U.N. (Jr.

) College of Science & Technology

JOURNAL
DEFINITION:

A journal is a book or computer file in which monetary transactions are

entered the first time they are processed. This journal lists transactions in
chronological sequence by date prior to a transfer of the same transactions to
a ledger in the process of bookkeeping
JOURNAL ENTRY
Journal entries are an important part of accountancy. A journal entry,
in accounting, is the logging of a transaction into accounting journal items. The
journal entry can consist of several recordings, each of which is either a debit or
a credit. The total of the debits must equal the total of the credits or the journal
entry is said to be "unbalanced". Journal entries can record unique items or
recurring items such as depreciation or bond amortization. In accounting
software, journal entries are usually entered using a separate module
from accounts payable, which typically has its own subledger that indirectly affects
the general ledger. As a result, journal entries directly change the account
balances on the general ledger.
RECORDING
In order to record journal entries, one needs to have knowledge about:
1. Type of Accounts
2. Golden Rules of Accounting
3. Experience of Working
TYPE OF ACCOUNTS
There are three type of accounts in accounting:
1. Personal account
2. Real account
3. Nominal account

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Personal accounts consist of all those accounts which are related to a person,
business, firm etc. There are also subtypes of personal account:
1. Natural Personal Any person like Peter Account, Ram account etc.
2. Artificial Personal Any company or group of people like Microsoft
account, Hindustan Petroleum account etc
3. Representative Personal this type of Personal a/c represents owner like.
Capital a/c, drawings a/c etc
For example: Mohan's account, Apple ltd. account etc. Capital account
Real accounts consist of all those accounts which are related to assets.
For example: Plant and Machinery account, Stock account etc.
Nominal accounts consist of all those accounts which are related to expenses,
losses, Income and Gains.
For example: Rent account, wages account etc.
Ledger:
The journal provides a complete listing of the daily transactions of a business. But
it does not provide information about a specific account in one place. For
example, to know how much cash balance we have, the accounting clerk would
have to check all the journal entries in which cash is involved, and this is very
laborious job; because there are hundreds or even thousands of cash transactions

recorded on different pages of journal. To avoid this difficulty, the debit and
credit of journalized transactions are transferred to ledger accounts. Thus all the
changes for a single account are located in one place - in a ledger account. This
makes it easy to determine the current balance of any account.

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Contents:
 Definition and explanation of ledger
 Characteristics of ledger account
 Types or forms of ledger accounts
LEDGER
DEFINITION AND EXPLANATION:
The book in which accounts are maintained is called ledger. Generally,
one account is opened on each page of this book, but if transactions relating to a
particular account are numerous, it may extend to more than one page. All
transactions relating to that account are recorded chronologically. From journal
each transaction is posted to at least two concerned accounts - debit side of one
account and credit side of another account. Remember that, if there are two
accounts involved in a journal entry, it will be posted to two accounts in the ledger
and if the journal entry consists of three accounts (compound entry) it will be
posted to three different accounts in the ledger. The process of transferring
information from journal to ledger accounts is known as posting. The goal of all
transactions is ledger. Ledger is known as the destination of entries in journal but
it must be remembered that transactions cannot be recorded directly in the ledger
- they must be routed through journal. This concept is illustrated below:
Transaction
↓
Journal
↓
Ledger
So, the books in which all the transactions of a business concern are finally
recorded in the concerned accounts in a summarized form is called ledger.

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Characteristics of Ledger Account:

The ledger has the following main characteristics:
1. It has two identical sides - left hand side (debit side) and right hand side
(credit side).
2. Debit aspect of all the transactions are recorded on the debit side and
credit aspects of all the transactions are recorded on credit side according
to date.
3. The difference of the totals of the two sides represents balance. The excess
of debit side over credit side indicates debit balance, while excess of credit
side over debit side indicates the credit balance. If the two sides are equal,
there will be no balance.
4. Generally the balance is drawn at the year end and recorded on the lesser
side to make the two sides equal. This balance is know as closing balance.
5. The closing balance of the current year becomes the opening balance of
the next year.
Types or Forms of Ledger Accounts:
There are two forms of ledger accounts. These are:
1. Standard form
2. Self-balancing form

