Accounting Process - Journal, Ledger and Trial Balance
Financial Accounting Notes
B.Com 2nd SEM NEP 2023
Accounting cycle
The sequence of accounting procedures used to record, classify, and summarize accounting information is often termed the accounting cycle. At this point, we have illustrated a complete accounting cycle as it relates to the preparation of a balance sheet for a service-type business with a manual accounting system. The accounting procedures discussed to this point may be summarized as follows:
a)
Recording
transaction in the journal
b)
Post to ledger accounts
c)
Prepare a trial
balance
d)
Prepare financial
statements: It includes Trading Account, Profit and Loss Account and Balance
Sheet.
“Journal” and its features
Journal: The word ‘Journal’ has been derived from the
French word ‘JOUR’ means daily records. Journal is a book of original entry in
which transactions are recorded as and when they occur in chronological order
(in order of date) from source documents. Recording in journal is made showing
the accounts to be debited and credited in a systematic manner.
In the words of E. L. Kolher, “A Journal is a
chronological record of accounting transactions showing the names of the
accounts that are to be debited or credited, the amounts of debits and credit,
and any useful supplementary information about the transactions. It is
analogous to a diary.”
Thus, the journal provides a date-wise record of all the transactions
with details of the accounts and amounts debited and credited for each
transaction with a short explanation, which is known as narration.
Features
of Journal
The following are the main characteristics of
Journal:
a) Journal is
a book of original entry.
b) Transactions
are recorded in the journal as and when they occur, i.e., the record is
chronological.
c) Journal is
so ruled that all the transactions can be passed through it.
d) The
process of recording transactions in the journal is called journalising.
e) Any entry
made in the journal is called 'Journal Entry'.
f) Journal
contains all non-cash transactions which have taken place during the accounting
period.
Advantages and disadvantages of journal
Advantages of Journal: The chief advantages of the use of the journal are the following:
a) The possibility of errors is reduced. Since the amounts to be
debited and credited are written side by side, the two can be compared to see
that they are equal.
b) Along with the entry in the journal a complete explanations is
written so that later it would be possible to understand the entry property.
c) Transactions are entered in to journal in the chronological order.
Limitations of Journal
It is possible to
record every transaction in the journal. This however may make it unwieldy.
Therefore the usual practice is to have separate journals or books for
different classes of transactions. The reasons for this are the following.
a) The journal will be too long if all transactions are recorded
there.
b) Firms like to ascertain the cash balance everyday; hence they
usually record cash transactions directly in a separate book. This obviated the
necessity of journalizing cash transactions.
c) By recording different classes of transactions in different books,
book-keeping and accounting becomes easier, since, then, entries can often be
made in totals.
Journalising and steps of journalising
Journalising: The process of recording the transaction in the Journal or
making entry in the journal is called Journalizing. Since transactions are
first of all recorded in this book, Journal is also called "The Book of
Original Entry'. Entries in the Journal are recorded on the basis of source
Documents like Cash Memos, Vouchers etc which serve as an evidence of a
transaction. Entries in the Journal are made on the basis of ' Rules
of Journalizing'.
In the
words of H. Chakraborty,” the technique of writing a transaction in its
two-fold aspect with proper description in Journal is called Journalising.”
The
following steps lead to the preparation of a journal:
a) Identifying
the Affected Accounts. First of all, the affected accounts in a
transaction should be identified. For example, if goods worth Rs. 20,000 are
sold for cash, then goods and ‘Cash’ are the two affected accounts.
b) Recognizing
the Kinds of Affected Accounts. The kind of the affected accounts
should be determined e.g. in the above case, ‘goods’ and ‘Cash’ are both asset
accounts.
c) Applying
the Rules of Debit and Credit. Then the rules of ‘debit’ and ‘credit’
should be applied to the affected accounts.
Traditional and modern rules of Debit and Credit
Traditional
Approach: Under this
approach, Accounts are classified in to three namely real accounts, personal
accounts and nominal accounts. There are separate rules for each type of
accounts they are as follows
1. Real accounts: An account
relating to an asset or property is called real account. Cash, furniture, plant
and machinery etc are examples of real accounts the debit, credit rule
applicable to real account is:
Debit what comes in
Credit what goes out
2. Personal accounts: It
includes the account of person with whom the business deals. These accounts are
classified in to three categories
a) Natural personal accounts: The term natural persons mean persons
who are creation of god. For e.g.;-Raja’s accounts, Gupta’s accounts etc.
