Module Code: CIII MBA - 02

Module Name: Managing

business accounts
Course Name: CIII in office
management and administration

www.cyryxcollege.edu.mv I info@cyryxcollege.edu.mv I
3320004 I Chapter
3315872
3005872 to business accounting.......................................................3
One I: Introduction

1.1

Introduction....................................................................................................................3

1.2

Definitions:....................................................................................................................3

1.3

Objectives of Accounting:..............................................................................................4

1.4

Basic Terms used in Accounting.....................................................................................5

Chapter Two : Accounting concepts and conventions.....................................................8

Chapter Three : Process of accounting...........................................................................13
3.1

Accounting process:.....................................................................................................13

3.2

Accounting Equation....................................................................................................14

3.3

Classification of Accounts............................................................................................14

3.4

Rules of accounting......................................................................................................15

Chapter Four : Journal....................................................................................................16

4.1

Meaning and definitions:..............................................................................................16

4.2

Characteristics of Journal.............................................................................................17

4.3

Advantages of Journal:.................................................................................................17

4.4

Objective of journals:...................................................................................................18

4.4.1

Steps to Journalizing..............................................................................................18

4.4.2

Rules of journalising:.............................................................................................19

4.5

Format of journal entries..............................................................................................19

Chapter Five : Ledger......................................................................................................20

5.1

Meaning.......................................................................................................................20

5.2

Features of ledger.........................................................................................................20

5.3

Importance and advantages of Ledger:.........................................................................21

5.4

Posting of journal entries into ledger:...........................................................................21

5.5

Format of ledger...........................................................................................................23

Chapter Six : Trial Balance.............................................................................................24

6.1

Meaning and definition................................................................................................24

6.2

Features of trial balance...............................................................................................25

6.3

Preparation of Trial Balance.........................................................................................25

6.4

Format of trial balance statement.................................................................................26

Chapter Seven : Subsidiary books..................................................................................27

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Chapter 1: Introduction to business accounting

1.1 Introduction
The main purpose of accounting is to ascertain profit or loss during a specified
period, to show financial condition of the business on a particular date and to have
control over the firms property. Such accounting records are required to be maintained
to measure the income of the business and communicate the information so that is may
be used by managers, owners and other interested parties. Accounting is a discipline
which records, classifies, summarizes and interprets financial information about the
activities of a cozener so that intelligent decisions can be made about the concern.

1.2 Definitions:
Accounting is a profession. It is a means of communication of accounting
information, through profit & loss account and balance sheet, to the users of
such information.
According to Smith and Ashburne, Accounting is a means of measuring and
reporting the results of economic activities.
According to Malchman and Slavin, Accounting is the process of recording the
changes in terms of increases and decreases in property or in the right to
property and the analysis and interpretations of financial transactions.
According to the American Institute of Certified Public Accountants (AICPA)
Accounting is the Art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at
least, of a financial character and interpreting the results thereof.

On analyzing these definitions we find that accounting process involves:

Recording: Entering the business transactions in books of original entry.

Classification: Posting in ledger and balancing of accounts.
Summarising: Preparation of Profit and Loss account and Balance Sheet.
Analysis and interpretation: Proprietors, Banks, Government, Investors and
other persons, who have interest in such accounts, interpret the accounts, to
know whether their expectations have been fulfilled.

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1.3 Objectives of Accounting:

The following are the main objectives of accounting
To keep systematic records: Accounting is done to keep a systematic record of
financial transactions. In the absence of accounting there would have been
terrific on human memory which in most cases would have been impossible to
bear.
To protect business properties: Accounting provides protection to business
properties form unjustified and unwarranted use. This is possible on account of
accounting supplying the following information to the manager or the proprietor.
The amount of the proprietors funds invested in the business.
How much the business has to pay to others?
How much the business has to recover from others?
How much the business has in the form of (a) fixed assets, (b) cash in hand, (c)
cash at bank, (d) stock of raw materials, work in progress and finished goods?
Information about the above matters helps the proprietor in assuring that the
funds of the business are not necessarily kept idle or underutilized.
To ascertain the operational profit or loss: Accounting helps in ascertaining the
net profit earned or loss suffered on account of carrying the business. This is
done by keeping a proper record of revenues and expense of a particular period.
The profit and Loss accounts is prepared at the end of a period and if the amount
of revenue for the period is more that the expenditure incurred in earning that
revenue, there is said to be a profit. In case the expenditure exceeds the revenue,
there is said to be a loss.
To ascertain the financial position of the business: The profit and Loss account
gives the amount of profit or loss made by the business during a particular
period. However, it is not enough. The business man must know about his
financial position i.e. where he stands? What he owes and what he owns? This
objective is served by the Balance Sheet or position Statements. The Balance

