!

'
1 DefineAccounting and explain its scope. .
2 What are the objectives of Accounting? Name the different parties inte~stedin
accounting information ahd state why they want it.
3 Write notes on :
. a) Advantages of Accounting
b) Branches of Accounting
, c) Accounting Process
'df Types of Accounts
4 Brjefly explain the accounting concepts which guide the accountant at the recording
stage. I

5 +Whatdo you understand by Dual Aspect Concept? Explain its accounting implications.

Note: These: questions will help you to understand the unit better. Try to write
answers for them. But do not submit your answers to the University. These are
for your practice only.
- - --
 UNIT 2 THE ACCOUNTING PROCESS

2.0 Objectives
2.1 Introduction
2.2 Journal
2.2.1 Tv~sactionsReIating to Goods
2.2.2 Receipts and Payments by Chaqucs
2.2.3 'Transactions with the Proprietor
2.2.4 Transactions Relating to Cash Discount
2.2.5 Compound Journal Entry
2.2.6 'Transactions Relating to Bad Dehas
2.3 I~dger ,

2.3.1 Posting into Ledger

2.3.2 Balancing Ledger Accounts
2.3.3 Significnncc. of Balances
2.4 Trial Balance
2.5 Openidg Entry
2.6 Let Us Sum Up
2.7 Key Words
2.8 Some Useful Books
2.9 Answers to Check Your Progress
2.10 Terminal Questions/Exercises

' After studying this unit you should be able to:

explain what a journal is
8 describe how differen: types of transactions will be recorded in rhe journal
post joumal entries in the concemed ledger accounts
balance a ledger account and cxplain the significance of balances in different types of
accounts
a prepare a trial balance to test the arithmetical accuracy of recording in the books of
I account
explain what an opening enby is and how it is posted into ledger

2.1 INTRODUCTION
In Unit 1 you learnt that the accounting process involves four stages: (i) recording the
transactions, (ii) classifying-the transactions, (iii) su~nmarisingthe transactions, and (iv)
interpreting the results. Thus, you are aware that all transactions are recorded first in the
books of original entry viz,, Journal, and then posted into the concerned accounts in the
ledger. You have also learnt the basic accounting concepts to be observed at the recording
"stage and the rules of debit and credit. With the help of these rules we shall discuss in this
unit how various transactions are recorded in the Journal and how they will be posted into
the concemed ledger accounts, We shall also explain how to balance different accounts and
prepare a Trial Balance in order to test the arithmetical accuracy of the books of account.
I

* .
2.2 JOURNAL
.Journal is a daily record of business transactions,It is also called a 'Day Book' and is used
for recording all day today transactrons in the order in which they occur. It is a B&k of
prime entry (also called book of original entry) because all transactions are recorded first in.
this book. h e process of recordjnga (ransaction in the journal is called 'Joumalising' and
I the entries made in this book-are.called '~&bhd Eiirries'. The proforma of Journal is given
*
I in Figure 2.1.
..I
 Accounting Fundomentols Flgure 2.1: Journal

Date Particulars L. F.
Agunt - 1 Azunt

The Journal is divided into five columns. The first column is used for writing the date of the .
transaction. It is customary to write the year at the top of the column only once and then in
the next line the month and date are written.
The second column called 'Particulars' column, The names of the two accounts affected by .
the transaction are to be recorded in this'column. The name of the account to be debited is
written first. The abbreviation 'Dr,' for debit is also written against the name of the account
to be debited. It is written on the same line very close to the L. F. column. In the next line,
the name of the account to be credited is written. It is always preceded by the word 'To'. It
is not necessary to write 'Cr.' against the name of the account to be credited. In the next
line, a brief description of the transaction is also given within brackets. It is called 'Narra-
tion'. After writing the narration a line is drawn in the particulars column to separate one
entry from the other.
The third column L. F. (Ledger Folio) is meant for writing the page number of the ledger
where the concerned account appears. This column is filled at the time of posting into the
ledger. The fourth and the fifth columns are meant for recording the amounts with which the
two accounts have been affected, The amount to be debited is entered in the debit amount
column against the name of the account debited, and the amount to be credited is entered in
the credit amount column against the name of the account credited. Both the amounts will
always beequal.
Let us take a transaction and see how it will be recorded in the Journal.
Purchased Machinery for Rs.10,000 on May 1,1988
'
In this transaction, the two accounts affected are Machinery Account and Cash Account.
You know both are real accounts. According to rules relating to real accounts, the
Machinery Account is to be debited and the Cash Account is to be credited. The entry will .,
be made in the Journal as follows
/ '
Date Particulars L.F. Dr. Cr.
Amount Amount
1988 Rs. Rs.
May I Machinery Account Dr. 22* 10,000
To Cash Account 10,000
(Being machinery purchased)
Glmaginary figure.

2.2.1 Transactions Relating to Goods

The term goods refer to articles which are traded by the firm i.e., articles bought for resale.
For example, for a book-seller books are goods, for an electrical store fans and other
electrical items are goods, for a furniture dealer table and chairs are goods. Articles bought
, for using them in business are not to be treated as goods. They may be fixed assets or
consumables and are to be treated as such in books of account.
The transactions relating to goods include purchases, sales, purchases returns and sales
returns. Normally, as per rules, when gaods are bought you will debit the Goods Account
and when they are sold you will credit the Goods Account. Similarly, when goods are
returned by your customer you will debit the Goods Account and when you return goods to
the suppliers, you yill credit the Goods Account. In other words, for all transaction relating
to goods you will maiotain only one account viz., Goods Account. But, in practice, five
separate account are maintained, as shown below:

. . i) Purchases Account-for recording all purchases of goods

24. ' ' .- ii)+ Sales Account-for recording all sales of goods
I '
' - '#' .
 iii) Keturns Onwards Accourii or Purchases Returns k~count-for recording goods returned The Accounting Proces
to suppliers
. iv) Returns Inwards Account or Sales Returns Account-For recording goods returned by
customers I .

v) Stock Account-for goods in stock (unsold goods) as at the end of the year
Thus, when goods are purchased you will debit the Purchases Account and when they are
sold y ~ will
u credit the Sales Account. Similarly, when goods are returned by your
customers you will debit the Returns Inwards Account (or Sales Returns Account) and when
you return goods to the suppliers you will credit Returns Outwards Acwunt (or Purchases
Returns Account). There will be no Goods Account at all. This helps in ascertaining the
amount of purchases and sales more quickly and correctly.

