Payments:- Payment means the amount of money paid by an entity in course of its business activity.

An
entity may pay money in cash or by cheque / demand draft or through digital mode. Payment is two types

i) Capital Payment:- Capital Payments are those payments which either cause an decrease in
liability or increase in assets. Withdrawal by the proprietor, partner, repayment of loan.
ii) Revenue Payment:- Revenue payments are those payments which are made for carrying
out the normal activities of business. For example:- payment for purchase of goods and
services, payment for salary, and wages to the staff.

Expenses:- Expenses is the cost incurred in producing and selling the goods and services. According to
Miller, “Expenses is the cost of use of things or services for the purpose of generating Revenue”. Cost of
goods sold, amount paid for salary, Rent, Commission, Discount, etc.

i) Direct Expense:-
ii) Indirect Expense:-

Expenditure:-Any payment of cash or transfer of property or incurring a liability for the purpose of
acquiring assets, goods or services is called expenditure. This are three types.

i) Capital Expenditure:- Any expenditure which is incurred for acquiring or increasing the
value of a fixed asset is termed as capital expenditure. Example, Amount spent for purchase,
erection of Building, Plant, Furniture, etc.
ii) Revenue Expenditure:- Any Expenditure, from which the benefit is received during an
accounting period is termed as revenue expenditure.
iii) Deferred Revenue Expenditure:- The expenditures which are of revenue nature but the
benefit of which can be derived over a number of years is termed as Deferred Revenue
Expenditure.

Income:- Excess of revenue over expenses is called “Income”. Income is different from Revenue, amount
received from sale of goods is called revenue and the cost of goods sold is called expense. For example,
The Goods Costing is 22,000/- are sold for 30,000/- . The sale amounting to Rs. 30,000/- is the Revenue,
The Cost amounting is Rs. 22,000/- is Expense, and the difference between the two i.e. Rs. 8000/- is the
income. Income =Revenue – Expense.

i) Direct Income :-
ii) Indirect Income:-

Debtor:- The term Debtor represent those persons or firms to whom goods have been sold or services
rendered on credit and the payment has not been received from them. In other words, Debtors are the
persons or firms from whom the payment is to be received by the business in future or in due course of
time.

Creditor:- The term Creditor represent those persons or firms to whom goods have been Purchased or
services rendered on credit and the payment has not been Paid to them. In other words, Creditor are the
persons or firms from whom the payment is to be Paid by the business in future or in due course of time.

Goods:- The term goods means the things in which the business deals in.
Purchase:- In accounting , the term purchase means the purchase of Goods in which the business deals.

Purchase Returns or Returns Outward:- When Goods were purchased on credit earlier and if for some
reasons any of these goods are returned to the supplier.

Sales:- The term sales is used only for the sale of those goods which are purchased for the purpose of
resale.

Sales Returns or Returns inward:- When Goods were Sales on credit earlier and if for some reasons any of
these goods are returned by the Customer.

Cost:- Cost means expenses incurred in a business for the purpose of earning revenue.

Gain:- gain is a monetary benefit, profit or advantage resulting from a business transaction or a group of
transactions.

Loss:- When the expenses incurred by a business in a particular period exceed the revenue, it means that
the operation of the business has resulted in to a loss.

Profit:- Profit is the excess of revenue earned during a particular period over expenses incurred during that
particular period.

Voucher:- Voucher is the document on the basis of which transactions are recorded in the books of
account.

Discount:- Discount means a reduction on the price of the goods. There are two types of discount-

i) Trade Discount:- Trade Discount is a reduction allowed in the list price by the
wholesaler or distributor in order to enable the retailer to sell the goods to
customers at the list price and still have a margin to cover his expenses and to earn a
profit.
ii) Cash Discount:- When the goods are sold on credit the payment will be received at
future date. Therefore , in order to induce the debtor debtors to clear their dues
within a specified date, a further discount may be allowed such discount is called
cash discount. It is allowed on net invoice value i.e. on the amount remaining after
deduction of trade discount.

Goods & Service Tax:- Goods & Service Tax (GST) is a tax on supply of goods or services or both. All indirect
taxes like Excise Duty, Sales Tax, VAT, Service Tax etc. have been merged into a single tax known as GST.
GST is collected from the buyer by seller at the time of supply.