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Sheet is a statement of assets and liabilities of the business on a particular date.

It serves as barometer for ascertaining the financial health of the business.
To facilitate rational decision making : Accounting these days has taken upon
itself the task of collection, analysis and reporting of information at the required
points of time to the required levels of authority in order to facilitate rational
decision making.
Information system: Accounting functions as an information system for
collecting and communicating economic information about the business
enterprise. This information helps the managements is taking appropriate
decisions.

1.4 Basic Terms used in Accounting

The following basic terms generally used in accounting for recording and presenting
the accounting information.
Business Transactions: It is an economic event that relates to a business entity. It can
be a purchase of goods, collection of money, payment to creditors for goods and
expenses. An event to be a transaction must possess the quality of economic substance,
relate to business and affect the economic results. In other words, an event must be
capable of being measured in monetary terms and related to business enterprise in
terms of economic consequence.
Assets: These are economic resources of an enterprise that can be usefully expressed
in monetary terms. Assets are things of value used by the business in its operations.
Liabilities: These are the obligations or debts that the enterprise must pay in money or
services at sometime in the future. Therefore, represent creditors, claims against assets
of the firms. Both small and big businesses find it necessary to borrow money at some
time or the other, and to purchase goods on credit.

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 Capital: Investment by the owners for the use in the firm is known as capital. It is
equal to total assets minus total external liabilities this is also called Owner's equity.
Sales: Sales are total revenues from goods sold and/or services sold or provided to
customers. Sales may be cash sales or credit sales.
Revenues: These are the amounts the business earns by selling it products or providing
services to customers. These are called 'sales revenues'. Other items and sources of
revenues common to many businesses are: sales, fees, commission, interest, dividends,
royalties, rent received, etc.
Expenses: These are costs incurred by a business in the process of earning revenues.
Generally, expenses are measured by the cost of assets consumed or services used
during an accounting period.
Loss: Loss is the gross decreases in the assets or gross increases in the liabilities. It is
the excess of expenses over revenues. It represents reduction in owners' equity due to
inability of the firm to recover the assets used in the business.
Income: Income is the increase in the net worth of the organization either from
business activity or other activities. Income is a comprehensive term, which includes
profit also. In accounting income is the positive change in the wealth of the firm over a
period of time.
Profit: It is the excess of revenues over expenses during an accounting year. It
increases the owners equity.
Drawings: It is the amount of cash or other assets withdrawn by the owner for his
personal use.
Purchases: Purchases are total amounts of goods procured by a business on credit and
for cash, for use or sale. In a manufacturing concern, raw materials are purchased,

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processed further into finished goods and then sold. Purchases may be cash purchases
or credit purchases.
Stock: Stock (inventory): A measure of something on hand-goods, spares and other
items-in a business. It is called stock on hand.
Opening stock (beginning inventory): The amount of stock at the beginning of the
accounting year.
Closing stock (ending inventory): The amount of goods which have not been sold on
the date.
Debtors/Accounts Receivable: Debtors (accounts receivable) are persons and/or other
entities who owe to an enterprise an amount for receiving goods and services on the
credit. The total amount due from such persons and/or entities on the closing date is
shown in the balance sheet as the sundry debtors (account receivables) on the asset
side.
Creditors/Accounts Payable: Creditors (accounts payable) are persons and/or other
entities that have to be paid by an enterprise an amount for providing the enterprise
goods and/ or services on credit. The total amount standing due to such persons and/or
entities on the closing date is shown on the balance sheet as sundry creditors (accounts
payable) on the liability side.