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Standard Form of Ledger Account:

To understand clearly as to how to write the accounts in ledger, the standard form
of an account is given below with two separate transactions:
Date Particulars J.R Amount Date Particulars J.R Amount

2005 2005
Dec. Cash A/C 1,200 Dec. Purchases 2,000
17 17 A/C
It appears that each account in the ledger has two similar sides - left hand side is
called debit side (briefly Dr.) and right hand side (briefly Cr.) side. Now a days
these two words are not used, because it is obvious that the left hand side is debit
side and right hand side is credit side.
Posting Procedure:
Transferring information i.e. entries from journal to ledger accounts is called
posting. The procedure of posting from journal to ledger is as follows:
1. Locate the ledger account from the first debit in the journal entry.
2. Record the date in the date column on the debit side of the account. The
date is the date of transaction rather than the date of the posting.
3. Record the name of the opposite account (account credited in entry) in the
particular (also know as reference column, description column etc)
column.
4. Record the page number of the journal in the journal reference (J.R)
column from where the entry is being posted.
5. Record the amount of the debit in the "amount column"
6. Locate the ledger account for the first credit in the journal and follow the
same procedure.

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Balancing An Account:
The difference between the two sides of an account is its balance. The balance is
written on the lesser side to make the two sides equal. The process of equalizing
the two sides of an account is known as balancing.
The rules for balancing an account are stated as below:
1. Add up the amount columns of both the sides of an account and write the
totals in a separate slip of paper.
2. Find out the difference of the two totals.
3. Write down the difference on the lesser side of the account.
4. Now total up both the sides and write the totals and draw double lines
under them.
5. Again write the difference on the opposite side below the double line.
If the debit side of an account is heavier, its balance is known as debit balance.
and if the credit side of an account is heavier its balance is know as credit balance.
If the two sides are equal, that account will show zero balance. The rules for
determining the balance is as follows:
More than total
Total debit = = Debit balance
credit
More than total
Total credit = = Credit balance
debit
Total debit = Total credit = Nil balance
It may be noted that at the time of balancing an account debit balance is placed
on the credit side and credit balance on debit site. This balance is known as
closing balance. What is closing balance in this year, is the opening balance of the
next year.

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Example:
Enter the following transactions in journal and post them into ledger:
2005
Jan. 1 Mr. Javed started business with cash $100,000
Jan. 2 He purchased furniture for $20,000
Jan. 3 He purchased goods for $60,000
Jan. 5 He sold goods for cash $80,000
Jan. 6 He paid salaries $10,000
Solution:
Journal
Date Particular L.F Amount Amount

2005

Jan. Cash A/C 9 100,000

1 .....................................................Dr. 11 100,000
Capital
(Being capital brought in)

2 Furniture 13 20,000
A/C.................................................Dr. 9 20,000
Cash A/C
(Being furniture purchased for cash)

3 Purchases 15 60,000
A/C...............................................Dr. 9 60,000
Cash A/C
(Goods purchased for cash)

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5 Cash 9 80,000
A/C......................................................Dr. 17 80,000
Sales A/C
(Sold goods for cash)

6 Salaries 19 10,000
A/C..................................................Dr. 9 10,000
Cash A/C Return
(Salaries paid)
Ledger
Cash Account (No.9)
Date Particular J.R Amount Date Particulars J.R Amount

2005 2005

Jan.1 Capital A/C 1 100,000 Jan.2 Furniture A/C 1 20,000

Jan.5 Sales A/C 1 80,000 Jan.3 Purchases A/C 1 60,000

Jan.6 Salaries A/C 1 10,000

Balance c/d 90,000

Total 180,000 Total 180,000
Capital Account (No.11)
Date Particular J.R Amount Date Particulars J.R Amount

2005 2005

Jan.6 Balance c/d 100,000 Jan.1 Cash A/C 1 100,000

Total 100,000 Total 100,000

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Furniture Account (No.13)

