interest Payment in the Next Year
📌 Scenario: The company pays the ₹30,000 interest in the next year.
Dr. Interest Payable ₹30,000 (Liability - Decrease)
Cr. Bank ₹30,000 (Asset - Decrease)
(Being accrued interest paid to the bank)
💡 Explanation: The liability is cleared (Liability ↓), and the bank balance reduces (Asset ↓).
55. Depreciation for the Year
📌 Scenario: The company depreciates its machinery by ₹50,000 for the year.
Dr. Depreciation Expense ₹50,000 (Expense - Increase)
Cr. Accumulated Depreciation ₹50,000 (Contra-Asset - Increase)
(Being depreciation recorded for the year)
💡 Explanation: Depreciation is an expense (Expense ↑), while accumulated depreciation increases (Contra-Asset ↑), reducing asset value indirectly.
56. Prepaid Expense Adjustment
📌 Scenario: ₹10,000 was paid in advance for rent, and now ₹5,000 is used during the year.
Dr. Rent Expense ₹5,000 (Expense - Increase)
Cr. Prepaid Rent ₹5,000 (Asset - Decrease)
(Being prepaid rent adjusted for the portion used)
💡 Explanation: The prepaid rent (Asset ↓) is now recognized as an expense (Expense ↑).
📌 Reference: Check Entry 10 for the initial prepaid expense booking and Entry 22 for a similar adjustment.
57. Unearned Revenue Adjustment
📌 Scenario: The company received ₹40,000 in advance for services but has now earned ₹20,000 of it.
Dr. Unearned Revenue ₹20,000 (Liability - Decrease)
Cr. Service Revenue ₹20,000 (Revenue - Increase)
(Being portion of unearned revenue now earned)
💡 Explanation: Since the company has provided half the service, part of the liability is removed (Liability ↓), and revenue is recognized (Revenue ↑).
58. Closing Stock Adjustment
📌 Scenario: The company has ₹1,00,000 worth of unsold inventory at year-end.
Dr. Closing Stock ₹1,00,000 (Asset - Increase)
Cr. Purchases ₹1,00,000 (Expense - Decrease)
(Being closing stock recorded and purchase expense adjusted)
💡 Explanation: The inventory remaining at year-end is recorded as an asset (Asset ↑), reducing the expense (Expense ↓).
Category 14: Goods Receipt & Invoice Receipt (GR/IR) Transactions
(New Category Created: “GR/IR Clearing & Reconciliation”)
The GR/IR (Goods Receipt/Invoice Receipt) Account is used in accrual accounting to temporarily hold amounts related to inventory purchases when there is a timing difference between goods receipt and invoice receipt.
67. Goods Received But Invoice Not Yet Received (GR/IR Liability Created)
📌 Scenario: The company receives raw materials worth ₹1,50,000, but the supplier’s invoice has not yet arrived.
Dr. Inventory ₹1,50,000 (Asset - Increase)
Cr. GR/IR Clearing Account ₹1,50,000 (Liability - Increase)
(Being goods received but invoice not yet received)
💡 Explanation:
- The inventory account increases (Asset ↑) because goods are received.
- The GR/IR account acts as a temporary liability (Liability ↑) until the invoice is received.
68. Invoice Received & Matched with Goods Receipt (Clearing GR/IR)
📌 Scenario: The supplier sends an invoice for ₹1,50,000, which matches the goods received earlier.
Dr. GR/IR Clearing Account ₹1,50,000 (Liability - Decrease)
Cr. Accounts Payable ₹1,50,000 (Liability - Increase)
(Being invoice received and matched with GR/IR, liability moved to accounts payable)
💡 Explanation:
- The GR/IR liability is cleared (Liability ↓).
- The payable to the supplier is now recorded under Accounts Payable (Liability ↑).
69. Invoice Received But Goods Not Yet Delivered (Accrual of Expense)
📌 Scenario: The supplier sends an invoice of ₹2,00,000 for materials not yet received.
Dr. Purchase Expense ₹2,00,000 (Expense - Increase)
Cr. GR/IR Clearing Account ₹2,00,000 (Liability - Increase)
(Being invoice received but goods not yet delivered, recorded under GR/IR)
💡 Explanation:
- The purchase is recognized as an expense (Expense ↑) since the invoice is received.
- The liability is temporarily recorded in GR/IR (Liability ↑) until the goods are received.
70. Goods Arrive After Invoice (Clearing GR/IR)
📌 Scenario: The company receives the materials worth ₹2,00,000 after the invoice was already booked.
Dr. Inventory ₹2,00,000 (Asset - Increase)
Cr. GR/IR Clearing Account ₹2,00,000 (Liability - Decrease)
(Being GR/IR account cleared upon goods arrival)
💡 Explanation:
- Inventory is recorded (Asset ↑) since goods are now received.
- The temporary GR/IR liability is removed (Liability ↓).
71. GR/IR Reconciliation Adjustment (If Mismatch in Amount)
📌 Scenario: The invoice received is ₹1,48,000, but the goods were recorded at ₹1,50,000. The company adjusts the ₹2,000 difference.
Dr. GR/IR Clearing Account ₹2,000 (Liability - Decrease)
Cr. Purchase Expense ₹2,000 (Expense - Decrease)
(Being adjustment of GR/IR due to invoice mismatch)
💡 Explanation:
- The liability is adjusted down (Liability ↓) since the invoice was lower.
- The purchase expense is also adjusted (Expense ↓).