Top Journal Entry Questions for 2024

Journal entry questions test one's ability to record financial transactions accurately. They involve identifying the correct accounts to debit and credit and helping learners understand how these entries affect a company's financial statements, which is essential for effective accounting practice.

Journal Entries are fundamental concepts of accounting, involving the recording of financial transactions. They play a crucial role in maintaining accurate financial records, ensuring compliance with accounting standards and facilitating financial analysis. Properly executed journal entries capture every financial event, classify them into relevant accounts and establish a clear audit trail. 

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In this blog, we will cover the most important journal entry questions. We will begin by explaining you Journal Entry meaning followed by journal entry questions and examples. But before that, let’s understand some significant basics that will help you solve journal entry questions with ease. 

Table of Content

• Journal Entry Meaning
• Process of Solving Journal Entry Questions
• Journal Entry Questions

Journal Entry Meaning

A Journal in Accounting is a record where all financial transactions are initially documented. Journal entries are the individual records in the journal, that detail each transaction with date, accounts involved, and amounts. This foundational concept is crucial in accounting for maintaining accurate and chronological financial records, aiding in error detection, and supporting the integrity of the entire accounting process. 

Process of Solving Journal Entry Questions

Accounting records are maintained utilizing a double-entry accounting system.  It ensures that the Accounting Equation (Assets= Liabilities + Equity) remain balanced. Under this system, debit and credit entries of equal amounts are made to record every transaction. On the left side, we record debit (Dr.) entry and on the right side Credit (Cr.) entry is recorded. The rules of debit and credit differ with the account type. The accounts can be classified into the following categories:

(i) Asset Account
(ii) Liability Account
(iii) Capital Account
(iv) Expense Account
(v) Income Account

Step 1: Identify the type of account as rules of debit and credit differ with the account type. Rules are as follows:

1.  Increases in assets are debits; decreases in assets are credits.

2. Increases in liabilities are credits; decreases in liabilities are debited.

3. Increases in owners' capital are credits; decreases in owners’ capital are debited.

4. Expenses and losses are debits; incomes and gains are credits. 

For example: A started business with Rs. 100,000.

Accounts involved: Cash (Asset) and A’s Capital (Capital)

Step: 2 Once you analysed the type of account, determine whether it will be increased or decreased

In the above example: 

Cash which is an Asset to the company is increasing

A’s Capital which is owner’s equity is decreasing.

Step: 3 Form the journal entry, and check if it’s balanced. 

For example:
Cash A/C                  Dr.             100,000

      To, Capital A/C                                      100,000
Step: 4 Use the proper format to write a journal. The format is as follows:

Let’s understand journal entry questions with answers. We will begin with basic journal entries. 

Journal Entry Questions  

1. Cash Purchase

A cash purchase in accounting is when a business buys goods or services and pays immediately with cash or its equivalent. This transaction decreases the company's cash balance while increasing its assets (like inventory).

Journal Entry on Cash Purchase (Variations)

• Cash purchases journal entry
• Bought goods for cash journal entry

Format

Example of Cash Purchase:

On January 10th, ABC Stationery Store purchased office supplies worth ₹5,000 in cash from XYZ Office Supplies Company.

Description

• ABC Stationery Store debits the "Office Supplies Expense" account with ₹5,000 to record the expense of purchasing office supplies.
• The "Cash" account is credited with ₹5,000 as it represents the payment made in cash for the supplies.

Note: Scenarios where it’s not mentioned that a purchase or sale is being made on cash or credit that is considered “Cash” purchases or sales. This approach is based on the principle of conservatism, where revenue is not recognised until it’s certain. 

2. Credit Purchase

A cash purchase in journal entry refers to a transaction where a company buys goods or services and makes an immediate payment using cash or its equivalent. Here, the company debits the respective expense or asset account to record the purchase cost and credits the cash account to reflect the cash outflow. This journal entry captures the immediate exchange of cash for goods or services.

 Variations of Cash Purchase Journal Entry

• Credit purchase journal entry
• Goods sold on credit journal entry

Format

Example of Credit Purchase

On 15th Septemeber, ABC Manufacturing purchases raw materials worth ₹30,000 on credit from XYZ Suppliers.

Description

• Debit Raw Materials Inventory: This represents the cost of raw materials that ABC Manufacturing acquired, increasing its inventory assets.
• Credit Accounts Payable: This reflects the amount ABC Manufacturing now owes to XYZ Suppliers, acknowledging the liability created by the credit purchase.

3. Sales Entry

A sales entry for cash purchases records the revenue generated when a company sells goods or services and receives immediate cash payments. In sales entry, the company debits the cash account to reflect the cash inflow and credits the sales revenue account to recognize the earned revenue. It captures the immediate exchange of goods or services for cash.

Sales can be done both on a cash and credit basis. Let’s first understand the Journal Entry for Sales on cash basis.