Chapter 2: Accounting concepts and conventions

In order to maintain uniformity and consistency in preparing and maintaining books of
accounts, certain rules or principles have been evolved. These rules/principles are classified as

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concepts and conventions. These are foundations of preparing and maintaining accounting
records. There are certain rules that an accountant should follow while recording business
transactions and preparing accounts. These may be termed as accounting concept.
Accounting concept refers to the basic assumptions and rules and principles which work
as the basis of recording of business transactions and preparing accounts. The main objective
is to maintain uniformity and consistency in accounting records. These concepts constitute the
very basis of accounting. All the concepts have been developed over the years from
experience and thus they are universally accepted rules. Following are the various accounting
concepts that have been discussed in the following sections:

Business entity concept

Money measurement concept
Going concern concept
Accounting period concept
Cost concept
Duality aspect concept
Realization concept
Accrual concept
Matching concept

Business entity concept: This concept assumes that, for accounting purposes, the
business enterprise and its owners are two separate independent entities. Thus, the
business and personal transactions of its owner are separate. For example, when the
owner invests money in the business, it is recorded as liability of the business to the
owner. Similarly, when the owner takes away from the business cash/goods for his/her
personal use, it is not treated as business expense. Thus, the accounting records are
made in the books of accounts from the point of view of the business unit and not the
person owning the Business. This concept is the very basis of accounting. The
business entity concept states that business and the owner are two separate/distinct
persons. Accordingly, any expenses incurred by owner for himself or his family from
business will be considered as expenses and it will be shown as drawings.
Money measurement concept: This concept assumes that all business transactions
must be in terms of money that is in the currency of a country. Thus, as per the money
measurement concept, transactions which can be expressed in terms of money are
recorded in the books of accounts. But the transactions which cannot be expressed in

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monetary terms are not recorded in the books of accounts. For example, sincerity,
loyalty, honesty of employees are not recorded in books of accounts because these
cannot be measured in terms of money although they do affect the profits and losses of
the business concern.
Going concern concept: This concept states that a business firm will continue to carry
on its activities for an indefinite period of time. Simply stated, it means that every
business entity has continuity of life. Thus, it will not be dissolved in the near future.
This is an important assumption of accounting, as it provides a basis for showing the
value of assets in the balance sheet.
Accounting period concept: All the transactions are recorded in the books of accounts
on the assumption that profits on these transactions are to be ascertained for a
specified period. This is known as accounting period concept. Thus, this concept
requires that a balance sheet and profit and loss account should be prepared at regular
intervals. This is necessary for different purposes like, calculation of profit,
ascertaining financial position, tax computation etc.
Cost concept: Cost concept states that all assets are recorded in the books of accounts
at their purchase price, which includes cost of acquisition, transportation and
installation and not at its market price. It means that fixed assets like building, plant
and machinery, furniture, etc are recorded in the books of accounts at a price paid for
them. The cost concept is also known as historical cost concept. The effect of cost
concept is that if the business entity does not pay anything for acquiring an asset this
item would not appear in the books of accounts.
Dual aspect concept: Dual aspect is the foundation or basic principle of accounting. It
provides the very basis of recording business transactions in the books of accounts.
This concept assumes that every transaction has a dual effect, i.e. it affects two
accounts in their respective opposite sides. Therefore, the transaction should be
recorded at two places. It means, both the aspects of the transaction must be recorded
in the books of accounts. For example, goods purchased for cash has two aspects
which are (i) Giving of cash (ii) Receiving of goods. These two aspects are to be
recorded.