2.2.2 Receipts and Payments by Cheque

You must be aware that most of the.payments in business are made by cheques these days.
This involves the bank where the firm has opened its account. Hence, when payment is
made by cheque, you will credit the Bank Account because bank is the giver. Similarljl,
when payment is received by cheque, the amount will be debited to the Bank Account
because cheque is deposited in the bank who is the receiver.

2.2.3 Transactions with the Proprietor

You have learnt that the business and its proprietor are treated as separate entities. This
implies that separate accounts must be maintained in the ledger for recording transactions
between the proprietor and the business. Usually, two accounts viz., Capital Account and
Drawings Account are maintained for this purpose. Whatever the proprietor brings into the
business is treated as his capital and credited to his Capital Account. Similarly, when he
withdraws cash from the business for his personal use, he is to be debited with the amount
withdrawn by him. Such a debit is given to his Drawings Account. Drawings Account is also
debited when the proprietor takes goods from business for domestic use. Note that the
proprietor can be charged only by the cost of goods taken and not its selling price. In
pr'actice, the cost of such goods are credited to the Purchases Account because it is assumed
that it was purchased for him and should therefore be excluded from the purchases for the
business.
Look at Illustration 1 and study how various transactions are recorded in the Journal.
Illustration1
Journalise the following transactions in the journal of Krishna.

1988 Rs.
Jan. 1 Commenced business with cash
Paid into Canara'Bank
Goods purchased for cash
Bought furniture and paid by cheque
Bought goods from Anand
Sold gbods for cash
Sold goods to Sunil
Sold goods for cash to Anil
Drew cash for private expenses.
Paid salaries
+;Solution:
JOURNAL

ate' . ( Partiiulars L. F. Dr. I Cr.

Amount I Amount
1988 R s. Rs. ,

'" ( Cash Account

To Capital Account
(Being c'apital brought in)
Dr. 1 0 , ~
10,000

1
" 2 Bank Account Dr.
To Cash Accouot
(Being cash deposited into' bank)
- - ----I
Acco~intingFundamentals Date Particulars Dr.
Amount
-
. -
1988 Rs.
Jan, 4 Purchases Account Dr. 2,000
To Cash Account
(Being purchases of goods for cash) ,

Furniture Account Dr.

To Bank Account
(Being furniture purchased nnd paid by cheque)
-- -
Purchascll) Account Dr.
To AZ~nd'sAccount
(Being goods bought on credit)

Cash Accourit
To Sales Account
(Being goods sold for cash)

Sunil's Account Dr.

To Sales Accou~~t
(Being goods sold on credit)

Cash Account Dr.

To Seles Account
(Being goods sold for cash)

Drawings Account Dr.

To Cash Account
(Being cash withdrawn for
personal use)

S;~luiesAccount Dr.
To Cash Account
(Beiny payment of snlarics)

Note: The following explanations with regard to some transactions will help you to
understand their journal entries,
Jnn, I: The credit has been given to Capital Account because Krishna, the
proprietor of the business, brought cash into the business.
Jan. 2: Cash deposited in Canata Rank implies that a bank accounl has been opened
for the business. Any money deposited in the bank is debited to Bank Account and
any withdrawal frotn the bank is to be credited to Bank Account.
Jan. 4: When goods are purchased you would normally debit Goods Account as
goods come in. But as explained, purchases of goods are debited lo Purchases
Account since no Goods Account is to be maintained.
Jan. 5 : Furniture is not goods for this business. It is a fixed asset and hedce debited
to Furniture Account and not the Purchases Account. Since the payment has been
tilade by cheque which leads to withdrawal from the bank, the anlount has been
credited to Bank Account.
Jan, 10: When goods are sold you would nonllally credit the Goods Account as
goods go out. But, as explained earlier, sales of goods are credited to Sales Account
since no Boods Account is to be maintained.
Jan. 29: Any amount withdrawn by the proprietor for personal use is treated as
drawings by the proprietor and hence debited to Drawings Account.
4
2.2.4 Transactions Relating to Cash Discount
There ate two types of discout~tsallowed to customers: (i) trade discount, and (ii) cash
di~cbunt,Trade discount is a reduction in selling price allowed at the time of sale. nie
buyer pays only the net price and the recording in books is made for the net amount only.
No entry is made in books for the trade discount. Cash discount, on the other hand, is a
reduction in the net amount due. It is allowed only if the customer makes payment before
the due date. Cash discount must be recorded in the books of account. This is because when
goods were sold to the customer his account was debited with the net amount due. Later,
when he makes the payment and is allowed some cash discount, it must be adjusted in his
personal account so that his account stands cleared.
When cash discount is allowed to the debtor, it is a loss to the business. So, it is debited to The Accounting Process
the Discount Allowed Account and credited to the personal account of the debtor. Similarly,
when cash is paid to the creditor (the party from whom goods had been purchased on credit)
he may also allow some cash discount to the business. Such discount will be a gain to the
business. So, it is credited to the Discount Received Account and debited to the personal '
account of the creditor. The entries relating to cash discount will be illustrated under :
Compound Journal Entry (Section 2.2.5).

