Preparation of Journal

Single Entry Book keeping

Maintained by small businesses Records only the bare essentials
E.g. cash, accounts receivable, accounts payable and taxes

Assets, inventory, expenses, revenues & other essential elements may not be recorded. Inadequate except where operations are simple and volume of activity is low

Disadvantages
Data may not be available for effectively planning and controlling the business.

DEFINITION OF JOURNAL
A book of prime entry where the accounts to be debited and that to be credited are specified together, respectively, with explanation for the entry called the narration, before being posted in the ledger, in a chronological order.

Basic Accounting Rules: 1. DEBIT WHAT COMES IN, CREDIT WHAT GOES OUT. 2. DEBIT THE RECEIVER, CREDIT THE GIVER. 3. DEBIT ALL EXPENSES AND LOSSES, CREDIT ALL INCOMES AND GAINS.

RULES REGARDING ASSETS LIABILITIES

INCREASE DECREASE

DEBIT CREDIT CREDIT DEBIT CREDIT

CREDIT DEBIT DEBIT CREDIT DEBIT

CAPITAL EXPENSES INCOMES & PROFITS

TYPES OF JOURNAL
Cash book- for recording all the cash transactions Purchase book- for recording all the credit purchases Sales Book- for recording all the credit sales Purchase return Book- for recording all the returns of goods purchased on credit.

Contd Sales return Book- for recording all returns of goods sold on credit. Bills Payable Book- for recording bills of exchange issued to the creditors in lieu of payments due to them. Bills Receivable book- for recording bills of exchange received from customers in lieu of

Contd Journal Proper- it is meant only for such transactions which cannot be recorded in any of the other subsidiary books.

Advantages of journal
Its use reduces the chances of error in the book of accounts Narration in journal entry enables one to understand the entry properly It provides a permanent record of all the transactions date wise and can thus help in auditing . Helps in locating errors when made.

Contd
When journal is subdivided into other subsidiary books it helps administration of office work as the work can be conveniently divided among different persons.

Limitations of journal
A single journal for a big business will become too big and unwieldy It fails to provide the information which normally will be required by a businessman. For example cash balance in hand at the end of each day

Ruling of journal
Date- in this column the date of transaction is entered. The year is written on the top only once. Particulars- In this column full details of a transaction is recorded. Accounts to be debited are indicated by the word Dr and the accounts to be credited start with the word To .

Contd
Narration- in every journal entry full explanation of the transaction is given. This will help to know in the future as to why was the account debited or credited. Ledger folio- in this column the page no or folio no of the ledger is recorded where it has been posted from the journal. Amount- two columns are prepared for the amount.

Some examples
Ram started business with Rs 20,000.
Cash A/c Dr 20,000 to capital A/c 20,000 (being business started with cash Rs 20,000)

Contd .
Goods purchased for cash Rs 6000.
Purchase A/c Dr 6000 To cash A/c 6000 (being goods purchased for cash)

Goods sold for cash Rs 8000

Cash A/c Dr 8000 To sales A/c 8000 (being goods sold for cash)

Ledger???
The ledger is the principle book of accounts where similar transactions relating to a particular persons or thing are recorded.

Example: If the manager of the company wants to know the total purchase for an accounting period, he can see the Purchasing Account instead in wasting time checking the whole Journal he can invest his time in other .

Sub-divisions of ledger:

Ledger

General Ledger

Debtors Ledger

Creditors Ledger

Debtors Ledger:
It may contain the all accounts of all the customers to whom goods have been sold on credit. Entries in this Ledger are made mostly from sales day books, sales returns book and cash book. This Ledger is also called Customers Ledger or sales Ledger.

Creditors Ledger: It may contain the all accounts of all the suppliers from whom goods have been purchased on credit. Entries in this Ledger are made mostly from purchase day books, purchase returns book and cash book. This Ledger is also called Suppliers Ledger or Purchase Ledger.

General Ledger:

It may contain the all the residual accounts mainly real and nominal accounts. This Ledger is also called Nominal Ledger.

Standard form of Ledger Account: T accounts are simplified representation of ledger accounts and is widely used. AT accounts is divided into two sides-the left hand side represents debit side the right hand side represents credit side Each side of the ledger has columns of varying sizes for the following: (a) Date (b) Particulars (c) Folio (d) Amount
Dr.
Date Particulars

Title of Accounts
Folio Rs. Date Particulars

Cr.
Folio Rs.

Running balance form of Ledger Account:

An alternative ruling of a ledger, which is generally adopted by commercial banks and some other business houses, is that the entire ledger is divided into six columns as under: (a) Date (b) Particulars (c) Folio (d) Dr.Amount (e) Cr. Amount (f) Balance
Bank Account
Date Particulars Folio Dr.Amount Cr.Amount Balance

Sequence and Numbering of a ledger Accounts:

Ledger accounts are generally arranged in some logical manner, such as assets first, followed by liabilities, owners equity, revenues and expenses. Again amongst assets, fixed assets are first followed by current assets etc. The number of accounts required by a business will depend on its size, the nature of its operation, and the policy of the management.

Sequence and Numbering of a ledger Accounts:

Account Title
Fixed Assets(1-15) Good Will Land Building Current Assets(16-25) Stock in Trade Sundry Debtors Bills Receivable Cash at Bank Liabilities(26-50) Bills Payable 26 01 02 03 16 17 18 19 Account Number

Posting:
The process of transferring of the debits and credits from the journal to the ledger accounts is called posting. Each amount in the debit column of the journal is posted by entering it on the debit side/column of an account in the ledger, and each amount in the credit column of the journal is posted by entering it on the credit side/column of an account in the ledger.