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 Realization concept: This concept states that revenue from any business transaction
should be included in the accounting records only when it is realized. The term
realization means creation of legal right to receive money. Selling goods is realization,
receiving order is not. The concept of realization states that revenue is realized at the
time when goods or services are actually delivered. In short, the realization occurs
when the goods and services have been sold either for cash or on credit. It also refers
to inflow of assets in the form of receivables.
Accrual concept: The meaning of accrual is something that becomes due especially an
amount of money that is yet to be paid or received at the end of the accounting period.
It means that revenues are recognized when they become receivable. Though cash is
received or not received and the expenses are recognized when they become payable
though cash is paid or not paid. Both transactions will be recorded in the accounting
period to which they relate. The accrual concept under accounting assumes that
revenue is realized at the time of sale of goods or services irrespective of the fact when
the cash is received.
Accounting convention refers to common practices which are universally followed in
recording and presenting accounting information of the business entity. They are followed like
customs, tradition, etc. in a society. Accounting conventions are evolved through the regular
and consistent practice over the years to facilitate uniform recording in the books of accounts.
Accounting Conventions help in comparing accounting data of different business units or of
the same unit for different periods. These have been developed over the years. The most
important conventions which have been used for a long period are:

Convention of consistency.
Convention of full disclosure.
Convention of materiality.
Convention of conservatism.

Convention of consistency: The convention of consistency means that same

accounting principles should be used for preparing financial statements year after year.
A meaningful conclusion can be drawn from financial statements of the same
enterprise when there is comparison between them over a period of time. But this can
be possible only when accounting policies and practices followed by the enterprise are
uniform and consistent over a period of time. If different accounting procedures and

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practices are used for preparing financial statements of different years, then the result
will not be comparable.
Convention of full disclosure: Convention of full disclosure requires that all material
and relevant facts concerning financial statements should be fully disclosed. Full
disclosure means that there should be full, fair and adequate disclosure of accounting
information. Adequate means sufficient set of information to be disclosed. Fair
indicates an equitable treatment of users. Full refers to complete and detailed
presentation of information. Thus, the convention of full disclosure suggests that every
financial statement should fully disclose all relevant information.
Convention of materiality: The convention of materiality states that, to make financial
statements meaningful, only material fact i.e. important and relevant information
should be supplied to the users of accounting information. The question that arises
here is what a material fact is. The materiality of a fact depends on its nature and the
amount involved. Material fact means the information of which will influence the
decision of its user.
Convention of conservatism: This convention is based on the principle that Anticipate
no profit, but provide for all possible losses. It provides guidance for recording
transactions in the books of accounts. It is based on the policy of playing safe in regard
to showing profit. The main objective of this convention is to show minimum profit.
Profit should not be overstated. If profit shows more than actual, it may lead to
distribution of dividend out of capital. This is not a fair policy and it will lead to the
reduction in the capital of the enterprise. Thus, this convention clearly states that profit
should not be recorded until it is realized. But if the business anticipates any loss in the
near future, provision should be made in the books of accounts for the same.

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Chapter 3: Process of accounting

3.1 Accounting process:
The accounting process is a series of activities that begins with a transaction and ends with the
closing of the books. Because this process is repeated each reporting period, it is referred to as
the accounting cycle and includes these major steps:
Identify the transaction or other recognizable event.
Prepare the transaction's source document such as a purchase order or invoice.
Analyze and classify the transaction. This step involves quantifying the transaction in
monetary terms (e.g. dollars and cents), identifying the accounts that are affected and
whether those accounts are to be debited or credited.
Record the transaction by making entries in the appropriate journal, such as the sales
journal, purchase journal, cash receipt or disbursement journal, or the general journal.
Such entries are made in chronological order.
Post general journal entries to the ledger accounts.

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The above steps are performed throughout the accounting period as transactions occur or in
periodic batch processes. The following steps are performed at the end of the accounting
period:
Prepare the trial balance to make sure that debits equal credits. The trial balance is a
listing of all of the ledger accounts, with debits in the left column and credits in the
right column. At this point no adjusting entries have been made. The actual sum of
each column is not meaningful; what is important is that the sums be equal. Note that
while out-of-balance columns indicate a recording error, balanced columns do not
guarantee that there are no errors. For example, not recording a transaction or
recording it in the wrong account would not cause an imbalance.
Correct any discrepancies in the trial balance. If the columns are not in balance, look
for math errors, posting errors, and recording errors. Posting errors include:
posting of the wrong amount, omitting a posting, posting in the wrong column, or
posting more than once.
Prepare the adjusted trial balance. This step is similar to the preparation of the
unadjusted trial balance, but this time the adjusting entries are included. Correct any
errors that may be found.
Prepare the financial statements:
Income statement: prepared from the revenue, expenses, gains, and losses.
Balance sheet: prepared from the assets, liabilities, and equity accounts.
Preparing adjusted financial statement with all closing entries.

