EQUATION, RULES, PREPARATION OF JOURNAL AND LEDGER NOTES

Any economic transaction or event of a business which can be expressed in monetary terms should be recorded. Traditionally, accounting is a method of collecting, recording, classifying, summarizing, presenting and interpreting financial data of an economic activity. The series of business transactions occurs during the accounting period and its recording is referred to an accounting process/ mechanism. An accounting process is a complete sequence of accounting procedures which are repeated in the same order during each accounting period. Therefore, accounting process involves the following steps :

 Identification of Transaction : In accounting, only financial transactions are recorded. A financial transaction is an event which can be expressed in terms of money and which brings change in the financial position of a business enterprise. An event is an incident or a happening which may or may not bring any change in the financial position of a business enterprise. Therefore, all transactions are events but all events are not transactions. A transaction is a complete action, to an expected or possible future action. In every transaction, there is movement of value from one source to another. For example, when goods are purchased for cash, there is a movement of goods from the seller to the buyer and a movement of cash from buyer to the seller. Transactions may be external (between a business entity and a second party, e.g., goods sold on credit to Hari or internal (do not involve second party, e.g., depreciation charged on the machinery).

Illustration 1

State with reasons whether the following events are transactions or

not to Mr. Nikhil, Proprietor, Delhi Computers

  • Nikhil started business with capital (brought in cash)Rs. 40,000.
  • Paid salaries to staff Rs. 5,000.
  • Purchased machinery for Rs. 20,000 in cash.
  • Placed an order with Sen & Co. for goods for Rs. 5,000.
  • Opened a Bank account by depositing Rs. 4,000.
  • Received pass book from bank.
  • Appointed Sohan as Manager on a salary of Rs. 4,000 per month.

(viii)Received interest from bank Rs. 500.

(ix)       Received a price list from Lalit.

Solution :

Here, each event is to be considered from the view point of Mr. Nikhil’s business. Those events which will change the financial position of the business of Mr. Nikhil, should be regarded as transaction.

  • It is a transaction, because it changes the financial position of Mr. Nikhil’s business. Cash will increase by Rs. 40,000 and Capital will increase by Rs. 40,000.
  • It is a transaction, because it changes the financial position of Mr. Nikhil’s business. Cash will decrease by Rs. 5,000 and Salaries (expenses) will increase by Rs. 5,000
  • It is a transaction, because it changes the financial position of Mr. Nikhil’s business. Machinery comes in and cash goes out.
  • It is not a transaction, because it does not change the financial position of the business.
  • It is a transaction, because it changes the financial position of the business. Bank balance will increase by Rs. 4,000 and cash balance will decrease by Rs. 4,000.
  • It is also not a transaction, because it does not change the financial position of Mr. Nikhil.
  • It is also not a transaction, because it does not change the financial position of Mr. Nikhil.
  • It is a transaction, because it changes the financial position of Mr. Nikhil’sbusiness.
  • It is not a transaction, because it does not change the financial position of the business of Mr. Nikhil.
  1. Recording the transaction : Journal is the first book of original entry in which all transactions are recorded event-wise and date-wise and presents a historical record of all monetary transactions. Journal may further be divided into sub-journals as well.
  • Classifying : Accounting is the art of classifying business transactions. Classification means statement setting out for a period where all the similar transactions relating to a person, a thing, expense, or any other subject are grouped together under appropriate heads of accounts.
  1. Summarising : Summarising is the art of making the activities of the business enterprise as classified in the ledger for the use of management or other user groups i.e. sundry debtors, sundry creditors etc. Summarisation helps in the preparation of Profit and Loss Account and Balance sheet for a particular financial year.
  2. Analysis and Interpretation : The financial information or data is recorded in the books of account must further be analysed and interpreted so to draw meaningful conclusions. Thus, analysis of accounting information will help the management to assess in the performance of business operation and forming future plans also.
  3. Presentation or reporting of financial information : The end users of accounting statements must be benefited from analysis and interpretation of data as some of them are the “share holders” and other one the “stake holders”. Comparison of past and present statements and reports, use of ratios and trend analysis are the different tools of analysis and interpretation.