Accounting Principles
Accounting is the language of business through which the business communicates the results or the end
product of the whole accounting process to the user group. In order to make this language meaningful,
intelligible and commonly understandable by all. It becomes necessary that accounting should be based on
some rules or principles. Some principle are given below.

i) Money Measurement Concept :- In a business, A number of events- both monetary and non
monetary – take place. According to Money Measurement concept, only those events which
are capable of being expressed in terms of money are recorded in the books of account. The
 accounting system uses money as its basic unit of measurement. Every even transaction
before being recorded must have been expressed in terms of money.
ii) Going Concern Concept:- Going Concern concept is another important concept on the basis
of which transactions are recorded in the books of accounts. While recording business
transactions in the books of accounts. It is assumed that the business will be carried on for a
long time to carry out its objects.
iii) Periodicity Concept:- The life of the business is divided into appropriate segment or period
for studying the results shown by the business after each segment or period. This is because,
though the life of the business is considered to be indefinite, the measurement of income
and studying the financial position of business after a very long period would not be helpful
in taking corrective steps at the appropriate time. Therefore , after each segment or period
businessman must stop and see back how things are going. In accounting such segment or
period is called Periodicity Concept and the period is 1st April to 31st March of next year.
iv) Accrual concept :- Accrual concept is a concept of accounting under which all transactions
taking place during a particular accounting period. Let us assume that accounting year of an
entity ends on 31st March, if goods are sold on credit of March 2019, and the payment
received of April 2019, entry for the sale would be made in the books of account in the
March of 2019, accounting year 2018-19, not 2019-20, as the legal right to receive the
money from the debtor has arisen during the accounting year 2018-19.
v) Business Entity :- or Separate entity concept is A business and a business man are separate
from each other, because business is always considered as distinct and separate from the
business he owns. Business unit should have a completely separate set of books and the
business transactions are recorded from the point of view of the firm and not from the point
of view of the proprietor.
vi) Matching Concept:- Matching concepts tells about expenses incurred during a period to
be recorded in the same period in which revenues are earned. Revenues and expenses in
income statement are matched for a period of time. Investors get a better idea about
economics of the business. the matching principle states that the related revenues and
expenses must be matched in the same period. This is done in order to link the costs of an
asset or revenue to its benefits.
vii) Realization Concept:- The realization principle is the concept that revenue can only be
recognized once the underlying goods or services associated with the revenue have been
delivered or rendered, respectively. Thus, revenue can only be recognized after it has been
earned. ... Advance payment for services.

Rules of Debit and Credit When Accounts are Classified According to Traditional Classi-
fication of Accounts:-

Debit and credit are simply additions to or subtraction from an account. In accounting, debit refers to
the left hand side of any account and credit refers to the right hand side. Asset, expenses and losses
accounts normally have debit balances; liability, income and capital accounts normally have credit
balances.

The term debit is derived from the latin base debere (to owe) which contracts to the "Dr" used in
journal entries to refer to debits. Credit comes from the word credere (that which one believes in, including
persons, like a creditor), which contracts to the "Cr." used in journal entries for a credit.
Personal Accounts:

Debit the account of the person who receives something and credit the account of the person who
gives something.

Real Accounts:

Debit the account of the asset/property which comes into the business or addition to an asset, and
credit the account which goes out of the business. When furniture is purchased for cash, furniture account
is debited (which comes into the business) and cash account is credited (which goes out of the business).

Nominal Accounts:

Debit the accounts of expenses and losses, and credit the accounts of incomes and gains. When wages are
paid, wages account is debited (expense) and cash account is credited (asset goes out).

Valuation Account:

Debit the account when the account is to be reduced and credit the account when the account is to be
increased.

Rules of Debit and Credit at a Glance

Types of Account Account to be Debited Account to be credited

Personal account Receiver Giver

Real account What comes in What goes out

Nominal account Expense and loss Income and gain

Valuation account When account to be decrease When account to be increase

Example:

From the following transactions, state the nature of accounts and state which account will be debited and which
account will be credited.