2.2.5 Compound Journal Entry

Someti,mes, two or more transactiuns of the same nature may occur on the same day. In such
2)
a situation instead of passing a separate entry forteach transaction we may pass a single
journal entry, known as Compound Journal Entry. For example, on May 5, 1988 you sold
goods on credit to Ram for Rs. 600 and to Shyam for Rs. 800.Both of these transactions
took place on the same day (May 5, 1988) and are of the same nature (credit sale of goods).
You can ppss compound entry for both the transactions as follows:
Rs. Rs.
Ram's Account Dr. 500
Shyam's Account Dr. 800
To Sales Account 1,300
(Being goads sold on
credit to them)
A compound Journal entry can also be passed for a transaction which involves more than
two accounts. For example, paid cash to Rarnesh Rs, 950 and he allowed Rs. 50 as discount,
This transaction involves three accounts : (i) Ramesh's Account, (ii) Cash Account, and (iii)
Discount Received Account. As per rules, Ramesh's Account is to be debited with Rs. 1,000
(Rs. 950 for cash and Rs. 50 for discount), Cash Account is to be credited with Rs. 950, and
Discount Received Account is to be credited with Rs. 50. You can pass the following
compound journal entry for this transaction :
Rs. Rs.
Ramesh's Account Dr. 1,000
To Cash Account 950
To Discount Received Account 50
(Being cash paid to him, discount
received RS.50)
In practice, a compound journal entry is recorded when
i) one account is to be debited and two or more accounts are to be credited, or
ii) two or more accounts are to be debited and one account is to be credited, or
iii) two or more accounts are to be debited and two or more accounts are to be credited.

2.2.6 Transactions Relating to Bad Debts

When a debtor becomes insolvent, the business shall not be able to realise the full amount
due from him. A parf.of it remains unrealized. The unrealised amount is called 'bad debts'.
For example, Rs, 2,000 was due from Kaushal for the goods sold to him on credit. I-Ie
became insolvent and only Rs. 1,200 could be realised from him. The remaining amount of
Rs. 800 will be treated as bad debts. It is a loss to the business and so debited to Bad Debts
Account and credited to the personal account of the debtor. The journal entry for the above
transaction will be:
Rs. Rs.
, Cash Account Dr. 1,200
Bad Debts Account , Dr. 800
To Kaushal's Account 2,000
(Being Kaushal became
insolvent and only Rs. 1,200
could be recovered) ,
Accouritlng Fundamentals If any amount treated as bad debts is recovered late; on, it shall be a gain to.the business.
Hence, it shall be credited to Bad Debts Recovered Account and debited to Cash Account.
Note that the bad debts so recovered shall not be credited to the personal account of the ,
debtor because his account had already been closed. In the example.given above, suppose
Rs. 800 is recovered from Kaushal later on, the journal entry will be:

Rs. Rs.
:ash Account Dr. 800
To Bad Debts Recovered ~ c c o u n t 800
(Being bad debts recovered)
Look at illustration 2 and note how journal entries for transaciions of February 18,25,27
and 29 have been made.

Record the following transactions in the Journal of Sunil Kumar.

1988 Rs.
Feb. 1 Commenced business with cash
,* 2 Paid into Bank
' 4 Furniture purchased from Keshav
" 5 Goods purchased for cash
" 6 Sold gmds to Santosh
' 9 Bought goods from Harish
" 10 Paid for cartage
" 12 Paid for postage
" 13 Goods returned by Santosh
" ' 15 Goods returned to Harish
" 17 Goods sold for cash
" 18 Paid to Keshgv
He alIowed discount
Sold goods t i ~ k a s h -
Received from Santosh .
Allowed hiin discount
Cash drawn for personal use
Paid to Harish by cheque
He,allowed us discount
Paid rent by cheque
Paid salaries
Gkash becomes insolvent and only
Rs. 1500 could be realised from him
An old debt written off as bad in
1987 is recovered

Solution:
Journal '

-rticmlars L.F. ~ r . T--G--

Arnau~~t
Amount --
1988 Rs. Rs.
Feb. 1 Cash A/c Dr. 70,OoQ
To Capital A/c 70.000.
(Being business commenced with cash) . '

" 2 Bank Alc

To Cash Alc 40,000
(Being cash paid into bank)' I
. - --
 ~urnitureA/c Dr. The Accounting Profess
To Keshav
(Being furniture bought on credit)

Purchases A/c Dr.

To Cnsli A/c
(Being goods purcliased for cash)

Stuitosh Dr.
To Sales A/c
(Being goods sold on credit)

Purchases A/c Dr.

To I-Iarish
(Being goods purchased on credit)

Cartage A/c Dr.

To Cash A/c
(Bcing cartage paid)

Postage A/c Dr.

To Cash A/c
(Being postage paid)

Retun~sInwards A/c Dr.

To Santosh
(Being goods returned by Santosh)

Harish Dr.
To Returns Outwards A/c
(Being goods returned to Hnrish)

Casli A/c Dr.

To Sales A/c
(Being goods sold for cash)

Kcshav Dr.
To Cnsh A/c
To Discount A/c
(Being cash paid and discount received)

Akush . Dr.
To Sales A/c
(Being goods.sold on credit)

Cash A/c Dr.

Discount A/c , Dr.
To Santosh
(Being cash received and discount allowed)

Drawings A/c Dr.

To Cash A/c
(Being cash withdrawn for personal use)

Harish . Dr.
To Bank A/c
TO Discount A/c
(Being payment made by cheque and
discount received)

Rent A/c Dr,

To Bank A/c
(Being rent paid by cheque)

Salaries A/c Dr.

To Cnsh A/c
(Being salaries paid)

Cash A/c Dr.

Bad Debts A/c Dr.
To Akash
(Being Akash became insolvent and
only Rs. 1,500 could be recovered)
-
Cash A/c Dr.
To Bad Debts Recovered A/c
(Being the amount treated as bad debts
in 1987, now recovered)
.
.---+---. -- -. ---
Accounting Fundamentals Note: In this illustration you will notice that '

, a) Instead of writing full word '~ccount'its abbreviation 'A/cl has been used
againgt the names of the accounts debited and credited. This is a common
practice. In fact the latest trend is not to write anything, just the name of the
account is enough.
b) The word Account or its abbreviation 'Alc' has not been written against
personal names. This again is a common practice. Writing 'A/cl is confined to
the real and nominal account\ only.
Check Your Progress A
1 What is Journal?