From the above discussion one can conclude that accounting is an

art which starts and includes steps right from recording of business transactions of monetary character to the communicating or reporting the results thereof to the various interested parties. For this purpose, the transactions are classified into various accounts, the description of which follows in the next section.

3.2     ACCOUNTING EQUATION

Dual concept states that ‘for every debit, there is a credit’. Every

transaction should have two-sided effect to the extent of same amount. This concept has resulted in accounting equation which states that at any point of time assets of any entity must be equal (in monetary terms) to the total of owner’s equity and outsider’s liabilities. In other words, accounting equation is a statement of equality between the assets and the sources which finance the assets and is expressed as : Assets =  Sources of Finance

Assets may be tangible e.g. land, building, plant, machinery,

equipment, furniture, investments, cash, bank, stock, debtors etc. or intangible e.g. patent rights, trade marks, goodwill etc.,

Sources include internal i.e. capital provided by the owner and

external i.e. liabilities. Liabilities are the obligations of the business to others/ outsiders. The above equation gets expanded.

Assets = Liabilities + Capital

All transactions of a business can be referred to this equation :

Assets = Liabilities + Owner’s equity

To further explain the transaction of revenues, expenses, losses and

gains, the equation can be expanded thus :

Assets + Expenses = Liabilities + Revenue + Owner’s equity or       Assets = Liabilities + (Revenue – Expenses) + Owner’s equity or       Assets = Liabilities + Owner’s equity + Owner’s equity

(income) which ultimately becomes

Assets = Liabilities + Owner’s equity

Let us consider the facts of the following case, step by step, to

understand as to how the equation remains true even in changed circumstances.

 

Classification of Accounts

The classification of accounts is given as follows :

  1. Personal Accounts : Accounts which are related to individuals, firms, companies, co-operative societies, banks, financial institutions are known as personal accounts. The personal accounts may further be classified into three categories :
  • Natural Personal Accounts : Accounts of individuals (natural persons) such as Akhils’ A/c, Rajesh’s A/c, Sohan’s A/c are natural personal accounts.
  • Artificial Personal Accounts : Accounts of firms, companies, banks, financial institutions such as Reliance Industries Ltd., Lions Club, M/s Sham & Sons, Punjab National Bank, National College are artificial personal accounts.

iii) Representative Personal Accounts : The accounts recording transactions relating to limited expenses and incomes are classified as nominal accounts. But in certain cases (due to the matching concept of accounting) the amount on a particular date, is payable to the individuals or recoverable from individuals. Such amount (i) relates to the particular head of expenditure or income and (ii) represents persons to whom it is payable or from whom it is recoverable. Such accounts are classified as representative personal account e.g., Wages outstanding account, Pre-paid insurance account etc.

  1. Real Accounts : Real accounts are the accounts related to assets/properties. These may be classified into tangible real account and intangible real account. The accounts relating to tangible assets (which can be touched, purchased and sold) such as building, plant, machinery, cash, furniture etc. are classified as tangible real accounts. Intangible real accounts (which do not have physical shape) are the accounts related to intangible assets such as goodwill, trademarks, copyrights, patents etc.
  2. Nominal Accounts : The accounts relating to income, expenses, losses and gains are classified as nominal accounts. For example Wages Account, Rent Account, Interest Account, Salary Account, Bad Debts Accounts, Purchases; Account etc. fall in the category of nominal accounts.

3.3      RULES OF DEBIT AND CREDIT

Basically, debit means to enter an amount to the left side of an account

and credit means to enter an amount to the right side of an account. In the abbreviated form Dr. stands for debit and Cr. stands for credit. Both debit and credit may represent either increase or decrease depending upon the nature of an account.

