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 aspect of an economic activity. The series of business transaction occurring 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 stages or steps starting from identification of business transaction and ending with reverse entries for prepaid and occurred expenses:

1.      Identification of transaction

A number of transactions take place in a business enterprise in a particular accounting year. Every transaction or event, which occurs, must influence the financial position of a business enterprise. These transactions may be external (between a business entity and second party) or internal (not involve second party) i.e. depreciation etc.

2.      Recording the transaction

Journal is the first book of original entry in which all transactions are recorded event wise and date-wise and presenting a historical record of all monetary transactions. Journal may further be divided into sub-journals as well.

3.        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.

4.        Summarizing

Summarizing 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. Summarization helps in the preparation of Profit and Loss Account and Balance Sheet for a particular fiscal year.

5.      Analysis and interpretation

The financial information or data is recorded in the books of account must further be analyzed 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.

6.    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 ‘stock-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.


An account is a summary of the relevant transactions at one place relating to a particular head. It records not only the amount of transaction but also their effect and direction. The classification of accounts is given below:

1.       Personal accounts

Accounts, which are related with accounts of individuals, firms, companies, co-operative societies, 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, and Sohan’s A/c are natural personal accounts.
  • Artificial personal accounts: Accounts of firms, companies, institutions such as Reliance Industries Ltd., Lions Club, M/s Sham and Sons, National College are artificial personal accounts.
  • Representative personal accounts: The accounts which represent some person such as wages outstanding account, prepaid insurance account, accrued interest account are considered as representative personal accounts.

2.        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 such as building, plant, machinery, cash, furniture etc. are classified as tangible real accounts. Intangible real accounts are the accounts related to intangible assets such as goodwill, trademarks, copyrights, patents etc.

3.       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 etc. fall in the category of nominal accounts.


Basically, debit means to enter an amount on the left side of an account and credit means to enter an amount of the right side on 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.

Rules for debit and credit

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 and losses Credit all        incomes and gains



A journal is a book in which transactions are recorded in the order in which they occur i.e. in chronological order. A journal is called a book of prime entry (also called a book of original entry) because all business transactions are entered first in this book. The process of recording a transaction in the journal is called journalising. An entry made in the journal is called a Journal Entry.


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. An accounting system typically contains a large number of accounts and the number of accounts can be added as they are needed and anticipated. 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 summarize 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 entire information of all transaction relating to it. So ledger is a book of final entry wherein all the accounts find their place. Thus, to have a consolidated view of the similar transactions different accounts are prepared in the ledger. 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.

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.


When numbers of transactions are large, it is practically impossible to record all the transactions through one journal because of the following reasons:

  • The system of recording all transactions in a journal requires
    • Writing down of the name of the account involved as many times as the transactions occur; and
    • An individual posting of each account debited and credited and hence, involves the repetitive journalizing and posting labour.
  • Such a system does not provide the information on a prompt basis.
  • Such a system does not facilitate the installation of an internal check system since only one person can handle the journal.
  • The journal becomes bulky and voluminous.

To overcome the shortcomings of the use of the journal only as a book of original entry, the journal is sub-divided into special journals. It is subdivided in such a way that a separate book is used for each category of transactions, which are repetitive in nature and are sufficiently large in number. Subsidiary books refer to the journals meant for specific transactions of similar nature.

The proforma and number of special journals vary according to the requirements of each enterprise. In any large business, the following special journals are generally used:

Name of the special journal Specific transactions to be recorded
I.              Cash Journal

(a)             Single column cash book


Cash transactions

(b)       Double column cash book Cash and discount transactions
                 (c)              Triple column cash book Cash, bank and discount transactions
                 (d)         Petty cash book Petty cash transactions
II. Goods journal (a) Purchase book  

Credit purchase of goods

                 (b)         Sales book Credit sales of goods
                 (c)          Sales returns book (or

Return Inwards book)

Goods returned by those customers to whom goods were sold on credit
(d)       Purchase returns book (or Return outwards book) Goods returned to those suppliers from whom goods were purchased on credit
III. Bills journal

(a)          Bills receivable book


Bills receivable drawn

  (b)         Bills payable book Bills payable accepted
IV. Journal proper Transactions not covered elsewhere


The benefits of using special journals are as under:

  • Facilitates: The accounting work can be divided among many persons.
  • Permits the installation of internal check system: The accounting work can be divided in such a manner that another person automatically checks the work of one person. With the use of internal check, the possibility of occurrence of error/fraud may be avoided.
  • Permits the use of specialized skill: The accounting work requiring specialized skill may be assigned to a person possessing the required skills. With the use of a specialized skill, prompt, economical and more accurate supply of accounting information may be obtained.
  • Time and labour saving in journalizing and posting: For instance, when a Sales Book is kept, the name of the sales account will not be required to be written down in the Journal as many times as the sales transactions occur and at the same time, sales account will not be required to be posted again and again since, only a periodic total of sales book is posted to the sales account.

