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ACCOUNTING

Accounting is the art of recording, classifying and summarizing the financial transactions
and interpreting the results.Accounting involves the following functions.

RECORDING of transactions.This is done in a book called journal.

CLASSIFYING the transactions.This is done in a book called Ledger.
SUMMARISING the transactions.This includes preparation of trial balance, profit
and loss account and Balance sheet of the business.
INTERPRETING the results.This involves computation of various accounting
ratios etc to know about the liquidity, solvency and profitability of the business.

JOURNAL

The Journal records all daily transactions of the business in the order in which they
occur.A journal can be defined as the book containing chronological recording of
transactions.It is the book in which transactions are recorded first in a Double entry
system.The process of recording transactions in a journal is called Journalising.

The proforma of a journal is given below.

JOURNAL

DATE PARTICULARS L.F DEBIT(Rs) CREDIT (Rs)

(1) (2) (3) (4) (5)

1.DATE-The date in which transaction was entered is recorded here.

2.PARTICULARS-Details regarding accounts to be debited and credited is recorded
here.
3.L.F-It means Ledger Folio.The ttransactions entered in Journal are later posted to a
Ledger.
4.DEBIT-In this column amount to be debited is entered.
5.CREDIT-In this column amount to be credited is shown.

RULES OF DEBIT AND CREDIT

The transactions are entered in the Journal based on rules of debit and credit.For this
purpose business transactions are classified in to 3 categories.

1) Personal Account Transactions relating to persons.

2) Real Account Transactions relating to Properties and Assets.
3) Nominal Account- Transactions relating to income and expenses.

Notes by Swapnesh.S
Lecturer-Mechanical
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PERSONAL ACCOUNTS: Personal accounts include the accounts of persons with

whom the business has dealings.
Eg-Mohans Account

The rule is

Debit the receiver

Credit the giver

REAL ACCOUNTS-Real accounts deals with properties and assets.

Eg-Cash Account, Furniture account

Debit what comes in

Credit what goes out

NOMINAL ACCOUNTS-These accounts are opened in the books to simply explain the
nature of transactions.They do not really exist.

Eg- Rent Account, Salary Account

Debit all expenses and losses

Credit all incomes and gains

ACCOUNTS

PERSONAL REAL NOMINAL

EXPENSES INCOMES
NATURAL ARTIFICIAL REPRESEN TANGIBLE INTANGIBLE AND AND GAINS
-TATIVE LOSSES
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The Ledger Folio column in the Journal is used at the time when debits and credits are
posted to the Ledger.The page number of the Ledger on which then posting has been
done is mentioned in the L.F column of the Journal.

RELATION SHIP BETWEEN JOURNAL AND LEDGER

The transactions are recorded first of all in the Journal and and then they are
posted in to the Ledger.Journal is the book of first or original entry, while Ledger
is a book of second entry.
Journal records transactions in chronological order,while Ledger records
transactions in an analytical order.
Journal is more reliable as compared to Ledger since it is the book in which entry
is passed first.

RULES REGARDING POSTING

Separate accounts should be opened in the Ledger for posting transactions

relating to different accounts recorded in the Journal. For example separate
accounts may be opened for Sales, Cash, Purchase etc.
The concerned account which has been debited in the Journal should also be
debited in the Ledger.
The concerned account which has been credited in the Ledger should also be
credited in the Ledger.

PROFORMA OF A LEDGER

NAME OF ACCOUNT
Dr. Cr.
DATE PARTICULARS Rs DATE PARTICULARS Rs
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TRIAL BALANCE

The various debit balances and credit balances are put down in a statement called Trial
balance.Trial balance is a statement containing various ledger balances on a particular
date.Trial balance represents the summary of transactions during a period.

PROFORMA OF A TRIAL BALANCE

PARTICULARS Debit ( Rs.) Credit ( Rs.)

OBJECTIVES OF PREPARING THE TRIAL BALANCE

Checking the arithmetical accuracy of the accounting entries.According

to dual aspect concept for every debit there must be an equivalent credit.
Basis of financial statements.Trial balance forms the basis of preparing the
financial statements such as balance sheet.
Summarized Ledger.The entire Ledger is summarized in the form of Trial
Balance.

Q.1 Journalise the following transactions.Post them in a Ledger and Prepare a trial
balance.