The Rules for Debit and Credit are given below :

Types of Accounts Rules for Debit Rules for Credit
(a) For Personal Accounts Debit the receiver Credit the giver
(b) For Real Accounts Debit what comes in Credit what goes out
(c) For Nominal Accounts Debit all expenses Credit all incomes and
  and losses gains

Illustration 3 : How will you classify the following into personal, real and nominal accounts ?

  • Investments
  • Freehold Premises
  • Accrued Interest to Ram
  • Haryana Agro Industries Corporation
  • Janata Mechanical Works
  • Salary Account
  • Loose Tools Accounts (viii)Purchases Account
  • Corporation Bank Ltd.
  • Capital Account
  • Brokerage Account
  • Toll Tax Account
  • Dividend Received Account
  • Royalty Account
  • Sales Account

Solution :

Real Account : (i), (ii), (vii), (viii), (xv)

Nominal Account : (vi), (xi), (xii), (xiii), (xiv)

Personal Account : (iii), (iv), (v), (ix), (x)

3.4      MEANING AND FORMAT OF A JOURNAL

Journal is a historical record of business transactions or events. The word journal comes from the French word “Jour” meaning “day”. It is a book of original or prime entry written up from the various source documents. Journal is a primary book for recording the day to day transactions in a chronological order i.e. in the order in which they occur. The journal is a form of diary for business transactions. This is also called the book of first entry since every transaction is recorded firstly in the journal. The format of a journal is shown as follows :

Journal

Date Particulars L.F. Debit Credit
      (Rs.) (Rs.)
         
  • Date Column : This column shows the date on which the transaction is recorded. The year and month is written once, till they change.
  • Particular Column : Under this column, first the names of the accounts to be debited, then the names of the accounts to be credited and lastly, the narration (i.e. a brief explanation of the transaction) are entered.
  • F., i.e. Ledger Folio Column : Under this column, the ledger page number containing the relevant account is entered at the time of posting.
  • Debit amount Column : Under this column, the amount to be debited is entered.
  • Credit amount Column : Under this column, the amount to be credited is entered.

3.4.1 Meaning of Journalising

The process of recording a transaction in the journal is called

journalising. The various steps to be followed in journalising business transactions are given below :

Step 1 Ascertain what accounts are involved in a transaction.

Step 2 Ascertain what is the nature of the accounts involved.

Step 3 Ascertain which rule of debit and credit is applicable for each of the accounts involved.

Step 4 Ascertain which account is to be debited and which is to be credited.

Step 5 Record the date of transaction in the ‘Date column’.

Step 6 Write the name of the account to be debited, very close to the left hand side i.e. the line demarcating the ‘Date column’ and the ‘Particulars column’) along with the abbreviation ‘Dr.’ on the same line against the name of the account in the ‘Particulars column’ and the amount to be debited in the ‘Debit Amount column’ against the name of the account.

Step 7 Write the name of the account to be credited in the next line preceded by the word ‘To’ at a few spaces towards right in the ‘Particulars column’ and the amount to be credited in the ‘Credit Amount column’ against the name of the account.

Step 8 Write ‘Narration’ (i.e. a brief description of the transaction) within brackets in the next line in the ‘Particulars column’.

Step 9 Draw a line across the entire ‘Particulars column’ to separate one Journal Entry from the other.

Advantages of Journal

  1. The transactions are recorded in journal as and when they occur so the chances of error is minimized.
  2. It help in preparation of ledger.
  3. Any transfer from one account to another account is made through Journal.
  4. The entry recorded in journal are self explanatory as it includes narration also.
  5. It can record any such transaction which cannot be entered in any other books of account.
  6. Every transaction is recorded in chronological order (date wise) so the chances of manipulations are reduced.
  7. Journal shows all information in respect of a transaction at one place.
  8. The closing balances of previous year of accounts related to assets and liabilities can be brought forward to the next year by passing journal entry in journal.

