UNIT 2

ACCOUNTING PROCESS
TABLE OF CONTENTS
1.0 Learning Objectives
2.0 Introduction
3.0 Double Entry Accounting
3.1 Classification of accounts under Traditional approach
3.2 Classification of accounts under Accounting Equation approach
3.3 Comparison of traditional approach with modern equal approach
4.0 Accounting Trail
5.0 Transactions and events
6.0 Meaning and roles of debit and credit
6.1 Accounting equation
7.0 Books of accounts
7.1 Journal
7.2 Ledger
7.3 Cash book
7.4 Petty cash book
8.0 Preparation of Trial balance
8.1 Objectives of preparing Trial Balance
8.2 Methods of preparing Trial Balance
9.0 Self-assessment questions
10.0 Summary
11.0 Glossary
12.0 Terminal questions
13.0 Answers for SAQ’s
14.0 References
1.0 Learning Objectives:

After studying this unit, you should be able to:

 Define the accounting equation and describe the effects of financial transactions on it.
 Explain the double-entry system and the rules of debit and credit entries.
 Apply the rules of debit and credit to various business transactions.
 Compare and contrast the traditional and modern approaches to the classification of accounts.
 Evaluate the accuracy of financial statements by preparing a trial balance and identifying
discrepancies.
 Create journal entries for transactions and generate financial reports using the double-entry
system

2.0 Introduction

Double Entry Accounting is a foundational system in financial accounting where each transaction
impacts at least two accounts, maintaining a balance through corresponding debits and credits.
Accounts are classified traditionally into three types: Real, Personal, and Nominal. Under the
Accounting Equation approach, accounts fall under assets, liabilities, and equity, aligning with the
fundamental equation: Assets = Liabilities + Equity. While the traditional approach classifies
accounts based on their nature, the modern approach centers on the accounting equation, enhancing
financial clarity.
The Accounting Trail traces financial activities from source documents to final records,
encompassing transactions, events, and the impacts of debits and credits. The accounting equation
serves as a guide in this system, reflected in Books of Accounts like Journals, Ledgers, and Cash
Books. Compiling these records helps in preparing a trial balance, ensuring the accuracy of
financial statements. Understanding these core elements helps us build a solid accounting
foundation.

3.0 Double entry system

There are two systems of keeping records- Single entry system and Double entry system. The
single entry system appears to be time -saving and economical but it is unscientific as under this
system some transactions are not recorded at all whereas some other transactions are recorded only
partially. On the other hand, the double entry system is based on scientific principles and is,
therefore, used by most of the business houses. The system recognises the fact that every
transaction has two aspects and records both aspects of each and every transaction. Under this
system, in every transaction an account is debited and some other account is credited. The crux of
accountancy lies in finding out which of the two accounts are affected by a particular transaction
and out of these two accounts which account is to be debited and which account is to be credited.

3.1 Classification of accounts under traditional approach

In traditional approach, accounts were classified into personal account, real account and nominal
account. Personal accounts were further classified into natural, artificial and representative personal
accounts. Real account catered to intangible and tangible assets while nominal accounts pertain to
income, expenses, and loss and gain items.

3.2 Classification of accounts under modern approach

In modern approach, accounts are classified into 5 types namely asset a/c, liability a/c, capital a/c,
income a/c and expenses a/c. We have adopted modern approach to accounting in explaining the
concept and in solving the problems. Let us now learn the classification of accounts under modern
approach.
Table 3.2: Classification of Accounts under Modern Approach
Types of Meaning Examples
Accounts
Asset Deals with tangible and intangible Land a/c, Building a/c, Plant & Machinery a/c,
account real assets. Cash a/c, Good will a/c, Trademark a/c, Patents
a/c, Investments a/c.

Liabilities Deals with the financial obligations Long term loans, Debentures, Bank loans, Trade
account of the firm on outsiders. creditors, Outstanding expenses.

Capital Deals with accounts of the owners Capital a/c, Drawings a/c.
account of the company
Revenue Deals with amount charged for Sales a/c, Royalty received a/c, interest received
account goods sold or service rendered, and a/c, dividend received a/c.
other incomes.

Expenses Deals with expenses incurred in the Purchases a/c, Discount allowed a/c, Interest
account process of earning revenue paid a/c, Loss by fire a/c.