Variations of Sales Entry

• Sales accounting entry
• Cash sales journal entry
• Sold goods for cash journal entry

Format

Example:

On March 15th, XYZ Furniture Store sold office furniture to ABC Office Solutions for ₹15,000 in cash.

Description:

• XYZ Furniture Store debits the "Cash" account with ₹15,000 to record the cash received from the sale of office furniture.
• The "Sales Revenue" account is credited with ₹15,000 to recognize the revenue generated from the sale.

Sales Entry on Credit

A sales entry for credit purchase in a journal entry records the revenue generated when a company sells goods or services to a customer on credit terms. When sales are done on a credit basis, the company debits the accounts receivable or the customer's name to recognize the amount owed by the customer and credits the sales revenue account to acknowledge the revenue earned. It represents a sale made on credit, where payment will be received later according to agreed-upon terms.

Variations of Sales Journal Entry:

• Credit sales journal entry
• Goods sold on credit journal entry

Format

Example of Sales Entry on Credit:

On April 20th, ABC Electronics sold electronic gadgets to XYZ Retailers for ₹12,000 on credit terms.

Description:

• Debit XYZ Retailers A/C: This shows the amount due from XYZ Retailers for the electronic gadgets they purchased.
• Credit Sales A/C: It records the revenue generated from the sale of goods.

3. Account Payable

Accounts Payable- Goods purchased on credit. In a journal entry, they represent the amount a company owes to its creditors or suppliers for goods or services received but not yet paid for. It is a liability account and is credited in journal entries when the company incurs an obligation to pay for expenses or purchases on credit. The corresponding debit entry typically reflects the expense or asset related to the payable transaction.

Variations of Accounts Payable Entry:

• Accounts payable journal entry
• Accounts payable entry
• Accounts payable accounting entries
• AP Journal Entry
• AP Accounting Entries

Example of Account Payable on credit:

On July 10th, ABC Electronics sold electronic gadgets to XYZ Retailers for ₹15,000 on credit terms.

Description:

• ABC Electronics debits the "Accounts Receivable (XYZ Retailers)" account with ₹15,000 to acknowledge that they have an outstanding receivable of ₹15,000 from XYZ Retailers due to the credit sale.
• The "Sales Revenue" account is credited with ₹15,000 to recognize the revenue generated from the sale.

4. Account Receivable

Accounts Receivable- Goods sold on credit. In accounting it refers to the amount of money that a company owes to its creditors or suppliers for goods or services received but not yet paid for. It is a liability account and is credited in journal entries to recognize the obligation to pay off these debts. The corresponding debit entry typically reflects the expense or asset associated with the payable transaction.

Variations of Account Receivable Entry

• Accounts receivable journal entry
• Account receivable entry
• Account receivable example journal entry
• AR accounting entries
• Receivable journal entry
• Cash receivable journal entry

Format

Example:

On October 5, 2023, a retail company, Elegant Furnishings, sold a set of luxury sofas on credit to Decor House for ₹80,000.

Description:

• Debit Accounts Receivable: This reflects that Decor House now owes ₹80,000 to Elegant Furnishings for the luxury sofas. The accounts receivable is increased, indicating an increase in the company's assets.
• Credit Sales Revenue: It shows the revenue generated from the sale of the sofas. It's credited to represent an increase in Elegant Furnishings' earnings.

5. Accrual 

Accrual is an accounting method where revenues and expenses are recorded when they are earned or incurred, regardless of when cash transactions occur. This approach contrasts with cash accounting, where transactions are recorded only when cash changes hands. Accrual accounting provides a more accurate picture of a company's financial health by matching revenues with the expenses incurred to generate them, aligning with the principle of revenue recognition and expense matching.

Variations of Accrual Journal Entry

• Accrual Accounting Entries
• Accrual Accounting Journal Entries
• Accrual Entries
• Accrual Journal Entries

Format

Example

On November 30, 2023, Prestige Inc. has incurred utility expenses for the month, amounting to ₹10,000. However, the payment for these utilities will not be made until December 10, 2023.

Description:

• Debit Utility Expenses: This reflects the utility expenses that Prestige Inc. incurred during November. The debit increases the expense account, following the accrual principle of recognizing expenses when they are incurred.
• Credit Accrued Expenses: It represents the liability created due to unpaid utility expenses. The credit increases the accrued expenses account, indicating an obligation that the company will settle at a later date.

6. Bad Debts

Bad debts are sums owed to a company that is no longer expected to be paid by the debtor. This usually happens when a customer can't pay due to financial issues. In accounting, we recognize bad debts as an expense to reflect potential losses in the company's financial statements accurately. This ensures the company's earnings and receivables are realistically reported, acknowledging that some amounts won't be recovered.

