📘 JKSSB Finance & Accounts — Chapter 02
Accounting Equation & Journal Entries
Complete exam-ready notes covering the Accounting Equation, Golden Rules of Debit & Credit, Journal Format, Narration Writing, and 20+ JKSSB PYQs with answers.
⭐ HIGH PRIORITY — Heavily tested in every FAA exam
📋 Table of Contents
The Accounting Equation
Assets = Liabilities + Capital (Owner's Equity)
Also written as: A = L + C
Capital = Assets − Liabilities
Liabilities = Assets − Capital
What Does Each Term Mean?
| Term | Meaning | Examples |
|---|---|---|
| Assets | Resources owned by the business that provide future economic benefits | Cash, Bank, Debtors, Machinery, Land, Stock, Furniture |
| Liabilities | Obligations / amounts owed by the business to outsiders | Creditors, Bank Loan, Bills Payable, Outstanding Expenses |
| Capital | Amount invested by the owner; net worth of the business | Owner's Capital, Retained Earnings, Reserves |
Effect of Transactions on the Accounting Equation
Every business transaction affects at least two elements of the equation, yet the equation always remains balanced.
| Transaction | Effect | Equation Balance |
|---|---|---|
| Owner invests ₹1,00,000 cash | Cash ↑, Capital ↑ | A ↑ = L + C ↑ ✔ |
| Purchase machinery for ₹30,000 cash | Machinery ↑, Cash ↓ | A ↑↓ (net 0) = L + C ✔ |
| Took bank loan ₹50,000 | Bank ↑, Loan ↑ | A ↑ = L ↑ + C ✔ |
| Paid creditor ₹5,000 | Cash ↓, Creditors ↓ | A ↓ = L ↓ + C ✔ |
| Sold goods at profit ₹10,000 | Cash ↑, Capital ↑ (profit) | A ↑ = L + C ↑ ✔ |
| Owner withdrew cash ₹2,000 (Drawings) | Cash ↓, Capital ↓ | A ↓ = L + C ↓ ✔ |
📌 Key Point — Dual Aspect Concept
Every transaction has two effects (debit & credit) of equal amounts. This is why the Accounting Equation never breaks — it is the foundation of Double Entry Book-Keeping.
Types of Accounts
Personal Account
Persons & Organisations
- Natural: Ram's A/c, Mohan's A/c
- Artificial: Bank A/c, Company A/c, J&K Govt. A/c
- Representative: Capital A/c, Drawings A/c, Outstanding Salary A/c
Real Account
Tangible & Intangible Assets
- Tangible: Cash, Machinery, Land, Furniture, Stock
- Intangible: Goodwill, Patents, Trademarks, Copyright
Nominal Account
Expenses, Incomes & Losses
- Expenses/Losses: Salaries, Rent, Interest Paid, Bad Debts
- Incomes/Gains: Commission Received, Discount Received, Interest Earned
🧠 Quick Memory Aid — Account Types
"PRN" — Personal (persons), Real (resources/assets), Nominal (revenues & expenses).Nominal accounts are temporary — they reset to zero at year-end via Profit & Loss A/c.