Illustration 4 : From the following transactions of Nikhil, find out the nature of accounts and also state which account should be debited and which should be credited :

  1. Rent paid
  2. Interest received iii) Purchased furniture for cash iv) Machinery sold in cash v)          Outstanding salaries vi)      Paid to Surinder Solution :

Analysis of Transactions

Transaction Accounts Nature of Debit/
  Involved Accounts Credit
i) Rent paid Rent Account Nominal Account Debit
  Cash Account Real Account Credit
ii) Interest Received Cash Account Real Account Debit
  Interest Account Nominal Credit
iii) Purchased furniture for cash Furniture Account Real Account Debit
  Cash Account Real Account Credit
iv) Machinery sold in cash Cash Account Real Account Debit
  Machinery Account Real Account Credit
v) Outstanding Salary Salary Account Nominal Account Debit
  Outstanding Salary Account Personal Account Credit
vi) Paid to Surinder Surinder’s Account Personal Account Debit
  Cash Account Real Account Credit

Compound Journal Entries

When more than two accounts are involved in a transaction and the

transaction is recorded by means of a single journal entry instead of passing several journal entries, such single journal entry is termed as ‘Compound Journal Entry’.

Opening Entry

A journal entry by means of which the balances of various assets,

liabilities and capital appearing in the balance sheet of previous accounting period are brought forward in the books of the current accounting period, is known as ‘Opening Entry’. While passing an opening entry, all assets accounts (individually) are debited and all liabilities accounts (individually) are credited and the Net worth (i.e. excess of assets over liabilities) is credited to Proprietor’s Capital Account (in case of a proprietary concern) or Partners’ Capital Accounts (in case of a partnership concern).

Goods Account

In accounting the meaning of goods is restricted to only those articles

which are purchased by a businessman with an intention to sell it. For example, if a businessman purchased typewriter, it will be goods for him if he deals in typewriter but if he deals in other business say clothes then typewriter will be asset for him and clothes will be goods.

Sub-Division of Goods Accounts

The goods account is not opened in accounting books. In place of

goods account the following accounts are opened in the books of accounts :

Purchases Account :  This is opened for goods purchased on cash and credit.

Sales Account : This account is opened for the goods sold on cash and credit.

Purchase Returns Account or Return Outward Account : This account is opened for the goods returned to suppliers.

Sales Returns Account or Return Inward Account : This account is opened for the goods returned by customers.

 

IMPORTANT CONSIDERATIONS FOR RECORDING THE BUSINESS TRANSACTIONS

  • Trade Discount

Trade discount is usually allowed on the list price of the goods. It may be

allowed by producer to wholesaler and by wholesaler to retailer for purchase of goods in large quantity. It is not recorded in the books of account and entry is made only with the net amount paid or received

  • Cash Discount

Cash discount is a concession allowed by seller to buyer to encourage

him to make early cash payment. It is a Nominal Account. The person who allows discount, treat it as an expense and debits in his books and it is called discount allowed and the person who receives discount, treat it as an income and it is called discount received and credited in his books of account as “Discount Received Account.”

  • Goods distributed as free samples

Some times business distribute goods as free samples for the purpose

of advertisement. In this case, Advertisement Account is debited and Purchases Account is credited

  • Interest on capital

Interest paid on capital is an expense. Therefore interest account

should be debited. On the other hand the capital of the business increases. So the capital account should be credited

  • Interest charged on Drawings

If the interest is charged on drawings then it will be an increase in

the income of business, so interest on drawings will be credited. On the other hand there will be increase in drawings or decrease in Capital.  So Drawings Account will be debited

  • Depreciation charged on Fixed Assets

Depreciation is the gradual, permanent decrease in the value of an

asset due to wear and tear and many other causes

  • Bad Debts

Sometimes a debtor of business fails to pay the amount due from

him. Reasons may be many e.g. he may become insolvent or he may die. Such irrecoverable amount is a loss to the business. To record this following entry will be passed :

Bad Debts Account                               Dr.