Ram started business with a capital of Rs.10000/-

He Purchased goods from Mohan on credit Rs.2000/-
He paid cash to Mohan Rs.1000/-
He sold gods to Suresh Rs.2000/-
He received cash from Suresh Rs.3000/-
He further purchased goods from Mohan Rs.2000/-
He Paid cash to Mohan rs.1000/-
He further sold goods to Suresh Rs.2000/-
He received cash from Suresh Rs.1000/-
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Answer to Q1
JOURNAL

DATE PARTICULARS L.F DEBIT CREDIT

(Rs) (Rs)
Cash Account Dr. 10,000/-
To Capital Account 10,000/-
( Being commencement of Business)

Purchase Account Dr. 2,000/-

To Mohan Account 2000/-
( Being Purchase of goods on credit)

Mohan Account Dr. 1000/-

To Cash Account 1000/-
( Being payment of cash to Mohan)

Suresh Account Dr. 2,000/-

To Sales Account 2000/-
( Being goods sold to Suresh)

Cash Account Dr. 3,000/-

To Suresh Account 3000/-
( Being cash received from Suresh)

Purchase Account Dr. 2,000/-

To Mohan Account 2000/-
( Being Purchase of goods from Mohan)

Mohan Account Dr. 1,000/-

To Cash Account 1000/-
( Being payment of cash to Mohan)

Suresh Account Dr. 2,000/-

To Sales Account 2000/-
( Being goods sold to Suresh)

Cash Account Dr. 1,000/-

To Suresh Account 1000/-
( Being cash received from Suresh)
24,000/- 24,000/-
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LEDGER

Cash Account
Dr. Cr.
DATE PARTICULARS Rs DATE PARTICULARS Rs
To Capital A/c 10000/- By Mohan 1000/-
To Suresh 3000/- By Mohan 1000/-
To Suresh 1000/- By balance c/d 12000/-
14,000 14,000/-
To Balance b/d 12,000/-

Capital Account
Dr. Cr.
DATE PARTICULARS Rs DATE PARTICULARS Rs
To Balance c/d 10000/- By Cash A/c 10000/-
10000/- 10000/-

by balance b/d 10000/-

Purchases Account
Dr. Cr.
DATE PARTICULARS Rs DATE PARTICULARS Rs
To Mohan 2000/- By balance c/d 4000/-
To Mohan 2000/-
4,000 4,000/-

To Balance b/d 4000/-

Mohan Account
Dr. Cr.
DATE PARTICULARS Rs DATE PARTICULARS Rs
To Cash 1000/- By Purchase 2000/
To Cash 1000/- By Purchase 2000/
To Balance c/d 2000/-
4000/- 4,000/
By balance b/d 2000/-

Mohan Account
Dr. Cr.
DATE PARTICULARS Rs DATE PARTICULARS Rs
To Cash 1000/- By Purchase 2000/
To Cash 1000/- By Purchase 2000/
To Balance c/d 2000/-
4000/- 4,000/
By balance b/d 2000/-
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Suresh Account
Dr. Cr.
DATE PARTICULARS Rs DATE PARTICULARS Rs
To Sales 2000/- By cash 2000/
To Sales 2000/- By cash 2000/
4000/- 4,000/

Sales Account
Dr. Cr.
DATE PARTICULARS Rs DATE PARTICULARS Rs
To Balance c/d 4000/- By Suresh 2000/
By Suresh 2000/
4000/- 4,000/

By balance b/d 4000/-

TRIAL BALANCE as on ----------

PARTICULARS Debit ( Rs.) Credit ( Rs.)

Cash Account 12000/-

Capital Account 10000/-
Purchase Account 4000/-
Sales Account 2000/-
Mohan Account 4000/-

16000/- 16000/-
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FINAL ACCOUNTS

Every businessman is interested in knowing two facts.

Whether he has earned a profit or suffered a loss during the time period
What is his current financial position

The determination of profit or loss is done by preparing a Trading and Profit and loss
account.The financial position is judged by preparing the balance sheet of the
business.These two statements are together known as final accounts.

Trading and Profit and loss account is prepared in two parts.

1) Trading Account
2) Profit and Loss Account

TRADING ACCOUNT

Trading Account gives overall results of trading ( Purchasing and selling of goods).The
profit disclosed by the trading account is called Gross profit.

The Trading account can be prepared in the following format.

Trading Account for the period --------- to ------------

Dr. Cr.
PARTICULARS Rs PARTICULARS Rs
To opening stock By sales less returns
To Purcase Less Returns By Closing stock
To direct expenses

Importance of Trading Account

Trading Account provides following information to a businessman regarding his

business.
Upper limit at which he should keep his operating expenses
Gross profit ratio can be calculated and year by year performance can be
compared
Stock figures can be compared. This helps in preventing unnecessary holding of
inventory
In case of new products selling price can be calculated.