3 Golden Rules of Debit & Credit
| Account Type | DEBIT (Dr) | CREDIT (Cr) |
|---|---|---|
| Personal Account | Debit the Receiver | Credit the Giver |
| Real Account | Debit what comes IN | Credit what goes OUT |
| Nominal Account | Debit all Expenses & Losses | Credit all Incomes & Gains |
Applying the Rules — Illustrated
Example 1 — Cash paid as wages ₹5,000
Step 1: Wages A/c → Nominal (expense) → Debit Wages A/c
Step 2: Cash A/c → Real (goes out) → Credit Cash A/c
Example 2 — Cash received from Ram (debtor) ₹8,000
Step 1: Cash A/c → Real (comes in) → Debit Cash A/c
Step 2: Ram's A/c → Personal (giver) → Credit Ram's A/c
Example 3 — Goods purchased on credit from Shyam ₹12,000
Step 1: Purchases A/c → Real (comes in) → Debit Purchases A/c
Step 2: Shyam's A/c → Personal (giver) → Credit Shyam's A/c
Journal Format
The Journal (Book of Original / Prime Entry) is where every transaction is first recorded chronologically.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| 2025 Apr 1 | Cash A/c Dr. | 1 | 1,00,000 | |
| To Capital A/c | 2 | 1,00,000 | ||
| (Being cash brought in by the owner as capital) | ||||
| Apr 3 | Purchases A/c Dr. | 3 | 20,000 | |
| To Cash A/c | 1 | 20,000 | ||
| (Being goods purchased for cash) | ||||
| Apr 5 | Salaries A/c Dr. | 4 | 8,000 | |
| To Cash A/c | 1 | 8,000 | ||
| (Being salaries paid to employees for the month) | ||||
Components of a Journal Entry
| Column | What to Write | Important Note |
|---|---|---|
| Date | Year on first line, then month & date | Chronological order; blank for same date entries |
| Particulars | Debited account first (with "Dr."), then credited account ("To …"), then narration in brackets | Cr. account is always indented |
| L.F. | Ledger Folio — page number in the ledger | Left blank during journalising; filled when posted |
| Dr. Amount | Amount to be debited | Must equal Cr. Amount |
| Cr. Amount | Amount to be credited | Must equal Dr. Amount |
| Narration | Brief explanation in brackets | Starts with "Being …"; mandatory in exams |
Steps to Pass a Journal Entry
- Identify the accounts affected — which accounts change due to this transaction?
- Classify each account — Personal, Real, or Nominal?
- Apply the Golden Rule — decide which account to Debit and which to Credit.
- Record in Journal format — Debit account first, Credit indented with "To", then narration.
- Verify — Total Debit amount = Total Credit amount.
✅ Exam Strategy
Always work through these five steps mentally before writing. In JKSSB exams, marks are awarded for correct account identification and narration even if the amount has a minor error.
Narration Writing
Narration is a brief explanation of the transaction written in brackets below each journal entry.
Rules for Writing Narrations
- Always begins with "Being …"
- Written in brackets ( )
- Brief but complete — mention what happened and why (if applicable)
- Use past tense
- Written immediately below the credit entry
Standard Narrations for Common Transactions
| Transaction | Standard Narration |
|---|---|
| Owner brings in cash as capital | (Being cash brought in by owner as capital) |
| Goods purchased for cash | (Being goods purchased for cash) |
| Goods purchased on credit from Mohan | (Being goods purchased on credit from Mohan) |
| Goods sold for cash | (Being goods sold for cash) |
| Goods sold on credit to Ram | (Being goods sold on credit to Ram) |
| Cash received from debtor Ram | (Being cash received from Ram in full settlement) |
| Cash paid to creditor Shyam | (Being cash paid to Shyam in full settlement) |
| Rent paid | (Being rent paid for the month of ___) |
| Salary paid | (Being salaries paid to staff for the month) |
| Cash deposited into bank | (Being cash deposited into bank) |
| Cash withdrawn from bank | (Being cash withdrawn from bank for office use) |
| Machinery purchased | (Being machinery purchased for business use) |
| Discount allowed to debtor | (Being discount allowed to Ram on settlement) |
| Discount received from creditor | (Being discount received from Shyam on settlement) |
| Bad debt written off | (Being amount due from X written off as bad debt) |
| Drawings by owner | (Being cash withdrawn by owner for personal use) |
| Interest on capital | (Being interest on capital credited at __% p.a.) |
Compound Journal Entry
A Compound Journal Entry involves more than two accounts — either multiple debits, multiple credits, or both. Used when several related items are settled together.