To Debtor’s Account

  1. Bad Debts Recovered

When any amount becomes irrecoverable from any costumer or

debtor his account is closed in the books. If in future any amount is recovered from him then his personal account will not be credited because that does not exist in the books. So the following entry is passed :

Cash Account                                                 Dr.

To Bad Debts Recovered Account

  1. Purchase and Sale of investment

When business has some surplus money it may invest this amount is

shares, debentures or other types of securities. When these securities are purchased, these are recorded at the purchase price paid. At the time of sale of investment the sale price of an investment is recorded in the books of accounts.

The following entry is passed to record the purchase of investment :

Investment Account                              Dr.

To Cash Account

In case of sale of these securities the entry will be :

Cash Account                                       Dr.

To Investment Account

  1. Loss of Goods by Fire/Accident/theft

A business may suffer loss of goods on account of fire, theft or

accident. It is a business loss and a nominal account. It also reduces the goods at cost price, and increases the loss/expenses of the business. The entry will be passed as :

Loss by fire/Accident/theft Account         Dr.(for loss)

Insurance Company Account Dr. (for insurance claim admitted) To Purchases Account

  1. Income Tax Paid

Income Tax paid should be debited to Capital Account or Drawings Account and credited to Cash Account in case of sole proprietorship and partnership firms. The reason behind this is that income tax is a personal expense for the sole trader and partners because it is paid on income of proprietor. The entry will be as follows :

Capital Account/Drawing Account                            Dr.

To Cash Account

  1. Bank Charges

Bank provide various services to their customers. Bank deducts some

charges by debiting the account of customers. It is an expense for the business. To record this, Bank charges account is debited and bank account is credited in the books of customer.

  1. Drawings Account

It is a personal account of the proprietor. When the businessman

withdraws cash or goods from the business for his personal/domestic use it is called as ‘drawings’. Drawings reduce the capital as well as goods/cash balance of the business. The journal entry is  :

Drawings Account                       Dr.

To Cash Account

To Purchases Account

  1. Personal expenses of the proprietor

When the private expenses such as life insurance premium, income tax, home

telephone bill, tuition fees of the son of the proprietor etc. are paid out of the cash or bank account of business it should be debited to the Drawings Account of the proprietor.

  1. Sale of Asset/Property

When the asset of a business is sold, there may occur a profit or loss

on its sale. Its journal entry is :

  • In case there is a profit on sale of Property/Assets

Cash/Bank Account                                Dr.

To Asset/Property Account

To Profit on sale of Asset Account

  • In case of a loss on sale of asset
Cash/Bank Account Dr.
Loss on sale of Asset Account Dr.

To Asset Account

  1. Amount paid or Received on behalf of customer
    • When the business entity pays the amount on behalf of old reputed customers such as carriage in anticipation of recovering the same later on, carriage account should not be opened because carriage is not the expense of the seller. It should be debited/charged to customer’s Personal account.
    • When the business entity receives the amount on behalf of customers from the third party as mutually settled between the third party and the customer, the account of the third party/person making the payment should not be opened in the books of the receiving entity. The journal entry in the books of the entity is :

Cash/Bank Account                                        Dr.

To Customer/Debtor’s Account

  1. Amount paid on behalf of creditors

When the creditors/supplier instructs the business entity to make

payment on their behalf, the amount so paid should be debited to creditors account and liability of the business will decrease accordingly.

  1. The events affecting business but they do not involve any transfer/exchange of money for the time being, they would not be recorded in the financial books.
  2. Paid wages/installation charges for erection of machinery

Wages and installation charges are the expenses of nominal nature. But for erection of machinery no separate account should be opened for such expenses because these expenses are of capital nature and it will be merged/debited to the cost of assets i.e. machinery. The journal entry is:

Machinery Account                                        Dr.