3.2 Accounting Equation

The equation that is the foundation of double entry system accounting. The accounting
equation displays that all assets are either financed by borrowing money or paying with the
money of the companys shareholders. Thus, the accounting equation is:
Assets = Liabilities + Shareholder Equity.
The balance sheet is a complex display of this equation, showing that the total assets of a
company are equal to the total of liabilities and shareholder equity. Any purchase or sale by an
accounting equity has an equal effect on both sides of the equation, or offsetting effects on the
same side of the equation. The accounting equation is also written as
Liabilities = Assets Shareholder Equity and

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Shareholder Equity = Assets Liabilities

3.3 Classification of Accounts

An account is a summarized record of business transactions and account can be classified into
3 types
Personal Account: The accounts which relate to an individual, firm, company are
called personal accounts.
Real Accounts: The accounts of all things whose value can be measured in terms of
money are known as real accounts.
Nominal Account: It includes the accounts of all expenses and incomes. For example
commission earned, rent paid, bad debts, rent received etc.

3.4 Rules of accounting

Personal A/c:

Real A/c:

Nominal a/c:

Debit the receiver.

Credit the giver.
Debit what comes in.
Credit what goes out.
Debit all Expenses and losses.
Credit all incomes and gains.

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Chapter 4: Journal
4.1 Meaning and definitions:
The word "journal" has been derived from the French word "jour". Jour means
day. So journal means daily. Transactions are recorded daily in journal and hence it has been
named so. It is a book of original entry to record chronologically (i.e. in order of date) and in
detail the various transactions of a trader. It is also known Day Book because it contains the
account of every day's transactions.
The basic book of accounting is called journal. Precisely it is the book of prime entry which
means- Day book. Trader records his total daily transactions in it. The process of recording the
transactions into journal is called Journalizing. - Rowland
The Journal or Daily record as originally used was a book of prime entry in which
transactions were copied in order of date from a memorandum or waste book. The entries as
they were copied, were classified into debits and credits, so as to facilitate their being
correctly posted afterwards in the ledger. - Carter
A journal is a book, employed to classify or sort out transactions in a form convenient for
their subsequent entry in the ledger. Cropper
Thus journal may be described as a book in which the transactions are recorded in the order of
occurrence i.e. in chronological order. It is called a book of prime entry or original entry
because all business transactions are entered first in this book. The process of writing a

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transaction in journal is known as journalizing and the transaction written in journal is known
as journal entry.
The journal has two functions:
1.

To analyze each transaction into debt so as to enable their posting in the ledger and

2.

To arrange transactions, chronologically i.e. order of date.

4.2 Characteristics of Journal

Journal is a book of original entry because transaction is recorded at first stage in this
book.
Journal is the first step in the recording process of double entry system of bookkeeping.
Journal is also known as day book or diary because transactions are recorded in it on
day to day basis as and when they take place.
Journal is a chronological record of all transactions taking place according to the order
of occurrence.
Every entry in journal is accompanied with narration which describes, briefly, true
nature and context of the transactions.
Amount of the transaction is recorded in both debit and credit column-side by side. It
helps in maintaining arithmetical accuracy of the books.
Journal and ledger are interred linked because next step after journal is the ledger

Need of Journal: journal is needed and is useful in the following respects.

4.3

Convenient recording of transactions;

Maintaining and preserving the identity of transactions;
Ascertaining the true nature of transaction-with the help of narrations and
Maintain permanent record of information.
Advantages of Journal:

The following are the advantages of journal:

Each transaction is recorded as soon as it takes place. So there is no possibility of any
transaction being omitted from the books of account.