b) Artificial
personal accounts: These accounts includes accounts of corporate bodies or
institutions
c) Representative personal account-these
are accounts which represents certain person or group of persons. For example
salary due, rent outstanding etc. The rule of personal account is
Debit the receiver
Credit the giver
3) Nominal accounts: Accounts
relating to expenses and losses and incomes and gains are called nominal
accounts. Salary accounts, commission account etc are examples. The rule of
nominal account is
Debit all expenses and losses
Credit all incomes and gains
Modern
approach: Under this approach accounts are classified into five categories
namely Assets, Liabilities, Capital, Incomes & Gains and Expenses &
Losses. There are separate rules for each particular which are as follows:
|
Asset A/c |
: |
Increase Dr. |
: |
Decrease Cr. |
|
Liability A/c |
: |
Increase Cr. |
: |
Decrease Dr. |
|
Capital A/c |
: |
Increase Cr. |
: |
Decrease Dr. |
|
Revenue A/c |
: |
Increase Cr. |
: |
Decrease Dr. |
|
Expenses A/c |
: |
Increase Dr. |
: |
Decrease Cr. |
Also Read: FINANCIAL ACCOUNTING CHAPTERWISE NOTESUNIT 11. Preparation of Trial Balance and Preparation of Financial Statements UNIT 2Part A: Accounting for Partnership UNIT 3 UNIT 4 Some other Important Chapters
Ledger and its essential features
Ledger: A Ledger
account may be defined as a summary statement of all the transactions relating
to a person, asset, expense or income, which have taken place during a given
period of time and show their net effect. So every entry recorded in the
journal must be posted into the Ledger.
A ledger account is a statement shaped liked an English alphabet
'T' that systematically contains all financial transactions relating to either
a particular person or thing for a certain period of time. It is the
principal book of accounts.
Features
of ledger
The following are the features of ledger.
a) It has two
identical sides - left hand side and right hand side. The left hand side is
called debit side and right hand side is called credit side.
b) Debit
aspects of all the concerned transactions is recorded on the debit side, while
credit aspect on credit side according to date.
c) The
difference of the total of the two sides represents balance. The excess of
debit side over credit side indicates debit balance, while excess of credit
side over debit side indicates credit balance. If the total of the two sides
are equal there will be no balance.
d) The
closing balance of the current year will be the opening balance of the next
year.
Importance
of ledger
Ledger is an important book of Account. It
contains all the accounts in which all the business transactions of a business
enterprise are classified. At the end of the accounting period, each account
will contain the entire information of all the transactions relating to it.
Following are the advantages of ledger.
a) Knowledge
of Business results: Ledger
provides detailed information about revenues and expenses at one place. While
finding out business results the revenue and expenses are matched with each
other.
b) Knowledge
of book value of assets: Ledger records every asset separately. Hence,
we can get the information about the Book value of any asset whenever we need.
c) Useful for
management: It also helps the management in keeping the check on the
performance of business it is managing.
d) Knowledge
of Financial Position: Ledger provides information about assets and
liabilities of the business. From this we can judge the financial position and
health of the business.
e) Instant
Information: The ledger accounts provide this information at a glance through
the account receivables and payables.
Sub-division
of ledgers
In a big business, the number of accounts is
numerous and it is found necessary to maintain a separate ledger for customers,
suppliers and for others. Usually, the following three types of ledgers are
maintained in such big business concerns.
(i) Debtors’ Ledger: It
contains accounts of all customers to whom goods have been sold on credit. From
the Sales Day Book, Sales Returns Book and Cash Book, the entries are made in
this ledger. This ledger is also known as sales ledger.
(ii) Creditors’ Ledger: It
contains accounts of all suppliers from whom goods have been bought on credit.
From the Purchases Day Book, Purchases Returns Book and Cash Book, the entries
are made in this ledger. This ledger is also known as Purchase Ledger.
(iii) General Ledger: It
contains all the residual accounts of real and nominal nature. It is also known
as Nominal Ledger.
Difference between journal
and ledger:
(i) Journal is a book of prime entry, whereas
ledger is a book of final entry.
(ii) Transactions are recorded daily in the
journal, whereas posting in the ledger is made periodically.
(iii) In the journal, information about a
particular account is not found at one place, whereas in the ledger information
about a particular account is found at one place only.
(iv) Recording of transactions in the journal
is called journalising and recording of transactions in the ledger is called
posting.
(v) A journal entry shows both the aspects
debit as well as credit but each entry in the ledger shows only one aspect.
(vi) Narration is written after each entry in
the journal but no narration is given in the ledger.