1. Mr. A started business with $50,000 5. Sold goods to B for $6,000.

2. Purchased goods for cash $10,000. 6. Purchased furniture for $4,000.

3. Sold goods for cash $15,000 7. Purchased plant or $10,000.

4. Purchased goods from X for cash $5,000 8. Paid wages $400

Solution:
SN. Accounts Involved Nature of Accounts Debit or Credit

1. Cash account Real Debit (incomings)

Capital account Personal Credit (giver)
2. Purchases account Nominal Debit (expenses)
Cash account Real Credit (outgoings)
3. Cash account Real Debit (incomings)
Sales account Nominal Credit (income)
4. Purchases account Nominal Debit (expenses)
Cash account Real Credit (outgoings)
5. B account Personal Debit (receiver)
Sales account Nominal Credit (income)
6. Furniture account Real Debit (incomings)
Cash account Real Credit (outgoings)
7. Plant account Real Debit (incomings)
Cash account Real Credit (outgoings)
8. Wages account Nominal Debit (expenses)
Cash account Real Credit (outgoings

Rules of Debit and Credit When Accounts are Classified According to Modern
Classification of Accounts:

SN. Types of Account Account to be Debited Account to be Credited

1. Assets account Increase Decrease

2. Liabilities account Decrease Increase

3. Capital account Decrease Increase

4. Revenue account Decrease Increase

5. Expenditure account Increase Decrease

6. Withdrawal account Increase Decrease

Example:
From the following transaction, state the nature of accounts and state which account will be debited and which
account will be credited:

1. Mr. A started business with $50,000 5. Sold goods to B for $6,000.

2. Purchased goods for cash $10,000. 6. Purchased furniture for $4,000.

3. Sold goods for cash $15,000 7. Purchased plant or $10,000.

4. Purchased goods from X for cash $5,000 8. Paid wages $400

Solution:

Nature of
SN. Transaction Accounts Involved Debit ($) Credit ($) Reason
Account

1. Mr. A started business with $50,000 Cash Asset 50,000 Increased

Capital Liability 50,000 Increased

2. Purchased goods for cash $10,000. Purchased Expense 10,000 Increased

Cash Asset 10,000 Decreased

3. Sold goods for cash $15,000 Cash Asset 15,000 Increased

Sales Revenue 15,000 Increased

4. Purchased goods from X for cash $5,000 Purchases Expense 5,000 Increased
Cash Asset 5,000 Decreased

5. Sold goods to B for $6,000. B Asset 6,000 Increased

Sales Revenue 6,000 Increased

6. Purchased furniture for $4,000. Furniture Asset 4,000 Increased

Cash Asset 4,000 Decreased

7. Purchased plant or $10,000. Plant Asset 10,000 Increased

Cash Asset 10,000 Decreased

8. Paid wages $400 Wages Expense 400 Increased

Cash Asset 400 Decreased

Definition and Explanation of Journal:

 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 named so. As soon as a transaction takes
place its debit and credit aspects are analyzed and first of all recorded chronologically (in the order of their
occurrence) in a book together with its short description. This book is known as journal. Thus we see that
the most important function of journal is to show the relationship between the two accounts connected with
a transaction. This facilitates writing of ledger. Since transactions are first of all recorded in journal, so it is
called book of original entry or prime entry or primary entry or preliminary entry, or first entry.

Entry:
Recording a transaction in the appropriate place of the concerned book of account is called entry. Entry
may be of the following two types:

Journal Entry:

Recording a transaction in a journal is called journal entry or journalizing.

Ledger Entry:

Recording a transaction from journal to the concerned account in the ledger is called ledger entry. It is also
known as ledger posting.

Narration:
A short explanation of each transaction is written under each entry which is called narration. The subject
matter of the transaction can be ascertained through narration. Besides this, if there be any mistake in
determining debit or credit aspect of a transaction, it can be easily detected from narration. "A journal entry
is not complete without narration".

Characteristics:
Journal has the following features:

1. Journal is the first successful step of the double entry system. A transaction is recorded first of all in
the journal. So, journal is called the book of original entry.
2. A transaction is recorded on the same day it takes place. So, journal is also called a day book.
3. Transactions are recorded chronologically. So, journal is called chronological book.
4. For each transaction the names of the two concerned accounts indicating which is debited and
which is credited, are clearly written into consecutive lines. This makes ledger - posting easy. That
is why journal is called "assistant to ledger" or "subsidiary book".
5. Narration is written below each entry.
6. The amount is written in the last two columns - debit amount in debit column and credit amount in
credit column.