5.7     CASH BOOK

A cash book is a special journal, which is used for recording all cash receipts and cash payments.

5.7.1 Cash book-both a journal and a ledger

The cash book is a book of original entry (or prime entry) since transactions are recorded for the first time from the source documents. The cash book is a ledger in the sense that it is designed in the form of a cash account and records cash receipts on the debit side and cash payments on the credit side. Thus, the cash book is both a journal and a ledger.

5.7.2 Types of cash book

The various types of cash book from the point of view of uses may be as follows:

  1. Single-column cash book: This cash book has one amount column on each side. All cash receipts are recorded on the receipt side and all cash payments on the payment side. In fact, this book is nothing but a Cash Account. Hence, there is no need to open this account in the ledger. Its format is shown below:


  Receipts   Payments
Date Particulars L.F. Amount


Date Particulars L.F. Amount






  1. Two-column cash book: This cash book has two amount columns (one for cash and another for discount) one each side. All cash receipts and discount allowed are recorded on the receipt side and all cash payments and discount received are recorded on the payment side. It format is shown as follows:


Receipt Payment
Date Particulars L.F. Discount




Date Particulars L.F. Discount










  1. Three-column cash book: This cash book has three amount columns (one for cash, one for bank and one for discount) on each side. All cash receipts, deposits into bank and discount allowed are recorded on receipt side and all cash payments, withdrawls from bank and discount received are recorded on the payment side. In fact, a three-column cash book serves the purpose of Cash Account as well as Bank Account. Hence, there is no need to open these two accounts in the ledger. Its format is shown below:


    Receipts         Payments    
Date Particulars L.F. Discount






Date Particulars L.F. Discount








Contra entry: An accounting transaction involves two accounts and there may be a transaction where both cash account and bank account are involved. Since in the ledger there is no separate cash account and bank account, therefore, no posting will be done from the cash book to the ledger in case of such a transaction. The transaction will be recorded on both the side of the cash book. Such an accounting entry, which is recorded on the both the sides of the cash book, is known as contra entry. In order to give hint for the purpose the word ‘C’ is written in the ledger folio.

  1. Petty cash book: This book is used for the purpose of recording the petty expenses so that the main cash book is relieved of the detailed records of these petty expenses. Normally, one person is handed over a small amount to meet the petty expenses of a given period (say, week, fortnight or month) and is authorized to make such payments and to record them in a separate cash book. Such person, such amount and such cash books are called as ‘Petty Cashier’, ‘Imprest’ and ‘Petty cash Book’ respectively. The Petty Cash Book may or may not be maintained on ‘Imprest System’. Under both the systems (i.e. Imprest and Non-imprest), the petty cashier submits the Petty Cash Book to the Head Cashier who examines the Petty Cash Book. Under the Imprest system, the Head Cashier makes the reimbursement of the amount spent by the Petty Cashier but under Non-imprest system, the Head Cashier may handover the Cash to the Petty Cashier equal to/more than less than the amount spent. The format of Petty Cash Book may be designed according to the requirements of the business.


  Receipts           Payments        
Date Particulars Cash



Date Particulars Voucher No. Postage






Staff Welfare





Printing and




Items (Rs.)














5.8     SUMMARY

According as an information system is the process of identifying, measuring and communicating the economic information of an organization 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. Maintaining the ledger in which different accounts are opened to which transactions are posted performs the function of systematic analysis of the recorded data to accumulate the transactions of similar type at one place. When number of transactions are large, it is practically impossible to record all the transactions through one journal, the journal is subdivided in such a way that a separate book is used for each category of transactions which are repetitive in nature and are sufficiently large in number. All such books are known as subsidiary books or special journals.

5.9     KEYWORDS

Cash book: Cash book is a book in which receipts and payment of cash are recorded.

Petty cash book: A petty cash book is used to record all cash payments of smaller demoniations.

Contra entry: If the same entry appears on both debit and credit side then the entry is referred to as contra entry.


  1. What is meant by posting? How is posting made from the journal in the ledger? Explain with suitable examples.
  2. What do you understand by subsidiary books? Describe the purpose of preparing such books.


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