Books of Original Entry - Definition, Types & Components

 Book of Original Entry 

A book of original entry is a book of record in which transactions are recorded as they occur on daily basis and in chronological order, before they are posted to the relevant accounts in the ledger. These books are also known as books of prime entry as transactions are first recorded in them before they are posted to the accounts in the ledger. Before understanding the preparation of book of original entry we must understand the concept of ‘account’. It has been explained in the following lines.

What is an Account? - Definition | Meaning | Example | Types

It is in ‘T’ form consisting of two sides, left side as well as right side. Each side shows increase or decrease in accounts. Left side is abbreviated as ‘Dr’ which stands for Debit and right side is abbreviated as ‘Cr’ which stands for Credit. These two terms have been taken from the latin words ‘Debere’ and ‘Credere’.

Features of an Account

Following are the features of an account:

(i) An account is divided into two identical halves, separated by a thick vertical line.

(ii) It is usually prepared in ‘T’ form.

(iii) Left side is known as debit side (abbreviated as Dr) and right side is known as credit side (abbreviated as Cr).

(iv) Four columns are prepared on each side for date, particulars, journal folio and amount.

(v) Journal folio It is column in the ledger which records the page number of a transaction in the journal book. This column is filled at the time of posting a transaction in the respective account in the ledger.

Format of an Account

Classification of Accounts

1. Traditional Classification (British Approach)

Accounts can be classified in two types:

(i) Personal Accounts

(ii) Impersonal Accounts

(i) Personal Accounts

The accounts which relate to the name of the persons. Such persons can be natural or artificial. Personal accounts are broadly classified into three categories:

(a) Natural personal accounts 

Accounts created in the name of human beings are natural personal accounts e.g. Ram account, debtors account, creditors account, capital account, drawings account.

(b) Artificial personal

 accounts Artificial persons are those which are not living human beings but they may have existence in the eyes of law

e.g. Reliance Ltd, Shyam provisions stores, X and Co, bank account.

(c) Representative personal accounts 

Accounts which represents certain group of people to whom or from whom amount is payable or receivable respectively.

* Representative Personal Accounts 

Outstanding expense account

An expense or part of expense which relates to a particular accounting year but has not been paid is known as outstanding expense account. It is treated as liability in a business.

Prepaid expense

The expense which relates to next accounting year(s) but has been paid in current accounting year is known as prepaid expense. It is treated as asset for a business.

Accrued income

It is the income which is earned but not received in a particular accounting year. It is treated as asset for a business.

Income recived in advance

It is the income which is unearned but received. It is the income which relates to subsequent accounting year(s) but has been received in a current accounting year. It is treated as liability in a business.

Note When any suffix or prefix is added to a nominal account, it becomes representative account.

Accounting Rule

 Dr The receiver

Cr The giver

(ii) Impersonal Accounts

(a) Real accounts

  Accounts created for tangible or intangible assets of the firm. These are broadly classified as:

■ Tangible real accounts

 Tangible real accounts are those accounts which relate to such things which can be touched,  felt,  measured, etc e.g. Land account, stock account, etc.

■ Intangible real accounts 

The accounts which cannot be seen and touched. Such accounts represent legal rights e.g. goodwill account, patents account, brand/trademarks account, copyrights/ mastheads account, licences/franchise account, etc.

Accounting Rule 

Dr What comes in

Cr What goes out

(b) Nominal (Revenue or Expense) accounts 

All accounts which are simply opened as per the nature of the transactions. They do not really exist.

These are of two types:

■ Expenses and Losses

Expenses Rent paid account, salaries account.

Losses Loss on sale of assets account, loss due to decrease in the value of assets or increase in the value of liabilities.

■ Incomes and Gains

Incomes Interest received account, discount received account 

Gains Profit on sale of assets account, profit due to increase in the value of assets or decrease in the value of liabilities.

Accounting Rule 

Dr All expenses and losses

Cr All incomes and gains

2. Modern Classification (American Approach)

Note All the above accounts involved can be easily learnt with the help of word ‘CLEAR’.

Classification of Accounts.

Capital accounts

These are the accounts of partners or proprietors who have invested money in the business.

Liabilities accounts

These are the accounts which relate to outside liabilities and payables e.g. creditors, lenders, outstanding expenses, etc.

Expenses account

These are the accounts which relate to expenses, losses e.g. purchases account, salaries paid account, etc.

Assets account

These are the accounts which relate properties and receivables e.g. it inventory account, land and buildings account, debtors account, etc.

Revenue accounts

These are the accounts which relate to incomes and gains e.g. sales account, interest received account, etc.