Journal Entry Rules for Liability

Journal Entry Rules for Liability

 In this article we would explain the Journal entry rules liability or liabilities.  It is important to note that journal entry rules for income and liability are same i.e. Increase in liability is credit and decrease in liability is debit. This rule can be divided into two part or we can say that basically there are two rules for recording the journal entry for liability.

·         Increase in liability is Debit.

·         Decrease in liability is Credit.

Journal Entry Rule for Increase in Liability

We can explain the increase of liability rule with an example. We assume that we have made credit Purchases of PKR 40,000/- from Mr. Jimmy. To record the journal entry of this transaction, we would credit Mr. Jimmy (as our liability has increased) and we would debit purchase as our inventory has increased (increase in asset is debited under asset rules of recording the journal entry).

Date	Particular	Ledger Folio	Dr.	Cr.
01-05-2016	Purchases		40,000
01-05-2016	Jimmy			40,000

Journal Entry Rule for Decrease in Liability

Decrease in liability is credit; this can also be explained with a simple example. Suppose we have made payment of PKR 7,000 to our creditor (Payable). This payment would decrease our liability (creditor is a liability), so we would debit our creditor as decrease in liability is debited and credit our cash account. (Asset is credited for a decrease).

Date	Particular	Ledger Folio	Dr.	Cr.
01-11-2017	Jimmy (Creditor)		7,000
01-11-2017	Cash			7,000

Examples of Recording Journal Entries Liability

1.    Credit purchases made of PKR. 100,000 from Saleem.

2.    Loan taken from bank amounting 6,000.

3.    Loan paid back amounting 6,000/-

1

Date	Particular	Ledger Folio	Dr.	Cr.
21-01-2017	Purchases		100,000
21-01-2017	Saleem			100,000

Date	Particular	Ledger Folio	Dr.	Cr.
22-01-2017	Cash		6,000
22-01-2017	Loan			6,000

Date	Particular	Ledger Folio	Dr.	Cr.
21-01-2017	Loan		6,000
21-01-2017	Cash			6,000