Example — Ram settles his account of ₹10,000 by paying ₹9,500 cash; ₹500 discount allowed
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Cash A/c Dr. | 9,500 | |||
| Discount Allowed A/c Dr. | 500 | |||
| To Ram's A/c | 10,000 | |||
| (Being cash received from Ram and discount allowed on settlement) | ||||
📌 Verification
Total Debit (₹9,500 + ₹500) = Total Credit (₹10,000) ✔
Worked Examples — Journal Entries
Following transactions occurred in the books of M/s JK Traders during April 2025. Record them in the Journal.
| Date | Transaction | Amount (₹) |
|---|---|---|
| Apr 1 | Started business with cash | 2,00,000 |
| Apr 3 | Opened bank account and deposited cash | 50,000 |
| Apr 5 | Purchased goods for cash | 40,000 |
| Apr 8 | Purchased furniture on credit from Nathu Lal | 15,000 |
| Apr 10 | Sold goods to Arun on credit | 30,000 |
| Apr 12 | Received cash from Arun (₹28,000) + discount allowed (₹2,000) | 30,000 |
| Apr 15 | Paid rent by cheque | 5,000 |
| Apr 20 | Withdrew cash for personal use | 3,000 |
| Apr 28 | Paid salaries in cash | 12,000 |
Journal
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| 2025 Apr 1 | Cash A/c Dr. | 2,00,000 | ||
| To Capital A/c | 2,00,000 | |||
| (Being cash brought in as capital by the proprietor) | ||||
| Apr 3 | Bank A/c Dr. | 50,000 | ||
| To Cash A/c | 50,000 | |||
| (Being cash deposited into bank for opening an account) | ||||
| Apr 5 | Purchases A/c Dr. | 40,000 | ||
| To Cash A/c | 40,000 | |||
| (Being goods purchased for cash) | ||||
| Apr 8 | Furniture A/c Dr. | 15,000 | ||
| To Nathu Lal's A/c | 15,000 | |||
| (Being furniture purchased on credit from Nathu Lal) | ||||
| Apr 10 | Arun's A/c Dr. | 30,000 | ||
| To Sales A/c | 30,000 | |||
| (Being goods sold on credit to Arun) | ||||
| Apr 12 | Cash A/c Dr. | 28,000 | ||
| Discount Allowed A/c Dr. | 2,000 | |||
| To Arun's A/c | 30,000 | |||
| (Being cash received from Arun and discount allowed on full settlement) | ||||
| Apr 15 | Rent A/c Dr. | 5,000 | ||
| To Bank A/c | 5,000 | |||
| (Being rent paid by cheque for the month) | ||||
| Apr 20 | Drawings A/c Dr. | 3,000 | ||
| To Cash A/c | 3,000 | |||
| (Being cash withdrawn by the owner for personal use) | ||||
| Apr 28 | Salaries A/c Dr. | 12,000 | ||
| To Cash A/c | 12,000 | |||
| (Being salaries paid to staff in cash for the month of April) | ||||
Frequently Tested Journal Entries — Quick Reference
| # | Transaction | Debit | Credit |
|---|---|---|---|
| 1 | Cash introduced as capital | Cash A/c | Capital A/c |
| 2 | Goods purchased for cash | Purchases A/c | Cash A/c |
| 3 | Goods purchased on credit | Purchases A/c | Creditor's A/c |
| 4 | Goods sold for cash | Cash A/c | Sales A/c |
| 5 | Goods sold on credit | Debtor's A/c | Sales A/c |
| 6 | Cash received from debtor | Cash A/c | Debtor's A/c |
| 7 | Cash paid to creditor | Creditor's A/c | Cash A/c |
| 8 | Rent paid in cash | Rent A/c | Cash A/c |
| 9 | Salary paid by cheque | Salaries A/c | Bank A/c |
| 10 | Cash deposited into bank | Bank A/c | Cash A/c |
| 11 | Cheque received from debtor | Bank A/c | Debtor's A/c |
| 12 | Machinery purchased for cash | Machinery A/c | Cash A/c |
| 13 | Depreciation on machinery | Depreciation A/c | Machinery A/c |
| 14 | Bad debt written off | Bad Debts A/c | Debtor's A/c |
| 15 | Goods returned to supplier (Purchase Return) | Creditor's A/c | Purchases Return A/c |
| 16 | Goods returned by customer (Sales Return) | Sales Return A/c | Debtor's A/c |
| 17 | Drawings in cash | Drawings A/c | Cash A/c |
| 18 | Goods taken by owner for personal use | Drawings A/c | Purchases A/c |
| 19 | Interest on capital credited | Interest on Capital A/c | Capital A/c |
| 20 | Commission received in cash | Cash A/c | Commission Received A/c |
| 21 | Insurance premium paid | Insurance A/c | Cash A/c |
| 22 | Outstanding salary (year-end) | Salaries A/c | Outstanding Salaries A/c |
| 23 | Prepaid rent (year-end) | Prepaid Rent A/c | Rent A/c |
| 24 | Bank charges debited by bank | Bank Charges A/c | Bank A/c |
| 25 | Loan taken from bank | Bank A/c | Bank Loan A/c |
JKSSB PYQs — Accounting Equation & Journal
📢 Exam Pattern Note
JKSSB FAA exams include 5–8 MCQs and 1–2 journal questions from this chapter in every sitting. MCQs focus on Golden Rules, debit/credit identification, and narrations. Long-answer questions ask for complete journal entries with narrations.