Sub-Division of Journal – Meaning, Objectives and Advantages
SUB-DIVISION
OF JOURNAL: When innumerable number of transactions takes place, the journal,
as the sole book of the original entry becomes inadequate. In order to overcome
this problem, the journal is sub-divided into many subsidiary books which are
called special journals. The journal in which transaction of a similar nature
is recorded is known as special journal or subsidiary book.
The special journals are ruled differently on
the basis of the nature of transactions to be recorded. Transactions that
cannot be recorded in any of the special journals are recorded in a journal
called journal proper or miscellaneous journal.
Objects of
preparing subsidiary books:
a) Economy in labour: If the transaction are
recorded in the book of accounts directly if will be consume less time than if
transaction are recorded in the journal then posted to the ledger
b) More accuracy: There will be more accuracy
in the book of accounts as entries are made in total only.
c) Statistical record: Additional information
is collected while maintaining a subsidiary book as a book of original entry.
d) Journalizing of transaction: Recording a
transaction in journal is called journalizing.
Advantages
of subsidiary books
1. Division of work: since there are so many
subsidiary books, the accounting work may be divided amongst a number of
clerks.
2. Specialization: when the same work is
allotted to a period of time he acquires full knowledge of it and becomes
efficient thus the accounting works will be done more efficiently.
3. Save in time: the trader can save time and
labor by avoiding repetitions
4. Availability of information: since separate
subsidiary book is kept for each class of transactions, information relating to
that will be readily available.
5. Facility in checking: checking is
facilitated in subsidiary books which will prevent errors and frauds.
Various
types of subsidiary books
Important
Subsidiary Books: There are many types of journals and the
following are the important ones:
1. Cash Book-
to record all cash transactions of receipts as well as payments.
2. Sales Day
Book- to record all credit sales.
3. Purchases
Day Book- to record all credit purchases.
4. Sales
Returns Day Book- to record the return of goods sold to customers on credit.
5. Purchases
Returns Day Book- to record the return of goods purchased from suppliers on
credit.
6. Bills
Receivable Book- to record the details of all the bills received.
7. Bills
Payable Book- to record the details of all the bills accepted.
8. Journal
Proper-to record all residual transactions which do not find place in any of
the aforementioned books of original entry.
Cash book and its features
Cash Book:
Cash
Book is a sub-division of Journal recording transactions pertaining to cash
receipts and payments. Firstly, all cash transactions are recorded in the Cash
Book wherefrom they are posted subsequently to the respective ledger accounts.
The Cash Book is maintained in the form of a ledger with the required explanation
called as narration and hence, it plays a dual role of a journal as well as
ledger.
All cash receipts are recorded on the debit
side and all cash payments are recorded on the credit side. All cash
transactions are recorded chronologically in the Cash Book. The Cash Book will
always show a debit balance since payments cannot exceed the receipts at any
time.
A Cash
Book has the following features:
(1) It plays a dual role. It is both a
book of original entry as well as a book of final entry.
(2) Only one aspect of cash transaction is
posted to the ledger account. The other cash aspect needs no posting in Cash
A/c.
(3) It has two identical sides: left hand
side, the debit side and right hand side, the credit
(4) All the items of cash receipts are
recorded on the left hand side and all items of cash payments are recorded on
the right hand side in order of date.
(5) The difference between the total of
two sides shows cash in hand.
(6) Its balance is verified by counting
actual cash in the cash box.
(7) It always shows debit balance. It can
never show credit balance.
Is cash book a ledger or journal?
Cash Book is both journal and a ledger.
Cash Book is a journal in the sense that all
the transactions relating to receipt or payment of cash are recorded only in
Cash Book and not in the journal. Cash Book is a ledger also because there is
no need to open a separate account in the ledger. In case of Cash Book, only
one posting is required unlike in journal where two postings are required. Cash
Book is ruled like a ledger account.
In the words of Spicer and Pegler, “Cash book
is actually a ledger account but owing to the large number of entries made
therein, it is kept in a separate book called cash book, which is also used as
a book of prime entry.”
|
Cash
Book as Journal |
Cash
Book as Ledger |
|
1. All cash
transactions are first recorded in cash book like a journal. 2. Like
Journal, in cash book also, transactions are recorded in chronological order. 3. Transactions
recorded in cash book are ultimately posted to relevant accounts in the
ledger. |
1. Cash
book is maintained in account form (“T” form) like a ledger. 2. Like a
ledger, cash book too has debit and credit sides. 3. Like a
ledger accounts, cash and bank columns of cash book are periodically
balanced. |
Kinds
of Cash Book:
Cash Book serves both as a subsidiary
books as well as ledger. Depending upon the nature of business and the type of
cash transactions, various types of Cash books are used. They are:
a) Single Column Cash Book
b) Two Column Cash Book or Cash Book with cash
and discount columns.
c) Three Columnar Cash Book or Cash Book with
cash, bank and discount columns.
d) Petty Cash Book.
a) Single column
Cash Book: Simple Cash Book has only one amount column on
each side. This book serves the purpose of cash account. It is suited to concerns
which have only cash transactions.
b) Two-column
Cash Book: Two-column Cash Book has two amount columns.