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 Since the transactions are kept recorded in journal, chronologically with narration, it
can be easily ascertained when and why a transaction has taken place.
For each and every transaction which of the two concerned accounts will be debited
and which account credited, are clearly written in journal. So, there is no possibility of
committing any mistake in writing the ledger.
Since all the debits of transaction are recorded in journal, it is not necessary to repeat
them in ledger. As a result ledger is kept tidy and brief.
Journal shows the complete story of a transaction in one entry.
Any mistake in ledger can be easily detected with the help of journal.
4.4

Objective of journals:

While recording transactions in journal the following two objects must be aimed at:
That each entry in the journal should be so clear that at any future time we may,
without the aid of memory, perceive the exact nature of the transactions.
That each transaction should be so classified that we may easily obtain the aggregate
effect of such transactions at the end of a certain period.
4.4.1

Steps to Journalizing

The process of recording a transaction in the journal is called Journalizing. The various steps
to be followed in journalizing the business transactions are given below.
Step 1: Ascertain what accounts are involved in a transaction.
Step 2: ascertain what the nature of accounts involved is.
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 particular column) along with the
abbreviation Dr. on the same line against the name of the account in particulars

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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 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 particulars column
Draw a line across the entire Particulars column to separate one Journal Entry from
the other.
4.4.2 Rules of journalising:
The act of recording transactions in journal is called journalizing. The rules may be
summarized as follows:
Use two separate lines for writing the names of the two accounts concerned in each
transaction.
Write the name of the debtor or account to be debited in the first line and the name of
the creditor or the account to be credited in the next line
Write the name of the account to be debited close to the line starting the particulars
column and that of the account to be credited at a short distance from this line.
Use "Dr" after each debit item and "To" before each credit. The term "Cr." after a
credit item is unnecessary, as if one account is debtor, the other must be creditor.
To separate one entry from another a line is drawn below every entry to cover
particulars column only. The line does not extend to amount column.

4.5 Format of journal entries

Date
(1)

Particulars
(2)

L.F.
(3)

Dr. Amount

Cr. Amount

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Chapter 5: Ledger
5.1 Meaning
Ledger is bound book with pages consecutively numbered. It may also be a bundle of
sheets. All the accounts identified on the basis of transactions recorded in different
journals/books such as Cash Book, Purchase Book, Sales Book etc. will be opened and
maintained in a separate book called Ledger. So a ledger is a book of account; in which all
types of accounts relating to assets, liabilities, capital, expenses and revenues are maintained.
It is a complete set of accounts of a business enterprise. Thus, from the various journals/Books
of a business enterprise, all transactions recorded throughout the accounting year are placed in
relevant accounts in the ledger through the process of posting of transactions in the ledger.
Thus, posting is the process of transfer of entries from Journal/Special Journal Books to
ledger.

5.2 Features of ledger

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.
Ledger is an account book that contains various accounts to which various business
transactions of a business enterprise are posted.
It is a book of final entry because the transactions that are first entered in the journal or
special purpose Books are finally posted in the ledger. It is also called the Principal
Book of Accounts.
In the ledger all types of accounts relating to assets, liabilities, capital, revenue and
expenses are maintained.
It is a permanent record of business transactions classified into relevant accounts.
It is the reference book of accounting system and is used to classify and summarize
transactions to facilitate the preparation of financial statements

5.3 Importance and advantages 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.

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 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.
Knowledge of book value of assets: Ledger records every asset separately. Hence, you
can get the information about the Book value of any asset whenever you need.
Useful for management: The information given in different ledger accounts will help
the management in preparing budgets. It also helps the management in keeping the
check on the performance of business it is managing.
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.
Instant Information: The business always needs to know what it owes to others and
what the others owe to it. The ledger accounts provide this information at a glance
through the account receivables and payables.