To Cash/Bank Account (Being wages/installation charges paid for the erection of machinery)

3.5      LEDGER

Journal is a daily record of all business transactions. In the journal

all transactions relating to persons, expenses, assets, liabilities and incomes are recorded. Journal does not give a complete picture of the fundamental elements of book keeping i.e. properties, liabilities, proprietorship accounts and expenses and incomes at a glance and at one place. Business transactions being recurring in nature, a number of entries are made for a particular type of transactions such as sales, purchases, receipts and payments of cash, expenses etc., through out the accounting year. The entries are therefore scattered over in the Journal. In fact, the whole Journal will have to be gone through to find out the combined effect of various transactions on a particular account. In case, at any time, a businessman wants to now :

  • How much he has to pay to the suppliers/creditors of goods ?
  • How much he has to receive from the customers ?
  • What is the total amount of purchases and sales made during a particular period?
  • How much cash has been spent/incurred on various items of expenses such as salaries, rent, carriage, stationery etc.
  • What is the amount of profit or loss made during a particular period ?
  • What is the financial position of the unit on a particular date ?

The above mentioned information cannot be easily gathered from the

journal itself because the details of such information is scattered all over the journal. It is thus of dire need to get a summarised/grouped record of all the transactions relating to a particular person, or a thing or an expenditure to take managerial decisions. The mechanics of collecting, assembling and summarising all transactions of similar nature at one place can better be served by a book known as ‘ledger’ i.e. a classified head of accounts.

Ledger is a principal book of accounts of the enterprise. It is rightly

called as the ‘King of Books’. Ledger is a set of accounts. Ledger contains the various personal, real and nominal accounts in which all business transactions of the entity are recorded. The main function of the ledger is to classify and summarise all the items appearing in Journal and other books of original entry under appropriate head/set of accounts so that at the end of the accounting period, each account contains the complete information of all transaction relating to it. A ledger therefore is a collection of accounts and 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 shows their net effect.

3.5.1 Relationship between Journal and Ledger

Journal and Ledger are the most useful books kept by a business

entity. The points of distinction between the two are given below :

  • The journal is a book of original entry where as the ledger is the main book of account.
  • In the journal business transactions are recorded as and when they occur i.e. date-wise. However posting from the journal is done periodically, may be weekly, fortnightly as per the convenience of the business.
  • The journal does not disclose the complete position of an account. On the other hand, the ledger indicates the position of each account debit wise or credit wise, as the case may be. In this way, the net position of each account is known immediately.
  • The record of transactions in the journal is in the form of journal entries whereas the record in the ledger is in the form of an account.

Utility of a Ledger

The main utilities of a ledger are summarised as under :

(a)      It provides complete information about all accounts in one book.

(b)  It enables the ascertainment of the main items of revenues and expenses

(c)    It enables the ascertainment of the value of assets and liabilities.

(d)         It facilitates the preparation of Final Accounts.

Format of a Ledger Account

A ledger account can be prepared in any one of the following two

forms:

Form 1

Name of the Account …………..

Dr.                                                                                                          Cr.

Date Particulars Journal Amount Date Particulars Journal Amount
    Folio (Rs.)     Folio (Rs.)
               

Form 2

Name of the Account……………

Date Particulars Journal Debit Credit Dr./Cr. Balance
    Folio Amount Amount   Rs.
      Rs. Rs.    
             

3.5.2 Posting

Posting refers to the process of transferring debit and credit amounts

from the Journal or subsidiary books to the respective heads of accounts in the ledger. Journal will have at a minimum of one debit and one credit for each transaction. The ledger will have either a debit or a credit for each account used in the Journal. Posting may be done daily, weekly fort nightly or monthly according to the convenience and requirements of the business, but care should be taken to complete it before the preparation of annual financial statements.

3.5.3 Procedure/Rules of Posting

The following rules should be followed while posting business

transactions to respective accounts in the ledger from the journal :

  • Enter the date and year of the transaction in the date column.
  • Open separate account in the ledger for each person, asset, revenue, liability, expense, income and loss appearing in the Journal.
  • The appropriate/relevant account debited in the Journal will be debited in the ledger, but the reference should be given of the other account which has been credited.
  • Similarly, the account credited in the Journal should be credited in the ledger, but the reference has to be given of the other account which has been debited in the Journal.
  • The debit posting should be prefixed by the word ‘To’ and credit posting should be prefixed by the word ‘By’.