Variations of Bad Debts Entry:

• Accounting entry for bad debts
• Bad debt journal entries

Format

Example

On December 15, 2023, ABC Corporation determined that a debt of ₹25,000 owed by a customer, XYZ Enterprises, would not be recoverable due to XYZ's bankruptcy.

Description:

Debit Bad Debts Expense: In this entry, we record the recognition of the bad debt as an expense. It increases the expense account, which in turn reduces the net income of ABC Corporation.

Credit Accounts Receivable: This entry decreases the accounts receivable account by ₹25,000, acknowledging that the amount owed by XYZ Enterprises is no longer expected to be collected.

7. Prepaid Expenses 

Prepaid expenses are payments made in advance for goods or services to be received in the future. They are initially recorded as assets because they provide future economic benefits. Over time, as the service is used or the benefit period lapses, these expenses are gradually recognized as actual expenses in the income statement, aligning with the period they relate to, in adherence to the matching principle in accounting.

Variations of Prepaid Expenses Journal Entry

• Accounting entry for prepaid expenses
• Entries for prepaid expenses
• Journal entry for prepaid rent
• Prepaid expense example

Format

Example:

On March 1, 2024, a company named Quick Solutions paid ₹50,000 in advance for a six-month office rent covering the period from March to August 2024.

Description:

Debit Prepaid Rent: It records the payment of rent in advance. By debiting the prepaid rent account, we recognize it as an asset because it's a future economic benefit for Quick Solutions.

Credit Cash/Bank Account: This entry reflects the outflow of cash from the company's bank account to pay for the rent. The credit decreases the company's cash balance.

8. Depreciation

Depreciation is the accounting process of allocating the cost of a tangible asset over its useful life. It reflects how much of the asset's value has been used up over time. This concept recognizes that assets like machinery, vehicles, or office equipment lose value as they age and are used. The methods of depreciation help in accurately representing this decrease in value on financial statements, matching the cost of the asset with the revenue it helps generate.

Variations of Depreciation

• Accounting entries for depreciation
• Depreciation journal entry
• Depreciation entries
• Journal entry for depreciation on machinery
• Journal entry of depreciation on machinery
• Accumulated depreciation journal entry

Format

Example:

On December 31, 2024, Tech Innovations calculates the annual depreciation for a piece of equipment originally purchased for ₹200,000. The equipment has a useful life of 10 years, with no salvage value. Therefore, the annual depreciation expense is ₹20,000 (₹200,000 / 10 years).

Description

Debit (Depreciation Expense): It represents the annual cost of using the equipment, part of the asset's value that has been consumed during the year.
Credit (Accumulated Depreciation): This showcases increases in the total accumulated depreciation on the equipment, reflecting the reduction in its value over time.

9. Salary 

When a company pays salaries to its employees, it records the transaction by debiting the Salary Expense account, which reflects the cost of employee compensation on the income statement. Then, it credits the Cash or Bank account to show the outflow of money from the company's resources. This entry ensures accurate tracking of employee costs and cash movements, crucial for financial management and reporting.

Variations of Salary Journal Entry

• Journal entry for salary paid
• Journal entry for salary payable
• Journal entry for salary
• Salary account entry
• Advance salary paid journal entry

Format

Example

On March 31, 2024, XYZ Corporation needs to record the payment of monthly salaries to its employees. The total salary expense for March is ₹100,000.

Description

• Debit Salary Expense: Here, salary expense increases in the income statement, reflecting the cost incurred by XYZ Corporation for employee salaries in March.
• Credit Cash/Bank Account: This entry decreases the cash or bank balance in the balance sheet, showing the outflow of funds for salary payment.

10. Rent

When a company pays rent, it records this expense by debiting the Rent Expense account. It shows up on the income statement and reflects the cost of using the rented property. Simultaneously, it credits the Cash or Bank account to indicate the outflow of cash from the company. This journal entry helps in accurately tracking the cost of occupying a rental space, an essential part of managing business finances.

Variations of Rent Payable Journal Entry

• Rent payable entry
• Rent payable journal entry
• Journal entry for paid rent
• Journal entry for paying rent

Format

Example

Suppose on January 22, 2024, a company named Global Tech pays ₹30,000 for its office rent for the month.

Description

• Debit Rent Expense: This entry reflects the cost of renting the office space for the month. The debit increases the Rent Expense account on the income statement, showing an expense for the company.
• Credit Cash/Bank Account: It shows the payment of the rent, decreasing the company's Cash or Bank account balance on the balance sheet.

Check Out: Top Accounting Interview Questions with the Best Answers!

Conclusion

Journal entry questions are essential tools for understanding and applying accounting principles. They encourage the practical application of theoretical knowledge, helping learners and professionals alike to grasp the intricacies of financial transactions. By regularly practising these questions, one can effectively learn to accurately record and interpret a wide range of financial activities, crucial for maintaining precise and reliable financial records.