Advantages of Journal:
The following are the advantages of journal:

1. 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.
2. Since the transactions are kept recorded in journal chronologically with narration, it can be easily
ascertained when and why a transaction has taken place.
3. 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.
 4. Since all the details of transactions are recorded in journal, it is not necessary to repeat them in
ledger. As a result ledger is kept tidy and brief.
5. Journal shows the complete story of a transaction in one entry.
6. Any mistake in ledger can be easily detected with the help of journal.

Format of Journal:

Date Particulars L.F Amount Amount

Account to be debited .............................Dr. XXX
Account to be credited XXX
(Narration)

Rules for Journalizing:

How a transaction is recorded in journal, is discussed below:

Suppose the transaction is:

Purchased furniture from M. A on 10.01.05 for $16,000.

Here furniture accounting is debited and M A account is credited.

Date Particulars L.F Amount Amount

10.01.05 Furniture A/C .............................Dr. 16,000
M. A A/C 16,000
(Being cost of furniture purchased)

The various columns of journal are explained in details below:

Date:
This column is used to write the date of the business transaction. Different date formats are used in
different countries. Different formats of date are: 15.03.1981, 03.15.1981, 15 March 1981 etc.

Particulars or Details Column:

In this column the names of the two connected accounts are written in two consecutive lines - in the first
line the name of account debited and in the second line the name of account credited. While the name of
account debited always placed close the the left hand margin line, the name of account credited is
commenced a short distance away from the margin line. This arrangement will show clearly which account
is debited and which credited. This also shows that credit amount is placed on the right side of debit
amount. The world "Dr" is used at the end of the name of account debited. It is not necessary to place the
word "Cr." after the name of the credited account, because if one account is Dr. it follows that the other
account must be Cr. Below the names of the two accounts, i.e. in the third line narration is written usually
within a bracket. According to tradition, narration is written starting with a word "being". But modern practice
is not to use this word. In most of countries even in Great Britain using the word "To" at the beginning of the
name of account credited has become out-dated. So, here it has not been used too. But it is optional for the
students.

Ledger Folio (L.F):

The page numbers of the ledger where the two concerned accounts have been posted, are written in this
column against the name of each account. This will help locating easily the two concerned accounts from
the ledger. On the other hand, when a transaction is posted to ledger, the concerned folio number of the
ledger is written in this column. Thus if a folio number stands written in this column, it will mean that the
transaction has already been posted to ledger.

Amount:

The debit amount is written in the first "amount" column against the name of account debited and the credit
amount in the second "amount" column against the name of account credited.

Note: Although the above form of journal is used in examination answer book. It is not fully correct.
Because in large concerns journal is divided into eight subdivisions for the sake of convenience. Out of
them only in one subdivision (i.e. journal proper) the above form is used. In the remaining seven
subdivisions the form of journal is different.

Simple Entry and Compound Entry:

Every transaction effects two accounts - one is debited and another is account is credited. Thus in
recording a transaction in a journal one account is debited and another account is credited. This type of
entry is called simple entry.

The entry in which more than one account is debited or more than one account is credited, is known as
compound entry. Three or more accounts are connected with a compound entry.

Example of Simple Entry:

For example, on 10.04.05 we bought furniture from S. The entry is:

Date Particulars L.F Amount Amount

10.04.05 Furniture A/C .............................Dr. 10,000
S A/C 10,000
(Being furniture purchased on credit)

Example Compound Entry:

For example on 16.05.05 we paid $ 1,000 on account of salaries and $600 on account of rent. For this the entry will
be:

Date Particulars L.F Amount Amount

16.05.05 Salary A/C .............................Dr. 1,000
Rent A/C 600
Cash A/C 10,000
(Being salaries and rent)

Here tow accounts have been debited and the entry involves three accounts. Hence, it is a compound entry.

Personal Books and Business Books:

It should be noted here that no private transactions of the proprietor can be recorded in the books of
business. On the other hand, no transactions of the business can be recorded in the books of its proprietor.
But the transactions in between proprietor and business must be recorded in the books of both the
proprietor and business. If these rules are not strictly followed, the books of account will fail to disclose the
true result of business.