.....*
.L
.... ............
, 2 What is the purpose of writing narration?

............................ ...
i......iiii,.ii....,i.....ii..iiii..ii.i.i.i.ii...ii.i..........i.i.i...ii.......i....i...i.ii*....i.i.i..i..ii.

3 Name the five accounts which are maintained in lied of Goods Account.

ii) ..................................................................................................................................
iii) .................................................................................................................................
iv) ...................... . . . .................................................................................................
v) .................................... ...............................................................................................
-
. -.!
4 Distinguish between trade discount and cash discount..

............................................................................................................................................
5 Indicate the correct alternative in the followingcases by putting a tick at the number:
a) Sale of goods to Rakesh for cash should be debited to
i) Rakesh's Account
ii) Cash Account
.
iii) Sales Account
b) Purchase of machinery should be debited to
i) Machinery Account
ii) Goods Account
iii) Equipment Account
c) , Goods returned by Mahesh shopld be debited to
i) Goods Account
ii) Mahesh's Account
iii) Returns Inwards Account
.
 d) Wages paid to Ral~imshould be debited to The Accnunting Process
i) Rahim's Account
ii) Wages Account
iii) Repairs Account
e) Loan taken from Vikas should be credited to
i) Vikas's Account
ii) Cash Account
iii) Loan from Vikas Account
f) Cash discount allowed by a creditor should be credited to
i) Creditors Account
ii) Discount Received Account
iii) Allowance Account
g) The amount of bad debts should be debited to
i) Debtor's Account
ii) Bad Debts Account
iii) Discount Account
h) Rupees 500 received from Gopal whose account was previously written off as bad
debts should be credited to
i) Gopal's Account
ii) Bad Debts Account
iii) Bad Debts Recovered Account

2.3 LEDGER
You know that the Journal is just a chronological record of all business transactions. It does
not provide all information regarding a particular item at one place. This makes it difficult to
know the net effect of various transactions affecting a particular item. For example, if you
want to know the amount due to a particular supplier or the amount due from a particular
customer, you will have to go through the whole journal. To overcome lhis difficulty, we
maintain another book called 'Ledger'. In this book we open separate accounts for each item
and all transactions related to a particular item as recorded in journal are posted in the
concerned account. For example, all transactions related to a particular supplier, say Mohan,
are posted to Mohan's Account. Similarly, all cash payments and cash receipts can be posted
to Cash Account. Thus, you will have no problem in knowing the amount due to Mohan or
the balance in Cash Account, and so on. ,

Thus, ledger is a book where all accounts relating to different items are maintained and into
which all journal entries must be posted. In fact, ledger is the principal book of entry which
provides complete information about various transactions relating to all parties and all items
of asset, incomes and expenses. Some persons have even suggested that we should record all
transactions directly into ledger and do away with Journal. But, it is not advisable because in
that case we will not have any date-wise record of the transactions and the details thereof.
Such record is considered necessary for future reference.
You learnt about the 'T' form of an account which divides it into two parts. The left hand
side is called the debit side and the right hand side the credit side. The proper f o m of a
ledger account is g i v e n h Figure 2.2.
t\ccout11kt?;: Fundamentals Figure 2.2 : LEDGER '

Name of the Accopnt

You will notice that both sides of the account have date, particulars, folio and amount
columns. Now, let us see how postings are made into the ledger accounts.

' 2.3.1 Posting into Ledger

'
The journal entries form the basis for recording in the ledger accounts, and the process of
entering transaction in the ledger is called 'Posting'. When a journal entry has to be posted
in the concerned ledger accounts, the following procedure is adopted.

1 ~ v ejournal
j entry will have to be posted into all those accounts which have been
debited and credited in the journal entry. For example, for cash sales, Cash Account is
debited and Sales Account is credited in the joumal. When this entry is posted in the
ledger, it must be posted in Cash Account as well as in Sales Account.

2 Posting will be made on the debit side of the account which has been debited in the
journal, and the credit side of the account which has been credit@in the journal. In case
of the above example of cash sales, posting will be made on the debit side of Cash
Account, as it has been debited in journal and the credit side of Sales Account, as it had
been credited in the journal.

3 Whether the posting is made on the debit side or the credit side, first of all the date of
the transaction (as given in the journal) will be entered in the date column. The method
of recording the date in the ledger account is the same as in the joumal.

4 While posting on the debit side of an account in the particulars column, we shall write
the name of the account which had been credited in the journal and add the word 'To'
before the name.?irnilarly, while posting on the credit side of an account, we shall write
the name of the account which has been debited in the journal and add the word 'By'
before the name. In case of the above example, we shall write 'To Sales A/c' in the
particulars column on the debit side of Cash Account, and 'By Cash A/c' in the
Particulars Column on the credit side of the Sales Account.

5 The journal entries contain 'narration'. But it is not required in the ledger accounts.
Similarly, there is no need to draw a line between the two entries in an account as is
done in the journal. Note that posting in the ledger account is considered complete only
when both the debit and the credit aspects of all journal entries have been posted.

6 In the folio column, we shall mention the page number of the journal where concerned
journal entry appears. At the same time, the page number of the ledger accounts will be
entered in the 'L, F.' column in the journal so as to complete the cross reference.