5.4 Posting of journal entries into ledger:

You know that the purpose of opening an account in the ledger is to bring all related
items of this account which might have been recorded in different books of accounts on
different dates at one place. The process involved in this exercise is called posting in the
ledger. This procedure is adopted for each account. To take the items from the journal to the
relevant account in the ledger is called posting of journal.
Following procedure is followed for posting of journal to ledger:
Identify both the accounts debit and credit of the journal entry. Open the two
accounts in the ledger.
Post the item in the first account by writing date in the date column, name of the
account to be credited in the particulars column and the amount in the amount column
of the debit side of the account.
Write the page number of the journal from which the item is taken to the ledger in
Folio column and write the page number of the ledger from which account is written
in L.F. column of the journal.
Now take the second Account and give the similar treatment. Write the date in the
date column, name of the account in the amount column of the account on its credit
side in the ledger.
Write page number of journal in the folio column of the ledger and page number of
the ledger in the LF of column of the journal.

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Balancing of an account: It is the difference between the total of debits and total of credits of
an account. If debit side total is more than the credit side, the account shows a debit balance.
Similarly, the balance will be credit if the credit side total of an account is more than the debit
side total. This process of ascertaining and writing the balance of each account in the ledger is
called balancing of an account.
The following steps are to be followed in balancing the Ledger account:
Total up the two sides of an Account on a rough sheet.
Determine the difference between the two sides. If the credit side is more than the
debit side, the balance calculated is a credit balance. Put the difference on the Shorter
side of the account such that the totals of the two sides of the account are equal.
If the difference amount is written on debit side (i.e., if credit. side is bigger) then
write as Balance c/d (c/d stands for carried down). If difference is written on the
credit side (i.e., if debit side is bigger) then write it as Balance c/d.
Finally at the end of the year all the ledger accounts are closed by taking out the
balance of each account. The Balance then should be brought down or carried forward
to the next period. If the difference was put on credit side as Balance c/d it should
now be written on the debit side of the account as Balance b/d (b/d stands for
brought down) and vice-a-versa. Thus debit balance will automatically be brought
down on the debit side and a credit balance on the credit side.

5.5 Format of ledger

Date

Particulars

J.F. Amount Date

Particulars

J.F. Amount

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Chapter 6: Trial Balance

6.1 Meaning and definition
Trial balance is an important statement prepared under the double-entry system. The
fundamental principle of the double-entry system is that for every amount of debit there is an
equal amount of credit and vice versa. This principle provides a check on arithmetical
accuracy of the recording of financial transactions in different books such as journal and the
ledger. Such a check can be performed by preparing a statement called trial balance. Trial
balance is a statement prepared taking up the debit and credit totals or balances of all ledger
accounts on a particular date.

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Trial balance is a statement which is prepared by using the debit and credit totals or
balances of all ledger accounts with a view to ascertain the arithmetical accuracy of the
recordings of the financial transactions of the business. Trial balance is prepared after closing
all the ledger accounts and drawing balances there from a certain date. All the debit and credit
totals or balances are arranged in debit and credit column together with the heads of account
in a separate sheet of paper so as to ascertain whether the totals of debit and credit columns
agree. If the two totals of trial balance agree, it is assumed that recordings of financial
transactions in the journal and the ledger are arithmetically accurate. The trial balance can also
be used to prepare the final accounts of the business.
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."
According to Pickles, "The statement prepared with the help of ledger balances, at the end of
financial year (or at any other date) to find out whether debit total agrees with credit total is
called Trial Balance".
According to Rowlland, "The final statement of balances, joint and mixed, is called Trial
Balance".
Ideal definition, "On the basis of different definitions given by different accountants at
different times, following ideal definition of trial balance can be adopted:
"According to double entry system, after recording all the transactions into journal and
posting them into ledger and ascertaining their balances, the statement prepared to ascertain
the arithmetical accuracy of accounts on a certain date is called Trial Balance.

6.2 Features of trial balance

After recording all transactions until all Ute business transactions are journalized, and
posted, strictly according to double entry system, a trial balance can't be extracted.
After finding out the differences of debit and credit sides of all the ledger accounts :All the accounts opened in ledger totalled and balances (differences) are ascertained,
only then trial balance can be prepared.

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 Generally trial balance is prepared at the end of accounting year, but it can also be
prepared monthly, half yearly or quarterly.