Illustration 2:
List of examples of accounts and the category of accounts :
1. Capital (money brought in to the business) – capital a/c
2. Land – asset a/c
3. Patents (intangible asset) – asset a/c
4. Creditors (who owe to the firm) – liability a/c
5. Drawings (money withdrawn by the proprietor) – capital a/c
6. Cash (cash balance with the firm) – asset a/c
7. Sales (revenue earned by selling goods/services) – Revenue a/c
8. Purchases – (goods purchased for manufacturing/reselling) – Expenses a/c
9. Machinery – asset a/c
10. Discount allowed – expenses a/c
11. Investments – asset a/c
12. Interest paid, salaries paid – expenses a/c
13. Outstanding expenses (expenses incurred but not paid) – liability a/c
 14. Prepaid expenses (expenses paid in advance) – asset a/c
15. Outstanding income (income accrued but not received) – asset a/c

3.3Comparison between traditional approach and modern approach

While both approaches serve the same purpose—ensuring that every transaction has a
corresponding debit and credit—the modern approach is more streamlined and aligned with the
needs of today’s complex business environment, whereas the traditional approach is rooted in
earlier accounting conventions.
Following is the comparison between the Traditional Approach and Modern Approach of the
double-entry system of accounting in a table format:

Basis Traditional Approach Modern Approach

Classification of Assets, Liabilities, Equity, Revenue, and

Personal, Real, and Nominal
Accounts Expenses

Personal Accounts Debit the receiver, credit the giver -

Debit what comes in, credit what

Real Accounts -
goes out

Debit all expenses and losses, credit

Nominal Accounts -
all incomes and gains

Assets - Debit to increase, credit to decrease

Liabilities - Credit to increase, debit to decrease

Equity - Credit to increase, debit to decrease

Revenue - Credit to increase, debit to decrease

Expenses - Debit to increase, credit to decrease

Specific debit and credit rules based

Directly relates to the accounting
Rules on account type (personal, real,
equation (Assets = Liabilities + Equity)
nominal)

Requires familiarity with Easier to understand due to alignment

Understanding classification into personal, real, and with the accounting equation and global
nominal accounts standards

Common in manual accounting Widely used in computerized accounting

Application
systems; follows older conventions systems; aligned with IFRS and GAAP

4.0 Accounting trail

Accounting Trail (also known as the Accounting Cycle) refers to the systematic process of
recording and summarizing business transactions in financial accounting. This cycle ensures
accurate and consistent financial reporting.
1. Identifying Transactions: The process begins by identifying financial transactions, such as
sales, purchases, and payments, that affect the business.
2. Recording in Journals: Each transaction is recorded as a journal entry in the Journal,
using the double-entry system with corresponding debit and credit entries.
3. Posting to Ledgers: Journal entries are transferred to Ledger Accounts, which categorize
transactions under specific headings (e.g., Cash, Sales).
4. Preparing a Trial Balance: A Trial Balance lists all ledger balances, ensuring that total
debits equal total credits, which checks for any errors.
5. Adjusting Entries: Adjustments are made for accruals and prepayments to ensure that
revenues and expenses are recognized in the correct accounting period.
6. Financial Statements: The Income Statement, Balance Sheet, and Cash Flow Statement
are prepared to show the financial position and performance of the business.
7. Closing Entries: Temporary accounts like revenues and expenses are closed, transferring
their balances to equity accounts.
8. Post-Closing Trial Balance: A final trial balance is prepared to verify that all accounts are
properly closed.
This accounting trail helps businesses maintain accurate financial records and ensures transparency
and compliance with accounting standards.

5.0 Transactions and Events

Transactions in financial accounting are business activities that involve the exchange of monetary
value, such as purchases, sales, or payments. They are always measurable in financial terms and are
recorded in the company's accounts. Transactions can be classified as cash, credit, internal, or
external, depending on how they occur.
Events, on the other hand, are occurrences that may or may not involve money but can still affect
the financial position of a business. Some events, like signing a contract, may not be recorded
immediately, while others, like receiving rent, have a direct financial impact and are recorded. Both
transactions and events are important for accurate financial reporting.