The Mechanics of posting:

JOURNAL
Cash A/c To Capital A/c (Being new capital introduced)

Dr. Rs. 10,000

Cr. Rs. 10,000

Dr. Date

Ledger Cash Account Particulars Rs. Date

10,000

Particular

Cr. Rs.

1995 To Capital A/c July 9

Similarly in the Capital Account:

Dr.
Date Particulars

Capital Account
Rs. Date
1995 July 9

Cr.
Particular Rs.
10,000

By Cash A/c

Balancing of Ledger Account:

Balance is the sum necessary to equalize the debit and credit totals of an accounts in a ledger to balanced ascertain the cumulative effect of the entries on the accounts. The balance is an accounting term which means the difference between the two sides of an account.

Where the total of debit side exceeds the total of the credit side, the account is said to have a debit balance Where the total of credit side exceeds the total of the credit side, the account is said to have a credit balance

The following steps are followed for balancing the accounts:

On a rough sheet of paper take the total of the two sides of the account concerned. Compute the difference of the total of two sides If the debit side total is more, put the difference on the credit side amount column, by writing the words in a particular column By Balance c/d. If the credit side total is more, put the difference on the debit side amount column, by writing the words in a particular column To Balance c/d.

 After putting the difference in the appropriate side of the account, add both the sides of the account. Draw a thin line above and below the total. Bring down the debit balance on the debit side by writing the words in particular column" To Balance b/d. Similarly bring down the credit balance on the credit side by writing the words in particular column " By Balance b/d.

Dr.
Date 1.9.05 8.9.05 Particulars To Capital A/C To Sales A/C

Cash Account
J.F Rs. Date Particulars

Cr.
J.F Rs. 1000 2000 4000

3000 5.9.05 By Purchase A/c 4000 9.9.05 By wages A/c 15.9.05 By Balance c/d 7000 4000

30.9.05 To Balance b/d

DEFINITION OF TRIAL BALANCE

According to Carter , Trial Balance is the list of debit and credit balances , taken out from ledger . It also includes the balances of cash and bank taken from cash book.

FEATURES OF A TRIAL BALANCE

1) It is a list of balances of all ledger accounts and the cash book . 2) It is just a statement , and not an account 3) It is neither a part of double entry system , nor does it appear in the actual books of accounts . It can be prepared at any time during the accounting period .

5) It is always prepared on a particular date and not for a particular period . 6) It is prepared to check the arithmetical accuracy of the ledger accounts . 7) If the books are arithmetically accurate , the total of all debit balances of a trial balance will be equal to the total of all credit balances . 8) A tallied Trial Balance is not a conclusive proof of the accuracy of the books of accounts

OBJECTIVES OF PREPARING TRIAL BALANCE

1) To ascertain the arithmetical accuracy of the ledger accounts . 2) To help in locating errors . 3) To obtain a summary of the ledger accounts . 4) To help in the preparation of Final Accounts .

PREPARATION OF A TRIAL BALANCE

There are two methods for the preparation of a trial balance

1) Balance Method 2) Total Amount Method

Trial Balance by Balance Method Trial Balance by Total Amount Method 1) A Trial Balance prepared by this method shows the balances of all the ledger accounts . A Trial Balance prepared by this methos shows the total amounts of debit items and the credit items in each ledger account instead of their balances .

2) A trial Balance prepared by this method considers only those accounts which show a balance . If an account shows no balance , it is not included in trial balance .

A Trial Balance prepared by this method considers all the accounts in the ledger .

3) It can be prepared only when all the ledger accounts have been balanced .

It can be prepared immediately after the completion of posting to the ledger

TYPES OF ERRORS
1)Errors affecting Trial Balance 2) Errors not affecting the Trial Balance

ERRORS AFFECTING TRIAL BALANCE

1. 2. 3. 4. 5. 6. 7. 8. 9. Posting only one aspect of the journal entry in the ledger Posting a journal entry to the wrong side of an account Posting of wrong amount in one account and correct in another Errors of Partial Omission Double posting in a single account Errors of totaling and balancing of accounts in the ledger . Omitting writing the balance of an account in the Trial Balance. Writing the balance in the wrong column of Trial Balance Totalling the Trial Balance wrongly

ERRORS NOT AFFECTING TRIAL BALANCE

1) Errors of Complete Omission

2) Errors of Commission Errors of recording, 3) Compensating Errors 4) Errors of Principle 5) Errors of posting the correct amount in the correct side but in the wrong account

Errors of Omission
If a transaction is not recorded in the books of account or a transaction recorded in the journal is not posted in the ledger. Partial Omission e.g. credit sales recorded in sales account but not in party account.

Errors of Comission
Errors of Recording transaction is incorrectly recorded in the books of original entry Errors in Casting when a mistake is committed in totaling. Error of Posting information recorded in journal incorrectly entered in the ledger

Error of Principle
When a transaction is recorded in contravention of accounting principle. e.g. expenditure on installation of machinery being treated as revenue expenditure rather than capital expenditure.

Compensating Errors
Those errors the effect of which is nullified by another error of equal amount. e.g. Shyam s account debited with Rs 100 instead of Rs 1000 while Ram s account debited with Rs 1000 instead of Rs 100.