6.3 Preparation of Trial Balance

Trial Balance may be prepared either taking into consideration the total of each side of every
ledger account. Thus you may follow either "Total Method" or "Balance Method".
Total Method: If the total of debit sides of all the accounts in the ledger is placed in one
column of the list and similarly total of credit sides of all the accounts in the ledger is placed
win another column of the list then this list of total (Trial Balance) will be known to have been
prepared with the Total Methods.
Balance Method: Second method of preparing Trial Balance is to find out the difference of
the ' sides of every account. If debit side of an account is bigger, than insert the difference on
the credit side of the account. It is known as 'debit balance'. If credit side of an account is
bigger, then insert the difference on the debit side of the account. It is known as 'credit
balance'. Now prepare list of balances (Trial Balance) by putting all debits balances in one
column and credit balances in another column. Such method is known as Balance Method.

6.4 Format of trial balance statement

J.F

Dr. Balance

Cr. balance

$
4,017
9,222
--26,670
-10,000
20,000
-3,400
600

$
--7,644
120
-32,145
--35,000
---

Particulars

Cash Account
Sundry Debtors Account
Sundry Creditors Account
Discount Account
Purchases Account
Sales Account
Machinery Account
Building Account
Capital Account
Rent Account
Wages Account

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Salaries Account

1,000

--

74,909

74,909

Chapter 7: Subsidiary books

7.1 Meaning
Subsidiary book may be defined as a book of prime entry in which transactions of a
particular category are recorded. In other words, in order to save time and energy, the
transactions which are of similar character are recorded in separate books; these are called
subsidiary books or subdivision of journal. A number of subsidiary books are opened to record

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all business transactions. In practical system of book-keeping, generally used subsidiary books
are:
Cash Book: Transactions held in cash or by cheque are recorded in this book. There
are two sides in a cash book. In the left hand side all cash receipts are recorded and in
the right hand side all cash payments are recorded. Cash Book is of four types: single
column cash book, double column cash book, triple column cash book, and petty cash
book. In the single column cash book only receipt of cash and payment of cash are
recorded. In the double column cash book, receipt of cash, receipt of cash discount,
payment of cash and cash discount allowed are recorded. In the triple column cash
book along with the transactions which are recorded in double column cash book,
cheque received and cheque paid are recorded. In the bank cash book the receipt of
cheque, payment of cheque, cash discount allowed and cash discount received are
recorded. In the petty cash book only small payments of cash are recorded by the petty
cashier.
Purchase Book: All credit purchase of goods are written in this book. Cash purchase of
goods and credit purchase of assets are not recorded in this book. Other names of
purchase book are purchase day book, purchase journal, bought journal, inward
invoice book etc.
Sales Book: All sales of goods are written in this book. Cash sale of goods and credit
sale of assets are not recorded in this book. Other names of Sales Book are Sales Day
Book, Sales Journal, Sold book, Outward Invoice Book etc.
Purchase Return Book: It may be necessary to return some goods that the firm has
bought on credit for a variety of reasons. All returns of such goods are recorded
primarily in Return Outward Book. This book is also known as Purchase Return Book.
Sales Return Book: Goods may be returned by the customers for a variety of reasons.
All goods returned from customers are recorded in Sales Return Book. This book is
also known as Return Inward Book.

7.2 Advantages of subsidiary book:

The following are the advantages of subsidiary book:
It enables the division of work among accounting personnel by assigning with separate
books and it increases efficiency of personnel as they perform same activities daily.
It helps to save time and labor by recording similar type of transactions in a separate
book.

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 It becomes easy to access the detailed information relating to a particular transaction

as the transactions relating to one head are recorded in a separate book.
It helps to install internal check system as the subsidiary book maintained by a clerk is
automatically checked by another clerk.
It helps to maintain accounts and thus avoids the necessity of journal entries.
The existence of separate books help in the detection of errors quickly in case of
disagreement of trial balance

References:
http://www.quickmba.com/accounting/fin/journal-entries/
http://bizfinance.about.com/od/bookkeepingessentials/a/Accounting_Journal_Entries.htm
www.accountingcoach.com/
http://www.quickmba.com/accounting/
http://womeninbusiness.about.com/od/glossaryofaccountingterm/g/definition-journalentry.htm
http://accountlearning.blogspot.com

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