One for cash and another for Bank on each side. This book serves the purpose of
cash account as well as Bank account It is suited to concerns which have cash
transactions and banking transactions. There may be a two-column cash book
containing cash column and discount column also.
c) Three-column
Cash Book: Three-column Cash Book is prepared when there
are a large number of cash and banking transactions. This Cash Book has three
amount columns on each side namely cash column, bank column and discount
column.
d) Petty Cash
Book: In order to make the task of the cashier easy, a petty cashier is
appointed and handed over a small sum of money. He meets out small payments
like stationery postage, conveyance, cartage etc. At the end of the given
period, the petty cashier submits the account to the cashier who reimburses him
for payments.
Trade
Discount and Cash Discount
Trade discount is an allowance or concession
granted by the producers to the wholesalers or by the wholesalers to the
retailers on bulk purchase. Trade discount is normally deducted in the purchase
book, sales book or returns books, and the net amount is posted to the ledger
accounts.
Cash discount is a deduction allowed from
amount receivable from a credit customer on his paying the same within a
specified time. This cash discount is always associated with payment .A firm
may allow cash discount when it receives payment from customers and may receives
cash discount when it makes payment to suppliers.
Difference
between Trade Discount and Cash Discount
|
Trade Discount |
Cash Discount |
|
a) It
helps the retailers to make some profit. b) It
allowable at time of sale cash credit c) Only
retailers are entitled to get it. d) It is
calculated at a given rate on the published price. e) It is
not generally accounted for. |
a) It
encourages the debtors to pay within specified time b) It is
allowed only at time of cash receipt or cash payment. c) All
categories of costumers are entitled to get it. d) It
calculated at a given late on the net amount payable. e) It is
accounted. |
Journal Proper and examples of
transactions recorded in Journal Proper
Journal
proper is book of original entry (simple
journal) in which miscellaneous credit transactions which do not fit in any
other books is recorded. It is also called miscellaneous journal. This book
is used to record all the residual transactions which cannot find place in any
of the subsidiary books. While recording, the entries are made in the journal
covering both the aspects of the transaction. The
form and procedure for maintaining this journal is the same that of simple
journal.
The following are some of the examples of
transactions which are entered in this book:
a)
Opening
entries: When a businessman wants to open the
book for a new year, it is necessary to journalise the various assets and
liabilities before the new accounts are opened in the ledger. The journal
entries so passed are called “opening entries".
b) Closing entries: At the close of the accounting period balances from the various
accounts are transferred in order to balance the books of accounts. Thus, this
process of transferring balances of the trading and profit and loss account at
the end of year is called closing the books and entries passed at that time are
called closing entries.
c)
Adjusting
entries: Modification of the accounts at the
end of an accounting period is called adjustments. If there be any event
affecting the related period of accounts but left out of the books, the same
should be incorporated in the books before the preparation of the final
accounts. This is done by means of adjusting entries through the journal
proper.
d) Transfer entries from one account to another
account: Such entries are the entries which
are passed in order to transfer one account to another account.
e) Rectification entries: When an error is detected in the books, the same is
rectified through an entry in the journal proper which is called rectification
entry.
f) Entries for
rare transactions: Journal
proper is used for rare transactions.
g)
Entries for which there is no special journal: When the transactions cannot be recorded in the above
Trial Balance – Meaning, Objectives and Features
After posting the accounts in the Ledger, a
statement is prepared to show separately the debit and credit balances and to
check the arithmetic accuracy of the accounts of a certain periods such a
statement is known as the Trial
Balance.
The agreement of a Trial balance ensures
arithmetical accuracy only. A concern
can prepare Trial balance at any time, but its preparation as on the closing
date of an accounting year is compulsory.
According to M.S. Gosav “Trial balance is a
statement containing the balances of all ledger accounts, as at any given date,
arranged in the form of debit and credit columns placed side by side and
prepared with the object of checking the arithmetical accuracy of ledger
postings”.
