ACCOUNTING FOR MANAGERS (MBA-MU)

Unit
2

INTRODUCTION TO
FINANCIAL
ACCOUNTING - II

Semester 1

PREPARED & COMPILED BY:

JEET KAKKAD
Unit - 2 Introduction to Financial Accounting - II

INDEX

1. JOURNAL ............................................................................................. 3
1.1 Meaning .................................................................................................. 3
1.2 Format of Journal .................................................................................. 3
1.3 Procedure for Journalising ..................................................................... 4
1.4 Compound Journal Entry ....................................................................... 4

2. LEDGER ............................................................................................... 5
2.1 Meaning .................................................................................................. 5
2.2 Utility of Ledger ..................................................................................... 5
2.3 Format of Ledger .................................................................................... 6
2.4 Procedure for Ledger Posting ................................................................. 7

3. DIFFERENCE BETWEEN JOURNAL & LEDGER ...................................... 7

4. TRIAL BALANCE ................................................................................... 8

4.1 Meaning .................................................................................................. 8
4.2 Objectives of Trial Balance .................................................................... 8
4.3 Format of Trial Balance.......................................................................... 9
4.4 Methods of Preparation of Trial Balance ..............................................10
4.5 Totals Method ........................................................................................10
4.6 Balances Method ...................................................................................10
4.7 Totals-cum-Balances Method ................................................................11

5. DIFFERENCE BETWEEN LEDGER & TRIAL BALANCE .......................... 12

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1. JOURNAL

1.1 Meaning

o ‘Journal’ is the book of Primary Entry or book of Original Entry in which

every transaction is recorded before being posted into the ledger.

o It is that book of account in which transactions are recorded in a

chronological (day to day) order.

o The process of recording transactions in a journal is termed as ‘Journalising’.

1.2 Format of Journal

Debit Credit
Date Particulars L.F.
(Rs.) (Rs.)

Total

o Date:
The date on which the transaction has taken place is recorded in this column.

o Particulars:
The two aspects of a transaction are recorded in this column i.e. the accounts
which have to be debited and credited.

1. The name of the account(s) to be debited is entered at the extreme left

of the Particulars column next to the date column. The abbreviation
‘Dr.’ is written at the right end of the Particulars column on the same
line of the account debited.

2. The name of the account to be credited is entered in the next line with
a prefix ‘To’. A brief explanation of the transaction known as narration
is written below the account titles of the transaction.

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3. Finally, a thin line is drawn all through the particulars column to

indicate that the entry of the transaction has been completed.

o L.F.:
L.F. stands for Ledger Folio. This column records the page number of the
ledger in which the accounts in the Particulars column are posted.

o Debit Amount (Debit):

The debit amount is recorded in the debit amount column opposite to the title
of the account being debited.

o Credit Amount (Credit):

The credit amount is recorded in the credit amount column opposite to the
title of the account being credited.

1.3 Procedure for Journalising

Step-01:
Analyse each transaction in terms of accounts affected. As per rule, every
transaction has its effect on at least two accounts.

oStep-02:
oFind out the type of accounts affected in a transaction i.e. personal, real or
nominal.

oStep-03:
oApply the rules of debit and credit to each type of accounts involved.

1.4 Compound Journal Entry

o Transactions which are inter-connected and have taken place simultaneously

are recorded by means of a compound or combined journal entry.

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o In simpler terms, when there are more than one debit or credit accounts,
then that Journal Entry will be a Compound Journal Entry.

Example:

o If amount is spent on the same day for salaries, wages, stationery, rent, etc.
a combined entry can be passed debiting all the relevant nominal accounts
with respective amounts and crediting cash account with the total amount
spent.

Salary Expense A/c Dr.

Wages A/c Dr.
Stationery Expense A/c Dr.
Rent Expense A/c Dr.
To Cash A/c

2. LEDGER

2.1 Meaning

o ‘Ledger’ contains different accounts where transactions relating to that

account are recorded.

o A ledger is the collection of all the accounts, debited or credited, in the journal
proper and various special journal.

o The process of classifying the transactions in a ledger is termed as ‘Posting’.

2.2 Utility of Ledger

o A ledger is very useful and is of utmost importance in the organisation. The

net result of all transactions in respect of a particular account on a given date
can be ascertained only from the ledger.

o For e.g., the management on a particular date wants to know the amount due
from a certain customer or the amount the firm has to pay to a particular
supplier, such information can be found only in the ledger. Such information
is very difficult to ascertain from the journal because the transactions are
recorded in the chronological order and defies classification.

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Unit - 2 Introduction to Financial Accounting - II

2.3 Format of Ledger

Dr. Name of the Account Cr.

Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs.) (Rs.)

o Title of the account:

The Name of the item is written at the top of the format as the title of the
account. The title of the account ends with suffix ‘Account’.

o Dr./Cr.:
‘Dr.’ means Debit side of the account that is left side and ‘Cr.’ Means Credit
side of the account, i.e. right side.

o Date:
Year, Month and Date of transactions are posted in chronological order in this
column.

o Particulars:
Name of the item with reference to the original book of entry is written on
debit/credit side of the account. Also, the prefix used with the Account Name
on the Debit Side is ‘To’ and the prefix used with the Account Name on the
Credit Side is ‘By’.

o J.F.:
J.F. stands for Journal Folio. It records the page number of the original book
of entry on which relevant transaction is recorded. This column is filled up at
the time of posting.

o Amount:
This column records the amount in numerical figure, corresponding to what
has been entered in the amount column of the original book of entry.

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2.4 Procedure for Ledger Posting

Step-01:
Locate in the ledgers, the accounts debited and credited as
entered in the journal.

Step-02:
If the account is debited in the journal entry, then go to the debit
side of the ledger and post the entry and vice-versa in case of
account being credited.

