You have recently learned to pass the journal entries. It may be possible, you will do mistakes if you did not understand the double entry system correctly. If you want to find the mistakes of your entry, you need to ask the question, "Is my journal entry correct?" to your master of accounting.
Here, we are writing incorrect journal entries and we are telling the reason why it is incorrect? Understanding it will help you to understand about how to pass correct journal entries.
1st Wrong Journal Entries
When you have invested Rs. 10,000 in a business and passed following wrong journal entries.
Investment Account Debit 10000
Cash Account Debit 10000
Your Wrong Logic
You have invested money, so, your investment has increased. So, you have debited investment account.
Cash has gone from your pocket and went to business, so, your asset has decreased.
Reasons Why Your Logic and Journal Entries are Wrong
You have passed wrong journal entries because you are not differentiating yourself with your business. It is your personal investment but not your business. For your business, your invested money is liability because business has to return to you. Business has taken this money in the form of capital. So, it is increase of liability of business. You are preparing the books of your business. So, capital account will credit. Your given capital is increase in liability of your business. Your business has increased cash asset, so, cash account will debit. Following will be the correct journal entry.
Cash Account Debit 10,000
Capital Account Credit 10,000
2nd Wrong Journal Entries
Here, we are writing incorrect journal entries and we are telling the reason why it is incorrect? Understanding it will help you to understand about how to pass correct journal entries.
1st Wrong Journal Entries
When you have invested Rs. 10,000 in a business and passed following wrong journal entries.
Investment Account Debit 10000
Cash Account Debit 10000
Your Wrong Logic
You have invested money, so, your investment has increased. So, you have debited investment account.
Cash has gone from your pocket and went to business, so, your asset has decreased.
Reasons Why Your Logic and Journal Entries are Wrong
You have passed wrong journal entries because you are not differentiating yourself with your business. It is your personal investment but not your business. For your business, your invested money is liability because business has to return to you. Business has taken this money in the form of capital. So, it is increase of liability of business. You are preparing the books of your business. So, capital account will credit. Your given capital is increase in liability of your business. Your business has increased cash asset, so, cash account will debit. Following will be the correct journal entry.
Cash Account Debit 10,000
Capital Account Credit 10,000
2nd Wrong Journal Entries
You have bought goods from Sham of Rs. 5000. Paid Rs. 4000 and will pay tomorrow Rs. 1000
Purchase Account Debit 5000
Cash Account Credit 5000
There is no difference of today and tomorrow. So, we have passed entry by debiting purchase account and credit cash account with Rs. 5000
Reason of Wrong Journal Entry and its Logic
There is big difference of today and tomorrow business from accounting point of view. It is just amount of Rs. 1000 which we did not pay today when we are preparing our books. If same amount will Rs. 10 crores, there will big issue. So, correct journal entry will be below.
Purchase Account Debit 5000
Cash Account Credit 4000
Sham Account (Creditor ) Credit 1000
With this, entry, we are showing our current liability of sham creditor with Rs. 1000. Today, we did not pay. It means, we have to pay. It is increase in the liability, so ,we have to credit Sham. For example, if we will unable to pay tomorrow. Our creditor credit can add more amount of penalty in it. It is world truth, interest and rent is working 24 hours. It is the right of creditor to get interest on his unpaid debt which have taken in the form of goods. So, never do the mistake of passing the entry by credit whole amount as cash paid.