Objectives
of trial balance
a)
To Ascertain the
Arithmetical Accuracy of Ledger Accounts.: The agreement
of a Trial balance ensures arithmetical accuracy of books of books of accounts.
b)
To help in preparing
Final Accounts: Financial statements are normally prepared on the basis of the
Trial Balances.
c)
Summary of Each
Account: The trial balance offers a summary of the Ledger. The ledger may
have to be referred to only when more detail is required in respect of an
account.
d)
To Help in Locating
Errors: The Trial Balance helps in locating errors in books-keeping work.
Features of trial balance
The following are the important features of
Trial balance:
a)
A Trial balance is prepared as on a specified
date.
b)
It contains a list of all ledger account
including cash account.
c)
It may be prepared with the balances or totals
of Ledger accounts.
d)
Total of the debit and credit amount columns
of the Trial balance must tally.
e)
Tallying of Trial balance is not a conclusive
profit of accuracy of accounts.
Uses and limitations of trial balance
The uses
of the trial balance as follows:
a)
It provides a check on the accuracy of the
ledger account balances, ensuring that entries have been made correctly.
b)
It proves the arithmetical accuracy of
accounts.
c)
It makes preparation of the final accounts
easier.
d)
It is the connecting link between the ledger
accounts and the financial statements.
e)
It summarises the data. Trial balance reduces
the large number of personal accounts into sundry debtors and sundry creditors.
Limitations
of trial balance
a)
The Trial balance can be prepared only in
those concerns where double entry system of book- keeping is adopted. This
system is too costly.
b)
A Trial balance is not a conclusive proof of
the arithmetical accuracy of the books of account.
c)
It the Trial balance is wrong, the subsequent
preparation of Trading, P&L Account and Balance Sheet will not reflect the
true picture of the concern.
METHODS OF PREPARING TRIAL
BALANCE
A Trial balance
refers to a list of the ledger balances as on a particular date. It can be
prepared in the following manner:
1.
Total Method:
According to this method, debit total and credit total of each account of
ledger are recorded in the Trial balance.
2.
Balance Method:
According to this method, only balance of each account of ledger is recorded in
Trial balance. Some accounts may have debit balance and the other may have
credit balance. All these debit and credit balances are recorded in it. This
method is widely used.
3.
Compound Method:
This method presents both the balance and total method in the same trial
balance. There are four columns for balances and totals.
Types of Errors in Trial Balance
A. Errors
of Commission: These are the errors which are committed due to the wrong
posting of wrong transaction, wrong totaling or balancing of the accounts,
wrong casting of the subsidiary books. Such errors are called Errors of
Commission.
B. Errors
of Omission: The errors of omission may be committed at the time of recording
the transaction in the books of original entry or while posting to the ledger.
These can be of two types:
i) Errors
of complete omission
ii) Errors
of partial commission
When a
transaction is completely omitted from recording in the books of original
record, it is an error of complete omission. When a transaction is partially
omitted from posting in ledger, it is an error of partial omission.
C. Error of principle: Accounting entries are recorded as per the
generally accepted accounting principles. If any of these principles are
violated or ignored, errors resulting from such violation are known as errors
of principle. An error of principle may occur due to incorrect classification of
expenditure or receipt between capital and revenue. 1998, 2007
D.
Compensating errors: When two or more errors are committed in such a way that
the effect of these errors on the debits and credits of accounts is nil, such
errors are called compensating errors. Such errors do not affect the tally of
the trial balance.
Trial balance
disclosed some of the errors and does not disclosed some other errors. This is
given below.
A) Errors disclosed by the
Trial Balance
i)
Wrong totaling of
subsidiary books
ii)
Posting of an
amount on the wrong side
iii) Omission to post an amount into ledger
iv) Double posting or omission of posting
v)
Posting wrong
amount
vi) Error in balancing
B) Errors
not disclosed by the Trial Balance
i)
Error of
principle
ii)
Error of omission
iii)
Errors of
Commission
iv)
Recording wrong
amount in the books of original entry
v)
Compensating
errors
Suspense Account and Its utility in preparing
Trial Balance
Suspense: If the
trial balance does not tally due to the existence of one sided errors
accountant has to carry forward his accounting process prepare financial
statements. The accountant tallies his trial balance by putting the difference
on the shorter side as “suspense account”.
Utility of Suspense Account: The main use of suspense account is to facilitate the preparation of financial statements. Later on errors affecting the trial balance are located; rectification entries are passed through the suspense account.
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