In the Journal Folio (J.F.) column the page number of the book of original entry (Journal) is entered.

 

Balancing of an Account

After transferring the entries from Journal to the ledger, the next

stage is to ascertain the net effect of all the transactions posted to relevant account. When the posting is completed, most of the accounts may have entries on both sides of the accounts i.e. debit entries and credits entries. The process of finding out the difference between the totals of the two sides of a Ledger account is known as balancing and the difference of the total debits and the total credits of accounts is known as balance.

If the total of the credit side is bigger than the total of the debit side,

the difference is known as credit balance. In the reverse case, it is called debit balance.

Steps for Balancing Ledger Account

Ledger accounts may be balanced as and when it is required. The

balances of various accounts are ascertained as under :

  1. Make the total of both sides of an account in a worksheet.
  2. Write down the higher amount on the side obtained e.g. if the total of the debit side is 6,000 and the credit side is 5,500, the amount Rs. 6,000 is first inserted in the total on the debit side.
  3. Also write down the same total on the other side of the account i.e. the total of Rs. 6,000 is written against the total on the credit side also.
  4. Find out the difference between the two sides of the account. In this example debit side is more than credit side; therefore, there is a debit balance of Rs. 500.
  5. This debit balance of Rs. 500 is to be shown as “By Balance c/d” in the account on the credit side.
  6. Finally, the amount of the closing balance should be brought down as the opening balance at the beginning of the next day. Remember that if the opening balance is not written on the next day, the balancing is incomplete.

Balancing of different accounts

Balancing  is done either weekly, monthly, quarterly, biannually or

annually, depending on the requirements of the business concern.

Personal Accounts : Personal accounts are balanced regularly to know the amounts due to the persons or due from the persons. A debit balance of this account indicate that the person concerned is a debtor of the business concern and a credit balance indicates that he is a creditor of the business concern. If a personal account shows no balance at all, it means that the amount due to him or  due from him is settled in full.

Real Accounts : Real accounts are generally balanced at the end of the accounting year when final accounts are prepared and always shows debit balances. But, bank account may show either a debit balance or a credit balance.

Nominal Accounts : In fact, nominal accounts are not balanced, as they are to be closed by transferring them to the final accounts i.e. Trading and Profit and Loss Account.

 

SUMMARY

Accounting as an information system is the process of identifying, measuring and communicating the economic information of an organisation to its users who need the information for making decisions. An accounting process is a complete sequence with the recording of the transactions and ending with the preparation of the final accounts. Journal is concerned with the recording of financial transactions in an orderly manner, soon after their occurrence. The function of systematic analysis of the recorded data to accumulate the transactions of similar type at one place is performed by maintaining the ledger in which different accounts are opened to which transactions are posted.

3.7     KEYWORDS

Accounting equation: Accounting equations is an accounting formula expressing equivalence of the two expressions of assets and liabilities.

Journal: Journal is a tabular record in which business transactions are recorded in a chronological order.

Journal entry:  The record of the transaction in the journal is called a journal entry.

Ledger: Ledger is the principal book of accounts where similar transactions relating to a particular person or thing are recorded.

 

Posting: It is the process of transferring debit and credit amounts from the journal or subsidiary books to the respective heads of accounts in the ledger.

Compound journal entry: A journal entry which includes more than one debit or more than one credit is called compound journal entry.

3.8      SELF ASSESSMENT QUESTIONS

  1. What is meant by Journal ? Enumerate the steps in journalising.
  2. Define ledger. Explain the procedure for balancing a ledger account.
  3. What is meant by posting? How is posting made from the journal in the ledger? Explain with suitable examples.
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