Q1. Which of the following correctly states the Accounting Equation?
(A) Capital = Assets + Liabilities
(B) Assets = Liabilities + Capital
(C) Liabilities = Assets + Capital
(D) Assets = Capital − Liabilities
Answer: (B)
The fundamental accounting equation is A = L + C. This is the basis of double-entry book-keeping.
Q2. The rule for a Personal Account is:
(A) Debit what comes in, Credit what goes out
(B) Debit all expenses, Credit all incomes
(C) Debit the receiver, Credit the giver
(D) Debit all incomes, Credit all expenses
Answer: (C)
Golden Rule for Personal Accounts: Debit the receiver, Credit the giver.
Q3. When goods are purchased on credit from Ramesh, which account is credited?
(A) Purchases A/c
(B) Cash A/c
(C) Ramesh's A/c
(D) Sales A/c
Answer: (C)
Ramesh is the giver (Personal Account) → Credit the giver → Credit Ramesh's A/c. Purchases A/c is debited (Real — what comes in).
Q4. Which of the following is a Real Account?
(A) Rent A/c
(B) Ram's A/c
(C) Machinery A/c
(D) Salaries A/c
Answer: (C)
Machinery is a tangible asset → Real Account. Rent and Salaries are Nominal; Ram's A/c is Personal.
Q5. Which of the following is a Nominal Account?
(A) Cash A/c
(B) Commission Received A/c
(C) Mohan's A/c
(D) Furniture A/c
Answer: (B)
Commission Received is income → Nominal Account. Cash and Furniture are Real; Mohan's is Personal.
Q6. Journal is known as:
(A) Final Entry Book
(B) Book of Original Entry
(C) Secondary Entry Book
(D) None of the above
Answer: (B)
Journal is the Book of Original / Prime Entry where transactions are first recorded chronologically.
Q7. If assets are ₹5,00,000 and liabilities are ₹2,00,000, what is the Capital?
(A) ₹7,00,000
(B) ₹3,00,000
(C) ₹2,00,000
(D) ₹5,00,000
Answer: (B)
Capital = Assets − Liabilities = ₹5,00,000 − ₹2,00,000 = ₹3,00,000.
Q8. The narration in a journal entry is written:
(A) Before the debit entry
(B) Between debit and credit entries
(C) After the credit entry, within brackets
(D) In the L.F. column
Answer: (C)
Narration is always written after the credit entry in brackets, beginning with "Being…"
Q9. Cash withdrawn from bank for office use will be recorded as:
(A) Dr. Bank A/c, Cr. Cash A/c
(B) Dr. Drawings A/c, Cr. Bank A/c
(C) Dr. Cash A/c, Cr. Bank A/c
(D) Dr. Capital A/c, Cr. Cash A/c
Answer: (C)
Cash comes in (Real → Debit Cash A/c); Bank goes out (Real → Credit Bank A/c). Drawings A/c is used only when withdrawn for personal use.
