Accounting Process - Journal, Ledger and Trial Balance [Financial Accounting Notes BCOM 2nd SEM NEP 2023]

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 NOTES
UNIT 1
1. Preparation of Trial Balance and Preparation of Financial Statements
 
UNIT 2
Part 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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