Date Particular J.R Amount Date Particulars J.R Amount

2005 2005

Jan.2 Cash A/C 1 20,000 Jan.6 Balance c/d 20,000

Total 20,000 Total 20,000
Purchases Account (No.15)
Date Particular J.R Amount Date Particulars J.R Amount

2005 2005

Jan.3 Cash A/C 1 60,000 Jan.6 Balance c/d 60,000

Total 60,000 Total 60,000
Sales Account (17)
Date Particular J.R Amount Date Particulars J.R Amount

2005 2005

Jan.6 Balance c/d 80,000 Jan.5 Cash A/C 1 80,000

Total 80,000 Total 80,000

Salaries Account (19)
Date Particular J.R Amount Date Particulars J.R Amount

2005 2005

Jan.6 Cash A/C 1 10,000 Jan.6 Balance c/d 10,000

Total 10,000 Total 10,000

Self Balancing Form of Ledger Accounts:
In practice the standard form of the ledger account is not used. But it is usually
used for examination purposes.

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In practice, the self balancing form of ledger accounts is used. The advantage of
this type of ledger account is that the balance of the account after each transaction
is available at a glance from the last column. So, much time and labor is saved. In
the following example self balancing ledger accounts have been used.
Example:
Enter the following transactions in journal and post them into the ledger and also
prepare a trial balance.
2005
Jan. 1 Mr. X started business with cash $80,000 and furniture $20,000.
Jan. 2 Purchased goods on credit worth $30,000 from Y.
Jan. 3 Sold goods for cash $16,000.
Jan. 4 Sold goods on credit to S for $10,000
Jan. 8 Cash received from S $9,800 in full settlement of his account.
Solution:
Journal
Date Particulars L.F DR. Cr.
2005 Amount ($) Amount ($)
Jan. 1 Cash A/C 5 80,000
Furniture A/C 7 20,000
Capital A/C 9 1,00,000
(Owner invested cash and
furniture)

Jan. 2 Purchases Account 11 30,000

Y 13 30,000
(Bought goods on credit)

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Jan. 3 Cash A/C 5 16,000

Sales A/C 15 16,000
(Sold goods for cash)

Jan. 4 S A/C 17 10,000

Sales A/C 15 10,000
(Sold goods on credit)

Jan. 8 Cash A/C 5 9,800

Discount A/C 19 200
S A/C 17 10,000
(Cash received and discount allowed)
LEDGER
Cash Account (No.5)
Date references J.R Debit Credit Balance

2005 Dr. Cr.

Jan. 1 Capital A/C 5 80,000 80,000

Jan. 3 Sales A/C 5 16,000 96,000

Jan. 8 S A/C 5 9,800 105,800

Furniture Account (No.7)
Date references J.R Debit Credit Balance

2005 Dr. Cr.

Jan. 1 Capital A/C 5 20,000 20,000

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Capital Account (No.9)

Date references J.R Debit Credit Balance

2005 Dr. Cr.

Jan. 1 Cash A/C 5 80,000 80,000

Jan. 1 Furniture A/C 5 20,000 1,00,000

Purchases Account (No.11)
Date references J.R Debit Credit Balance

2005 Dr. Cr.

Jan. 2 Y A/C 5 30,000 30,000

Y Account (No.13)
Date references J.R Debit Credit Balance

2005 Dr. Cr.

Jan. 2 Purchases A/C 5 30,000 30,000

Sales Account (No.15)
Date references J.R Debit Credit Balance

2005 Dr. Cr.

Jan. 3 Cash A/C 5 16,000 16,000

Jan. 4 S A/C 5 10,000 26,000

S Account (No.17)
Date references J.R Debit Credit Balance

2005 Dr. Cr.

Jan. 4 Sales A/C 5 10,000 10,000

Jan. 8 Cash A/C 5 9,800

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Jan. 8 Discount A/C 5 200 Nil

Account (No.19)
Date references J.R Debit Credit Balance

2005 Dr. Cr.

Jan. 8 S A/C 5 200 200

CLOSING LEDGER ACCOUNTS

Ledger accounts are closed at the end of each accounting period by calculating
the totals of debit and credit sides of a ledger. The difference between the sum of
debits and credits is known as the closing balance. This is the amount which is
posted in the trial balance.