7 The amount involved in the journal entry shall be entered in amount columns of both the
accounts.

Now let us take a transaction, joumalise it, and then show how the posting is done in the
ledger. . ..
Purchased machinery for.cash, Rs. 50,000 on April 4,1988: This transaction will appear
in the joumal and the -ledger as undet-: - ..*
 f OUHNAL The Accounting Process
I
Dr. Cr.
Date Pnrtlculars L.F Amount Amount

1988 Rs. Rs.

April 4 Machinery Alc Dr. 50,000
To Cash A/c 50,000
(Being machinery phrchased)

LEDGER
Machinery Account

Dr. Cr.
- - - -
Dtlts 1 Particulars - IF I- Amount I Date ( Particulars I F I Amount

Cash Account

Date Particulars ( F I Amount 1 Date ( Pnrticulva I P I Amount

1988 Rb.
Apr, 4 By Machinery A/c 50.000

2.3,2 Balancing Ledger Accounts

Whenever one wants to know the net effect of various transactions in a particular account,
wc have to work out its balance, Balance is the difference between the totals of the debit and
the credit side of an account. The process of finding out the balance is known as balnncing,
The procedure for balancing is as follows:
i) Total the two sides of an account.
. ii) Find out the difference between the totals of the,two sides.
iii) Put the difference in the amount column of the side showing less total.
iv) If the difference is entered on the debit side, write against it in the particulars column
'To Balance c/d' (c/d stands for carried down). In case the difference is entered on the
credit side, write against it in the particulars column 'By Balance cld'.
v) Now, total both the sides and you will find that both the totals are equal,
vi) The closing balance (balance c/d) is going to be the opening balance for the subsequent
period, The opening balance is shown on the next date in the account by writing 'To
Balance b/d' (b/d stands for brought down) or 'By Balance b/d' as the case may be.
Note that if the closing balance was on the debit sides, the opening balance would be
shown on the credit side and if the closing balance was shown on the credit side, the
opening balance would be shown on the debit side. In fact, an account is said to have a
debit balwce if its debit side total is bigger and a credit balance if its credit side total is
bigger. Thus, the opening balance is shown according to the nature of the balance i.e.,
the debit balance on the debit side and the credit balance on the credit side.
vii) soittimes the totals of the debit side and the credit side of an account are equal. It
implies that the account has nil balance. In such a situation the account is said to have
closed having no closing and opening balances,
h o k at fllustration 3 and study how various transactions have been recorded in the Journal,
posted into various accounts in the ledger, and how ledger accoun@are halnnced.
Accounting Fundamentals Illustration 3
Journalise the following transactions, post them into ledger and balance the accouhts.

1987 Rs.

Dec. 1 Anil commenced business with cash

Purchased goods from Prakash
Purchased furniture for cash
Goods sold to Prem
Sold goods to Ramlal
Goods purchased from Ramesh for Cash
Paid wages
Sold goods to Ashok
Ashok returned goods .
Received from Ram La1 in full settlement
Stationery purchased for cash
Goods sold to Arun for cash
Withdrew for personal use
Paid to Prakash
Sold goods to Prem
Received from Prem
Cash sales .
Paid for interest
Received from Ashok
Paid rent
Paid salaries for the month
Prem becomes insolvent and a dividend of 50
paise in the rupee is received.

Solution:
JOURNAL

Date Pnrtlculars I L.. I ~9;u.t I ~i!knt

1987 1 Rs.
Ilec. 1 Cash A/c Dr. 1 ,M),oOo
To Capital A/c
(Being capital brought in)
Putcheses A/c
To Prakash
(Being goods purchased on credit)

To Cash Alc

" 3
To Sales A/c
(Being goods sold on cmdit)

To Sales A/c ,

(Being
-- - goods sold on credit)
" 5 Purchases A/c + Dr.
To Cash A/c
(Being goods purchased for
cash)
" 7 WagesA/c Dr.
To Cash A/c
(Being wages paid)
 Ashok Dr. The Accounting Process ,
To Sales Alc &oc'o
(Being goods sold on credit)

Returns Inwards AR Dr.

To Ashok
(Being goods returned by him)
--
Cash Alc Dr.
Discount A/c Dr.
,To Ram La1
(Being cash received in full
settlement of his account)

Stationery Alc Dr.

To Cash A/c
(Being stationery purchased)

Cash A/c Dr.

To Sales Alc
(Being goods sold for cash)

Drawings A/c Dr.

To Cash A/c
(Being cash withdrawn for
personal use)

Pfakash Dr.
To Cash A/c
(Being cash paid to Pmkash)

23 Prem Dr.
To Sales Alc
(Being goods sold on credit)

Cash A/c
To Prenl
(Being cash received from Prem) .

Cash Alc
To Sales A/c
(Being goods sold for cash)
-
27 Interest A/c Dr.
To Cash A/c
(Being interest pnid)

28 Cash A/c Dr.

To Ashok
(Being cash received)
,
29 Rent A/c Dr.
To Cash A/c
(Being rent paid)

30 Salaries AIc Dr.

To Cash Alc
1 (Being salaries paid)

Cash Account Dr.

Bad Debts Account Dr.
To Prem
(Being a dividend of 50
paise in a rupee received from Prern)

Notes:
1 Transaction on December 14: Ram La1 paid Rs, 4,950 in full settlement of Rs, 5,000
due from him on account of the goods sold to him on December 4. It implies that Rs. 50
@s. 5000- Rs. 4,950) was allowed to him as cash discount,
2 Transaction on December 30 : Prem becomes insolvent. The firm could recover only
50 paise in a rupee i.e., 50% of the amount due, Goods worth Rs. 8,000 were sold to him
(Rs. 6,000 on December 3 and Rs. 2,000 on December 23). He paid Rs. 5,000 on
December 25 leaving a balance of Rs, 3,000. Of this, the firm could recover Rs. 1,500
(50% of Rs, 3,000). The remaining amount of Rs. 1,500-has k e n treated as bad debts. ' 35
Dr.
1987 I Rs.
To capitnl Alc Dec. 2 By Furniture A k 7,000
To Ram Lal " 5 By Purchases A/c 5,000
To Sales N c " 7 By Wages A/c 100
To Prem " 15 by Stationery A/c 400
To Salcs Alc " 20 By Drn\vitlp A/c 1,1100
To Ashok " 22 By Prukash 20,000
" 27 By tn1eres.t AIL' 500
" 29 Ry Rent A/c 2,000
" 30 By Salaries N c 3,000
" 31 By Bolarice c/d 9 1,450