Q10. Discount allowed to a customer is recorded by debiting:
(A) Discount Allowed A/c
(B) Customer's A/c
(C) Discount Received A/c
(D) Sales A/c
Answer: (A)
Discount Allowed is an expense (Nominal Account) → Debit all expenses → Debit Discount Allowed A/c.
Q11. Goods taken by the proprietor for personal use will be credited to:
(A) Sales A/c
(B) Capital A/c
(C) Purchases A/c
(D) Drawings A/c
Answer: (C)
Dr. Drawings A/c (reduces capital), Cr. Purchases A/c (goods go out, reversing the original purchase).
Q12. Which account normally has a Credit balance?
(A) Cash A/c
(B) Purchases A/c
(C) Capital A/c
(D) Machinery A/c
Answer: (C)
Capital A/c (Representative Personal) — the owner is the giver → normally has a Credit balance. Cash, Purchases, Machinery normally carry Debit balances.
Q13. The full form of "L.F." in the journal is:
(A) Ledger File
(B) Ledger Folio
(C) Liability Fund
(D) Liquid Fund
Answer: (B)
L.F. = Ledger Folio — the page number of the ledger where the account has been posted.
Q14. A compound journal entry involves:
(A) Only one debit and one credit
(B) Only one account
(C) More than two accounts
(D) Only cash transactions
Answer: (C)
A compound journal entry involves more than two accounts — multiple debits, multiple credits, or both.
Q15. Record the following transactions in the Journal of Mr. Ajay:
(i) Started business with cash ₹80,000 (ii) Purchased goods on credit from Suresh ₹15,000 (iii) Sold goods for cash ₹20,000
(i) Started business with cash ₹80,000 (ii) Purchased goods on credit from Suresh ₹15,000 (iii) Sold goods for cash ₹20,000
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| (i) | Cash A/c Dr. | 80,000 | ||
| To Capital A/c | 80,000 | |||
| (Being cash brought in as capital by Mr. Ajay) | ||||
| (ii) | Purchases A/c Dr. | 15,000 | ||
| To Suresh's A/c | 15,000 | |||
| (Being goods purchased on credit from Suresh) | ||||
| (iii) | Cash A/c Dr. | 20,000 | ||
| To Sales A/c | 20,000 | |||
| (Being goods sold for cash) | ||||
Memory Tricks & Exam Tips
🔑 TRICK 1 — Remember the 3 Golden Rules (PRN)
Personal → Receiver / Giver |
Real → Comes In / Goes Out |
Nominal → Expense & Loss / Income & Gain
🔑 TRICK 2 — DEAL / CLIP for Normal Balances
DEAL = accounts with DEBIT normal balance:
Drawings, Expenses, Assets, LossesCLIP = accounts with CREDIT normal balance: Capital, Liabilities, Income, Profits
🔑 TRICK 3 — Office Use vs Personal Use (Frequently Tested!)
Cash withdrawn from bank for office use → Dr. Cash A/c | Cr. Bank A/cCash withdrawn from bank for personal use → Dr. Drawings A/c | Cr. Bank A/c
⚡ Rapid-Fire Exam Checklist
- The Accounting Equation always balances — if it doesn't, an error exists.
- Journal is the Book of Original / Prime Entry — not the Ledger.
- Narration begins with "Being …" and is written in brackets.
- The debit account is written first; credit account is indented with "To".
- Total Debits must always equal Total Credits in every entry.
- Goodwill is an intangible Real Account — not Nominal.
- Capital A/c is a Representative Personal Account — not Nominal.
- L.F. column is filled after posting, not during journalising.
- Purchases Return A/c = Returns Outward A/c.
- Sales Return A/c = Returns Inward A/c.
🚫 Common Mistakes to Avoid
- Crediting Cash A/c when bank is used (and vice versa).
- Confusing Sales A/c with Cash A/c in cash sales.
- Forgetting to write narration — marks are deducted.
- Calling Goodwill a Nominal Account — it is a Real Account.
- Writing "To Cash A/c Dr." — the "Dr." appears only on the Debit line.