3. DIFFERENCE BETWEEN JOURNAL & LEDGER

Basis Journal Ledger

1 Meaning ‘Journal’ is the book of ‘Ledger’ contains different

Primary Entry or book of accounts where transactions
Original Entry in which every relating to that account are
transaction is recorded before recorded.
being posted into the ledger.
2 Order The journal transactions get The ledger classifies the
recorded in chronological transactions from the journal
order on the day of their under the respective accounts
occurrence. to which they are related.
3 Narration Each journal entry has a The ledger accounts do not
detailed narration of the have a detailed narration of
transaction. each transaction.
4 Result The journal does not reveal The Ledger accounts help
the total results of a reveal the result of
transaction. transactions for a particular
account.
5 Trial The journal cannot help The ledger helps to prepare
Balance prepare the Trial Balance the Trial Balance.
directly.

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6 Financial The journal does not have a The balances from different
Statements direct role in the preparation ledger accounts help to
of financial statements prepare financial statements.
7 Opening A journal does not have an Some ledger accounts have an
Balance opening balance, and it is only opening balance, which is the
concerned with the current closing balance from the
transactions that occur on a previous year.
day-to-day basis.

4. TRIAL BALANCE

4.1 Meaning

o A ‘Trial Balance’ is a statement showing the balances, or total of debits and

credits, of all the accounts in the ledger with a view to verify the arithmetical
accuracy of posting into the ledger accounts.

o A trial balance is a bookkeeping worksheet in which the balances of all ledgers

are compiled into debit and credit account column totals that are equal. A
company prepares a trial balance periodically, usually at the end of every
reporting period.

o Trial balance is an important statement in the accounting process as it shows

the final position of all accounts and helps in preparing the final statements.
It may be noted that the trial balance is usually prepared with the balances
of accounts.

4.2 Objectives of Trial Balance

o To ascertain the arithmetical accuracy of the ledger accounts.

o To help in locating errors.
o To help in the preparation of the financial statements.

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4.3 Format of Trial Balance

Trial Balance of _____ Ltd. as on 31th March, 20XX

Debit Credit
Sr. No. Account Title L.F. Balance Balance
(Rs.) (Rs.)

1 Capital ✔
2 Drawings ✔
3 Liabilities ✔
4 Assets ✔
5 Incomes ✔
6 Expenses ✔

Total

o Sr. No.:
The Name of the item is written at the top of the format as the title of the
account. The title of the account ends with suffix ‘Account’.

o Account Title:
Name of the all the Accounts existing in the Ledger are recorded in this
column

o L.F.:
L.F. stands for Ledger Folio. This column records the page number of the
ledger in which the accounts in the Account Title column are posted.

o Debit Balance:
This column records the Debit Balance amount in numerical figure,
corresponding to what has been calculated in the ledger.

o Credit Balance:
This column records the Credit Balance amount in numerical figure,
corresponding to what has been calculated in the ledger.

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4.4 Methods of Preparation of Trial Balance

1. Totals Method
2. Balances Method
3. Totals-cum-Balances Method

4.5 Totals Method

o In this method, we ascertain the total of each side in the ledger, i.e., debit
and credit, separately and show them in the respective columns in the Trial
Balance.

o Here also the total of the column with debit totals should tally with the total
of the column of the credit totals. The dual aspect concept holds true in this
case also.

Trial Balance of _____ Ltd. as on 31th March, 20XX

(Totals Method)
Debit Credit
Sr.
Account Title L.F. Total Total
No.
(Rs.) (Rs.)

Total

4.6 Balances Method

o In this method, we total the debit side and the credit side of the accounts and
balance them. We then write these debit or credit balances of the ledger
accounts in the respective debit and credit columns in the Trial Balance.

o A trial balance tallies when the total of the debit column is equal to the total
of the credit column.

o This method is the most common method as it shows the net effect and also
helps in the preparation of the financial statements.

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Trial Balance of _____ Ltd. as on 31th March, 20XX

(Balances Method)
Debit Credit
Sr.
Account Title L.F. Balance Balance
No.
(Rs.) (Rs.)

Total

4.7 Totals-cum-Balances Method

o In this method, we prepare four columns. In two columns we write debit and
credit totals of accounts and in the other two columns, we write the debit and
credit balances of accounts.

o This method consumes a lot of time and is a duplicate of work. Hence, it is

rarely in use.

Trial Balance of _____ Ltd. as on 31th March, 20XX

(Totals-cum-Balances Method)
Debit Credit Debit Credit
Sr.
Account Title L.F. Total Total Balance Balance
No.
(Rs.) (Rs.) (Rs.) (Rs.)

Total

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5. DIFFERENCE BETWEEN LEDGER & TRIAL BALANCE

Basis Ledger Trial Balance

1 Meaning A ledger is an account wise It is a statement of debit and

summary of all monetary credit balances that are
transactions maintained in a extracted from ledger
classified form. accounts at a specified time.
2 Synonym It is also known as the There is no formal synonym of
principal book of accounts a trial balance, however, it is
and book of final entry. informally referred to as TB.
3 Hierarchy Ledger acts as a foundation to Trial balance acts as a
create a trial balance for the foundation to create financial
business. statements for the business.
4 Summary It is essentially a summarized It is essentially a summarized
form of all journal entries. form of all ledger accounts.
5 Types There are different types of There are no subtypes of a
ledgers such as Debtor’s trial balance. An adjusted trial
ledger, Creditor’s ledger, balance is made to fix partial
General ledger, etc. & improper transactions.
6 Format Ledger is prepared in ‘T’ Trial balance is prepared in a
format with debits posted in columnar format.
the left column and credits
posted to the right.

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