Jun. I 1 To Balance bld 1

(r-
Purchabes Account

30,000 Dec. 31 By Balance cld

1988 I
Jan. l I To Balnncc bld

Furniture Account

l u ~1 1 To Bvlrnce bld
I I iWl I I I
Returns Idwards Account

1987
bet, 13 To Ashok by Balance c/d
1988
Jan. 1 To Balance bld

5,w
31 By Cash Nc
By Bad Debts Nc
 Sales Account The Accounting Process

1987 Rs. 1987 Rs.

Dec. 3 1 By Balancc cld 33,000 Dec. 3 By 'Prem 6,000
" 4 By Ram La1 5,000
" I1 By Ashok 8,000
" 17 By Cash A/C 4,000
" 23 By Prem 2,000
" 26 By Cash A/c 8,000
33,000 33,000
1988
Jnn. 1 By Balance bld
-

Capital Account

1;oo,ooo
1918
Jnn. 1 By Bnlwcc bld

Prakash's Account
- -
1987. Ks. 1987 Rs,
Dec. 22 TO Cash A/c 20,000 Dec. 2 By Purchases A/c 30,000
" '31 To Balance cld 10,000

30,000 '
1988
Jan. I B y Balance bld 10,000
- --

Ram Lal's Account

* - - - T -5,000 R Dec.
T 14 T B y Cash
" A/c 4,950
By Discount

Ashok's Account

1987 Rs. 1987 Rs,

Pec. I I To Sales A/c 8,000 Dec. 13 By Returns
Inwards A/c 500
" 28 By Cash A/c 7,000
" 31 By Balance C/d 500

8,000 W"J0
1988
Jan. I To Balance b/d 500

Discount Allowed Account

"rh
Dec. I5

1988
Jan. I
To Cash A/c

To Balance bld
Slation~ryAccount

By Balance cld

Drawings Account 1
Dec. 20 To Cash A/c 1,000 Dec. 31 By Balance cld

Jan, I To Balance b/d 1,000

1987
Interest Account

Rs. 1987 Rs.

i
Dec. 27 To Cash A/c 500 Dec. 31 By Balance c/d 500
1988
Jan. 1 To Balance b/d 500

Rent Account
1
1987 Rs. 1987 Rs.
Dec. 29
1988
To Cash A/c
- 2,000 Dec. 31 By Balance c/d
- 2-
Jan. I To Balance bld 2,000

Salaries Account

1- 1
1987 Rs.
Dee. 30 To Cash A/c By Balance ~ / d
- 3,000
1988
Jan. 1 To Balance bld
31

Bad Debts Account

1987
1988
Jan. I
I
Dec. 30 To Prem

To Balance b/d
"31 By Balance c/d 1- 1!
5
Rs.
.
E

Note: Nominal accounts like Wages Account, Discount Account, Stationery Account, etc. and the accounts
relating to purchases, sales and returns of goods are not to be balanced. As per rules, they are simply
closed by transfer to the Trading and Profit and Loss Account at the time of preparing the final accounts.
In the above illustration, however, they have been balanced for the purpose of preparing the Trial
Balance which is being discussed in the next section,

2.3.3 Significance of Balances

You have learnt that the 'balance' in an account signifies the net effect of all transactions
related to it during a given period. It may be a debit balance or a credit balance or a nil
balance depending upon whether the debit or the credit total is higher. Let us now
understand the significance of a balance in respect of the various types of accounts in the
ledger.
Personal Accounts: Personal accounts are more frequently balanced as compared to any
other class of accounts. Balance in a personal account indicates whether the party concerned
 owes to thk business or the business is owing to him. When it shows a debit balance, it The Accounting Process
means that the party owes that amount to the business and he is a debtor to the business.
Similarly, when it shows a credit balance, it would mean that the business owes that amount
to him and he is a creditor of the business. If, however, the account shows a nil balance, it
means that the account has been cleared, nothing is due to him or due from him.
Real Accounts: Real accounts are normally balanced at the end of the accounting period
primarily for the purpose of preparing the final accounts. The Cash Account, however, is
balanced everyday because the actual cash is to be verified and confirmed with the closing
balance shown by Cash Account. All real accounts show a debit balance as these are assets
(property) accounts.
Nominal Accounts: Nominal accounts are not to be balanced. They are simply closed by
transfer to the Trading and Profit aid Loss Accounts, at the time of preparing the final
accounts. However, for the purpose of understanding the procedure involved, nominal
accounts have also been balanced. Even otherwise, the difference between the debit side and
credit side totals have to be worked out for preparing the Trial Balance. Note that the
accounts which relate to expenses or losses will show a debit balance; whereas those reiating
to incomes and gains will have a credit balance. This is because all expenses and losses are
debited and all incomes and gains are credited.
Check Your Progress B
1 State whether each of the following statements is True or False.
i) Ledger is the principal book of entry. ..............
ii) Process of joumalising is called posting. ..............
iii) Posting will be made on the debit side of the account that
had been debited in the Journal ..............
iv) The word 'By' is written before the name of an account in
the particulars column while posting on the credit side
of an account ..............
v) Writing narration is necessary while posting into ledger
accounts ..............
vi) Real accounts always show debit balances . , . . , . . . . . . , ,.
2 Why do you balance an account?

. . . . . . . . I

............................................................................................................................................
............................................................................................................................................
..........,......................................................*.............................,..*...............,..,,,...................
.

What do you mean by a debit balance of an account?

2.4 TRIAL BALANCE

After posting the journal entries into the ledger and balancing all accounts, we prepare a
statement called Trial Balance. This statement shows the balances of all the accounts which
appear in the ledger. The debit balances are shown in one column and the credit balances in
the other. It is usually prepared just before preparing the final accounts. m e purpose is to
check the arithmetical accuracy of the books of account.
You know that under the Double Entry System for every debit'there is an equal and
corresponding credit. So, the total of debits given to different accounts must be equal to the
Accounting Fundamentals total of credits given to different accounts. Similarly, the total of debit balances in different
accounts must be equal to the total of credit balances in different accounts. Now if the Trid
~ a i a n c etallies i.e., the total of its debit balances column is equal to the total of its credit
balances column, it would mean that both the aspects of each transaction have been
correctly &corded in the ledger. If, however, the two totals do not tally it implies that some
errors have been committed while posting the transactions into ledger.
There are two methods of preparing the Trial Balance: (i)Totals Method, and (ii) Balances
Method. Under the first method we show the totals of each side of an account in the Trial
Balance. The debit side total of an account is shown h the debit column of the Trial
Balance and the credit side total of the account in the credit column. Under the second
method we show only the balances of each account in the Trial Balance. The second method
is more convenient and commonly used because it eliminates all those accounts which have
nil balance.
Now, let us prepare the Trial Balance from the ledger accounts prepared. Under Illustration
3 you will notice that all the accounts which appear i t 1 the ledger have been included and
their balances entered in the appropriate column. The total of debit balances column in the
Trial Balance is equal to the credit balances column. This means that all postings have been
correctly made in different ledger accounts.