We are concerned with the books of business, not with the private books of proprietor. Transactions
between the business and its proprietor are recorded in the following two accounts:
 1. Capital Account: The money with which proprietor starts his business is called capital. When
proprietor brings capital in the business, it is recorded in capital A/C. Capital account is in fact the
personal account of the proprietor. So, it is a personal account. The proprietor has given the benefit
to the business through introduction of capital. So proprietor's account A/C, i.e. capital account will
be credited. From the view point of bookkeeping the introduction of capital to the business by
proprietor means that the proprietor lends the money to his business and the business becomes
indebted to him. The proprietor is regarded as a special or internal creditor to the business.

Example: Mr. R started a business with $20,000

Date Particulars L.F Amount Amount

16.05.05 Cash A/C .............................Dr. 20,000
Capital A/C 20,000
(Being capital brought in)

2. Drawings: If the proprietor draws any money or takes goods from his business for his personal use,
it will be recorded in drawings A/C. Drawings A/C is the personal account of the proprietor, so it is
classified as the personal account. Proprietor receives benefit, when he withdraws money or goods
from business. So the proprietor's account i.e. drawing is debited.

Example:

Date Particulars L.F Amount Amount

16.05.05 Drawings A/C .............................Dr. 2,000
Cash A/C 2,000
(Being amount withdrawn by proprietor)

Cash Discount:
The manufacturers and whole sellers frequently grant cash discount to their debtors who will pay their
debts before due date for goods purchased by them on credit. The seller regards it a "cash discount" or
"sale discount" or "discount allowed". The buyer calls the discount as "purchase discount" or "discount
received". The use of sales discount not only stimulates prompt collection but also tend to the possibilities
of losses resulting from "bad debts”.

Example of Journal:
Journalize the following transactions:

2005
Feb. 3 X commenced business with a capital of $15,000
05 Purchased good $6,000
07 Purchased goods on credit from S & Co. $3,000
10 Purchased furniture $2,400
11 Sold goods $3,900
15 Sold goods on credit to D $2,250
20 Paid salaries $960
25 Received commission $75
26 Returned goods to S & Co. $600.
27 Returned goods by D $450
28 Received from D $1,500
Paid to S & Co. $1,800
X withdrew from business $900
Charged depreciation on $240
Borrowed from K $1,500

Solution:

Journal

Date Particular L.F Amount Amount

2005

Feb. Cash A/C ......................................................Dr. 15,000

3 Capital 15,000
(Being capital brought in)
5 Purchases A/C...............................................Dr. 6,000
Cash A/C 6,000
(Being goods purchased for cash)
7 Purchases A/C...............................................Dr. 3,000
S & Co. A/C 3,000
(Being goods purchased form S & Co on credit)
10 Furniture A/C.................................................Dr. 2,400
Cash A/C 2,400
(Being furniture purchased for cash)
11 Cash A/C......................................................Dr. 3,900
Sales A/C 3,900
(Being goods sold for cash)
15 D Bros. A/C..................................................Dr. 2,250
Sales A/C 2,250
(Being goods sold on credit to D)
20 Salaries A/C.................................................Dr. 960
Cash A/C 960
(Being salaries paid)
25 Cash A/C......................................................Dr. 75
Commission A/C 75
(Being commission received)
26 S & Co. A/C..................................................Dr. 600
Purchases A/C Return 600
(Being goods returned to S & co.)
27 Sales Returns A/C........................................Dr. 450
 D Bros. A/C 450
(Being goods returned by D Bros.)
28 Cash A/C......................................................Dr. 1,500
D Bros. A/C 1,500
(Being amount received from D Bros.)
" S & Co. A/C..................................................Dr. 1,800
Cash A/C 1,800
(Being amount paid to S & Co.)
" Drawings A/C................................................Dr. 900
Cash A/C 900
(Being amount paid to S & Co.)
" Depreciation A/C...........................................Dr. 240
Furniture A/C 240
(Being depreciation charged on furniture)
" Cash A/C......................................................Dr.
K A/C
(Being amount borrowed from K)

Definition and Explanation of Ledger:

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.

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

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. 17 Cash A/C 1,200 Dec. 17 Purchases A/C 2,000

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.

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:

Total debit = More than total credit = Debit balance

Total credit = More than total debit = Credit balance

 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.