How closing balances are presented in the ledger depends on whether the
account is related to income statement (income and expenses) or balance sheet
(assets, liabilities and equity). Balance sheet ledger accounts are closed by writing
'Balance c/d' next to the balancing figure since these are to be rolled forward in
the next accounting period. Income statement ledger accounts on the other hand
are closed by writing 'Income Statement' next to the residual amount because it is
being transferred to the income statement as revenue or expense incurred for the
period.

The steps involved in closing a ledger account may be summarized as below:

 Add the totals of both sides of a ledger

 The higher of the totals among the debit side and credit side must be
inserted at the end of BOTH sides. Closing balance is the balancing figure
on the side with the lower balance.

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 In case of ledger accounts of assets, liabilities and equity, 'balance c/d' is

written next to the closing balance whereas in case of income and expenses
ledger accounts, 'Income Statement' is written next to the closing balance.

 The closing balances of all ledger accounts are posted into the trial balance.
TRIAL BALANCE

Trial Balance is a list of closing balances of ledger accounts on a certain

date and is the first step towards the preparation of financial statements. It is
usually prepared at the end of an accounting period to assist in the drafting of
financial statements. Ledger balances are segregated into debit balances and credit
balances. Asset and expense accounts appear on the debit side of the trial balance
whereas liabilities, capital and income accounts appear on the credit side. If all
accounting entries are recorded correctly and all the ledger balances are
accurately extracted, the total of all debit balances appearing in the trial balance
must equal to the sum of all credit balances.

PURPOSE OF A TRIAL BALANCE

 Trial Balance acts as the first step in the preparation of financial

statements. It is a working paper that accountants use as a basis while
preparing financial statements.

 Trial balance ensures that for every debit entry recorded, a corresponding
credit entry has been recorded in the books in accordance with the double
entry concept of accounting. If the totals of the trial balance do not agree,
the differences may be investigated and resolved before financial
statements are prepared. Rectifying basic accounting errors can be a much
lengthy task after the financial statements have been prepared because of
the changes that would be required to correct the financial statements.

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 Trial balance ensures that the account balances are accurately extracted
from accounting ledgers.

 Trail balance assists in the identification and rectification of errors.

EXAMPLE:
ABC LTD.
Trial Balance as at 31 December 2011
Account Title Debit Credit
$ $
Share Capital 15,000
Furniture & Fixture 5,000
Building 10,000
Creditor 5,000
Debtors 3,000
Cash 2,000
Sales 10,000
Cost of sales 8,000
General and Administration Expense 2,000
Total 30,000 30,000

 Title provided at the top shows the name of the entity and accounting
period end for which the trial balance has been prepared.

 Account Title shows the name of the accounting ledgers from which the
balances have been extracted.

 Balances relating to assets and expenses are presented in the left column
(debit side) whereas those relating to liabilities, income and equity are
shown on the right column (credit side).

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 The sums of all debit and credit balances are shown at the bottom of their
respective columns.

LIMITATIONS OF A TRIAL BALANCE

 Trial Balance only confirms that the total of all debit balances match the
total of all credit balances. Trial balance totals may agree in spite of errors.
An example would be an incorrect debit entry being offset by an equal
credit entry. Likewise, a trial balance gives no proof that certain
transactions have not been recorded at all because in such case, both debit
and credit sides of a transaction would be omitted causing the trial balance
totals to still agree. Types of accounting errors and their effect on trial
balance are more fully discussed in the section on Suspense Accounts.

PREPARATION OF TRIAL BALANCE

Following Steps are involved in the preparation of a Trial Balance:

 All Ledger Accounts are closed at the end of an accounting period.

 Ledger balances are posted into the trial balance.
 Trial Balance is cast and errors are identified.
 Suspense account is created to agree the trial balance totals temporarily
until corrections are accounted for.
 Errors identified earlier are rectified by posting corrective entries.
 Any adjustments required at the period end not previously accounted for
are incorporated into the trial balance.

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