Trial Balance as on December 31,1987

S. No. Name of Account L.F. Dr. Cr.

Balance Balance

Rs. Rs.
Cash Account 91,450
Capital Account 1, ~ , W
Furniture Account 7,000
Purchases Account 35,000
Sales Account 33,000
Prakash's Account 10,000
Wages Account 100
Returns Inwards Account 500
Ashok's Account 500
Discount Account 50
Stationery Account 400
Drawings Account 1,000
Interest Account 500
Rent Account 2,000
Salaries Account 1 3,000
16 Bad Debts Account 1,500

Total 1,43,OOa 1,43,W

-
2.5, OPENING ENTRY
When an accounting year begins. the previous year's balances in different accounts are
brought forward lo the new books of account. This is done by means of a journal entry-dl
assets accounts are debited and all liabilities accounts (including the proprietor's capital
account) are credited. In case the Capital Account balance is not given, it can be
calculated by deducting the other liabilities from the total assets. This will be clear from
Illustration 4.
Illustration 4
Ashok has the following balances on December 31, 1987: Cash in hand Rs.5,000, Debtors
Rs,7,200 (Ramesh Rs.6,000, Lalwani Rs. 1,200); Stock of goods Rs. 18,800; Machinery
Rs. 8,000, Furniture Rs. 3,000;Creditors Rs. 1,500 (Ravi & Co.) ; Ba* Loan Rs. 3,000.
Pass the opening entry on January 1,1988.
-.
 Solution : ' The Accounting ~rqce$s

JOURNAL

Date Particulars L.F. Dr. Cr.

Amount Amount

1988 Rs. Rs.

Jan. 1 Cash Account Dr. wJc'
Ramesl~ Dr. 6,000
Lalwani Dr.
Stock Account Dr.
Machinery Account Dr.
Furniture Account Dr.
To Ravi & Co.
To Bank Loan Account
To Capital Account
(For the balance brought
forward from the previous year)

Posting the Opening Entry into Ledger: The posting of an Opening entry into ledger is
slightly different from the posting of other journal entries. We have to open the accounts for
all items that appear in the opening entry. Then, in the accounts which have.been debited in
opening entry, we shall write 'To Balancb b If' on their debit side, and in the account which
have been credited in the opening entry, we shall write 'By Balance b/f' on their credit side.
The date, folio and amount columns are completed in the usual manner. As a matter of fact,
the accopnts which have been debited and credited through the opening entry merely
represent the closing balances of various personal and real accounts from the previous year.
The k s d n g of the opening entry as given in Illustration 4 will be made as follows:
i

Cash Account
, Dr. Cr.

1988 Rs.
Jan. 1 To Balance b/f 5 ,OOO

Ramesh'e Account

Jan. 1
lgS8 I ToBalance b/f ,

- .
1988 Rs.
Jan. 1 To Balance b/f 1,200

Stock Account
I 1988 Rs.
Jan. 1 . To BalanCC b/f 18,800

1988 Rs.
Jm:l ToBalana b/f , , 8,000
.. 4
 - %
.
L
1
Acmunting Fundamentals Furniture Accaunl

1988 Rs. I
i
Jan. I TO 'Balance b/f 3,000

Ravl & CO.'s Account 1

I
-
1988 Rs.
Jan. 1 By Balance b/f 1,500

Bank Loan Account

* ,
1988 Rs.
Jan. 1 By Balance b/f 3.000

Capital Account 1
1988 Rs.
Jan. 1 By Balance b/f 37,500

2.6 LET US SUM UP

Journal is a book of original entry wherein all business transactions are recorded in n
chronological order. he journd shows the accounts to be debited and those to be credited
in respect of each transaction. The journal does hot provide all information regarding a
particular item at one place. Hence, we maintain another book called Ledger. In ~hisbook
we open separate accounts for each item. An account has two sides, the debit side and the
credit side. When an account is balanced, it shows the net effect of all transactions relating
to that account during a given period, Before preparing a summary in the form of final
accounts, a statement called Trial Balance is prepared to check the arithmetical accuracy of
posting into Ledger. This statement shows the balances of a11 the accounts and if the totaI of
debit<.Jalances tally with the total of credit balances it is assumed that the transactions l~ave
been correctly recorded in the ledger.

2.7 KEY WORDS

Bad Debt: The ambunt of d%€ which is irrecoverable.
Cash Discount: An allowance given by the creditor to the debtor for making prompt
payment of the amount due from him.
Cheque: An instrument used for withrlt,,wing money from the bank.
Compound Entry: A journal entry involving more than two accounts.
I1
1
Drawings: Amount withdrawn by the proprietor from the business for personal use. .
Insolvent: A person who is not in a position to, pay his debts in full and is so declared by
I
the Court.
Opening Entry: A journal entry passed at the beginning of the year to bring forward the
previous year's assets and liabilities.
Posting: The process of entering transactions into the ledger accounts.
Returns Inwards; Goods returned by customers i.e., sales returns.
Returns Outwards: Goods returned to suppliers i.e., purchase returns. ,

Stock: Goods lying unsold with the business. It also includes unused raw materials and the
stock for semi-finished goods.
 Trade Discount: An allowance given by the seller to the buyer on the list price at the time The Accounting Process
of sale.
.Good: Articles bought for resale and usually traded by the business unit.