Example:

Enter the following transactions in journal and post them into ledger:

2005

Jan. 1 Mr. Javed started business with cash $100,000

2 He purchased furniture for $20,000

3 He purchased goods for $60,000

5 He sold goods for cash $80,000

6 He paid salaries $10,000

Solution:

Journal

Date Particular L.F Amount Amount

2005

Jan. 1 Cash A/C .....................................................Dr. 9 100,000

Capital 11 100,000
(Being capital brought in)

2 Furniture A/C.................................................Dr. 13 20,000

Cash A/C 9 20,000
(Being furniture purchased for cash)

3 Purchases A/C...............................................Dr. 15 60,000

Cash A/C 9 60,000
(Goods purchased for cash)

5 Cash A/C......................................................Dr. 9 80,000

Sales A/C 17 80,000
(Sold goods for cash)

6 Salaries A/C..................................................Dr. 19 10,000

Cash A/C Return 9 10,000
(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

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

Trial Balance

Definition and Explanation:

Trial balance may be defined as an informal accounting schedule or statement that lists the ledger account
balances at a point in time compares the total of debit balance with the total of credit balance.

The fundamental principle of double entry system is that at any stage, the total of debits must be equal to
the total of credits. If entries are recorded and posted correctly, the ledger will reflect equal debits and
credits, and the total credit balance will then be equal to the total debit balances.

Every business concern prepares final accounts at the end of the year to ascertain the result of the
activities of the whole year. To ensure correct result, the concern must be free from doubt that the books of
accounts have been correctly recorded throughout the year. Trial balance is prepared to test the
arithmetical accuracy of the books of accounts. As we know that under double entry system for each and
every transaction one account is debited and other account is credited with an equal amount. If all the
transactions are correctly recorded strictly according to this rule, the total amount of debit side of all the
ledger accounts must be equal to that of credit side of all the ledger accounts. This verification is done
through trial balance.

If the trial balance agrees we may reasonably assume that the books are correct. On the other hand, if it
does not agree, it indicates that the books are not correct - there are mistakes somewhere. The mistakes
are to be detected and corrected otherwise correct result cannot be ascertained. There are however, a few
types of errors which the trial balance cannot detect. In other words, the trial balance will agree in spite of
the existence of those errors.

The trial balance is not an absolute or solid proof of the accuracy of books of accounts. Thus if trial balance
agrees, there may be errors or may not be errors. But if it does not agree, certainly there are errors.

Purposes of Trial Balance:

The trial balance serves two main purposes. These are as under:

1. To check the equality of debits and credits - an arithmetical or mathematical test of accuracy.
 2. To provide information for use in preparing final accounts.

Methods of Preparing Trial Balance:

There are three methods for the preparation of trial balance. These methods are:

1. Total or gross trial balance

2. Balance or net trial balance
3. Total - cum - balance trial balance

The method 1 and 2 are described below:

Total or Gross Trial Balance:

Under this method the two sides of all the ledger accounts are totaled up. Thereafter, a list of all the accounts is
prepared in a separate sheet of paper with two "amount" columns on the right hand side. The first one for debit
amounts and the second one for credit amounts. The total of debit side and credit side of each account is then placed
on "debit amount" column and "credit amount" column respectively of the list. Finally the two columns are added
separately to see whether they agree of not. This method is generally not followed in practice.

Balance or Net Trial Balance:

Under this method, first of all the balances of all ledger accounts are drawn. Thereafter, the debit balances and credit
balances are recorded in "debit amount" and "credit amount" column respectively and the two columns are added
separately to see whether they agree or not. This is the most popular method and generally followed.

The various Steps involved in the preparation of Trial Balance under this method are given below:

1. Find out the balance of each account in the ledger.

2. Write up the name of account in the first column.
3. Record the account number in second column.
4. Record the debit balance of each account in debit column and credit balance in credit column.
5. Add up the debit and credit column and record the totals.

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)
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

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
Jan. 8 Discount A/C 5 200 Nil

Discount Account (No.19)

Date references J.R Debit Credit Balance

2005 Dr. Cr.
Jan. 8 S A/C 5 200 200

Trial Balance

S. No. Account Name A/C No. Debit Credit

1 Cash Account 5 105,800
2 Furniture Account 7 20,000
3 Capital Account 9 -- 100,000
4 Purchases Account 11 30,000
5 Y Account 13 -- 30,000
6 Sales Account 15 -- 26,000
7 S Account 17 -- --
8 Discount Account 19 200 --
Total 156,000 1,56,000

Note: If an account shows zero balance, it is not necessary to record it in trial balance.
 Accountancy Book

(Prepared For Tally Software)