2.8 SOME USEFUL BOOKS

1 Maheshwari, S.N., 1986. Introduction to Accounting, Vikas Publishing House: New
Delhi. (Chapters 3,4)
2 Patil, V.A. and J.S. Korlahalli, 1986. Principles and Practice of Accounting, R. Chand
& Co., New Delhi. (Chapters 4,5)
3 Gupta R.L. and M. Radhaswamy 1986. Advanced Accountancy,Sultan Chand & Sons:
New Delhi. (Chapter 3)

2.9 ANSWERS TO CHECK YOUR PROGRESS

A3 Purchases Account, $ales Account, Purchases Returns Account, Sales Returns.
Account and Stock Account.
5 (a) ii (b) i , (c) iii (d) ii
(e) iii (0 ii (g) ii (h): iii

B1 (i) True (ii) False (iii) True

' i: (iv) True (v) False (vi) True

2.10 TERMINAL QUESTIONSlEXERCISES .

\
Questions
1 " Ledger is said to @ the principal book of entry and the transactions can even be .
directly entered into the ledger account." Elaborate on the statement and explain why
Joumal is necessary. t

2 What does balancing an account mean? Explain how an account is balanced?

3 What is the significance of debit and credit balarlce in different types of accounts?
4 What do you pnderstand by opening entry? How is an opening entry posted into the
ledger?
5 What is Trial Balance? Explain how it is prepared?

Exercises
1 Joumalise the following transactions : .
Rs.
Jan. 1 Mohan commenced business with cash
" 2 Paid into bank
" 3 Purchased goods for cash
" 4 Bought furniture from Karim for cash
" 5 Sold goods for cash
", 8 Sold goods to Rakesh
" . 10 Paid cartage
" 11 Purchased goods from Sunil
" 15 Purchased statiohefy -,
. 9,
18 Received commission
 Jan. 20 Received from Rakesh
Allowed him discount
" 25 Returned goods to Sunil
" 28 Paid to SuniI in full settlement
" 30 Paid rent by cheque
" 30 Paid wages
" 31 Paid salaries
2 Journalise the following transactions':
: -
1988 Rs.
Jan. 1 Gopal Rao commenced bllsiness with cash 60,000
" 2 Bought a building 20,000
" 4 Purchased furniture from Lalaji on credit 2,000
" 5 Purchased goods for cash 15,000
" 6 Sold goods to Ranga Rao on credit 5,000
" 6 Sold goods to Augustine & Co. on credit 8,m
" 8 Purchased goods from Manohar Singh on credit 5,000
" 9 Goods returned by Ranga Rao 1,000
" 15 Goods returned to Manohar Singh 500
" 17 Purchased goods from Krishna Rao 20,000
" 20 Purchased investments 10,000
" 25 Paid to Manohar Singh 4,500
" 26 Received from Augustine by cheque , 7,000

r
" 27 Amount drawn for personal use by the proprietor 500
" 27 Stationery purchased 400
" 28 Paid to Lalaji in full settlement of his account 1,950
" 30 Salaries paid to clerk 1,200
" ' 30 Electricity charges paid 200
" 31 Ranga Rao became insolvent, Received final
composition of 50 paise in a rupee.
Hint: You can pass a compound journal entry for sales made to Ranga Rao and
Augustine & Co. on January 6, 1988.
3 Far the following transactions, pass journal entries , prepare ledger aecounts and balance
them. .
1987 ' Rs.
Dec. 1 Nagender commenced business with cash ~,~,oc"J
" 2 Bought building 30,000
" 3. Bought machinery .40,000

1
" 4 Purchased typewriter for cash . 5,008
" 6 Purchased stationery 200
" 7 Goods purchased from Mahender 15.000

I
" 9 Goods sold for cash 10,000
" 10 Goads &turned to Mahender 508
" 11 Goods sold to Rameswar 5.m
" 12 Goods purchased from Mahender for c&h 5,m
v9
13 Goods rehuned by Rarneswar 1,m
' 99 14 '~eceivedfmm Rameswar + 4,000
*

44 " ,,*;
16 Amount p i d to M&ender . 5,000

* 11
 Dec. 20 Amount drawn for personal use of Nagender The Accounting Process
" 22 Telephone bill paid
" 24 Municipal taxes paid
'' 26 Goods sold for cash
" 27 Advertisement expenses paid
" 28 Paid for printing & stationery
" 30 Salaries paid to sales girls
" 31 Commission received
4 Journalise the following transactions, enter them in the Ledger and prepare the Trial
.Balance.
1988 Rs.
Jan. 1 Siva Prasad started business with 2,50,000
" 2 Bought buildings 1,00,Ooo
" 2 Deposited into bank ' 1,00,000
" 3 Purchased furniture and paid by cheque 50,000
" 4 Purchased stationery 250
" 5 Purchased goods on credit fmm Balaji & Co. 25,000
" 6 Purchased goods on cash 15,000
" 7 Sold goods to Venkateswara & Co. 20,000
" 8 Sold goods on cash 5,000
" 9 Goods returned by Venkateswara & Co. 2,000
" 11 Goods returned to Balaji & Co. . 1,500
" 13 Purchased goods from Vivekananda & Co. 20,000
" 15 Sold goods to Balaji & Co. 10,000
" 16 Repairs paid 2,000
" 18 Goods returned by Balaji & Co. 500
" 20 Paid to Balaji & Co. by cheque 14,000
" 22 Goods returned to Vivekananda & Co. 2,000
" 25 Paid to Vivekananda & Co. 14,000
" 27 Cash received from Venkateswara & Co. 10,000
" 28 Municipal taxes paid 1,000
" 30 Salaries paid 5 ,ooo
" 30 Telepl~onecharges paid 450
" 30 Electricity bills'paid 500
(Answer : Total of Trial Balance Rs. 2,92,500)

Note: These questions h d exercises will help you to understand the unit better. Try to *
write answers for them. But do not send your answers to the University. These are
for your practice only.