6.0 Meaning and Rules of debit and credit entries

Accounting starts with recording and ends in presenting financial information in a manner, which
facilitates 'informed judgements and decisions by users’. The recording of transactions and events
follows a definite rule. Each transaction and/or event has two aspects or sides – debit and
credit.
Every debit has an equal and opposite credit

6.1 Accounting equation

A business concern requires resources (i.e., assets) for carrying on the business. These resources are
acquired through the finances or funds provided by two sources, viz., owners (i.e., owners' capital)
and creditors (i.e., liabilities). So, the accounting equation may be stated as a statement of equality
between the resources (i.e., assets) and the sources of finance (i.e., owners' capital and liabilities).
In short, the accounting equation is: Resources =Sources of finance.
The accounting equation asset = liabilities + capital, given above, can also be expressed in two
other ways. They are:
Assets – Liabilities = Capital
Assets – Capital = Liabilities

The accounting equation, viz., assets = liabilities + proprietor's capital, can be explained with a few
examples.
 Ascertain the variables (Assets, Liabilities or capital) of an equation affected by the
transaction.
 Find out the effect (in terms of increase or decrease) of a transaction on the variables of the
equation
 Show the effect on the appropriate side of an equation.
Illustration 1
Transaction 1: Started business with Rs.1, 00,000.
Variables affected Asset and capital
Effect of the transaction Increase in asset and capital
Accounting Equation Asset = Liabilities + Capital
1,00,000 = 0 + 1,00,000

Transaction 2: Purchased Goods for cash Rs.20,000

Variables affected Asset
Effect of the transaction Increase in asset (Stock) and decrease in another asset (cash)

Accounting Equation Asset = Liabilities + Capital

– 20,000 + 20,000 = 0 + 0
7.1 JOURNAL
Journal is the book of primary entry in which every transaction is recorded before being posted into the
ledger. It is that book of account in which transactions are recorded in a chronological (day to day) order. In
modern times, besides the main journal, specialized journals are maintained to record different type of
transactions. The process of recording transaction in a journal is termed as journalising. A journal is generally
kept on a columnar basis. Journalising is the root of accounting.
SPECIMEN OF JOURNAL
In the Books of …………..
Journal Entries

Date Particulars L.F. Debit Credit

Amount (`) Amount (`)
(i) (ii) (iii) (iv) (v)

(i) Date: The date on which the transaction has taken place is recorded here. The year is written at the top of
the date column of each page of the journal. On the next line of the date column, the month & day of the first
entry are written. Unless the month or year changes or until a new page is begun, neither the month nor the
year is repeated on the page.
(ii) Particulars: The two aspects of a transaction are recorded in this column i.e. the details regarding the
accounts which have to be debited and credited. 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. The name of the account to be credited is
entered on the next line with a prefix ‘To’ and is intended to the right of the date column. A brief explanation of
the transaction known as narration is written below the account titles of the transaction. Finally, a thin line is
drawn all through the particulars column to indicate that the entry of the transaction has been completed.

(iii) L.F. (Ledger Folio): This column records the page number in the ledger in which the accounts in the
particulars column are transferred (posted).
(iv) Amount (Debit): The debit amount is recorded in the amount (Dr.) column opposite to the title of the
account debited.
(v) Amount (Credit): The credit amount is recorded in the amount (Cr.) column opposite to the title of the
account credited.
Procedure of Journalising
The following procedure is followed for passing journal entries-
– Analyse each transaction in terms of accounts affected. As a rule, every transaction has at least two
accounts.
–Find out the type of accounts affected in a transaction i.e. personal, real or nominal.
–Apply the rules of debit and credit to each type of accounts involved.
–The debit and credit accounts must be equal.

Illustration 1:
Journalise the following transactions:
2022 `
Mar., 2 Commenced business with cash 2,50,000
” 4 Purchased furniture for cash 20,000
” 4 Cash purchases 1,45,000
” 5 Deposited with bank 30,000
” 6 Bought from Kiyan 40,000
Sold to Noor for cash 14,300
” 7 Stationery purchased 1,050
” 7 Bought from Rahil 26,000
” 7 Sold to Mayank 8,080
” 9 Rent for two years paid in advance 24,000
” 9 Drawings by the proprietor for household expenses 4,000
Goods taken out by the proprietor for domestic use 500
” 9 Cash withdrawn from Bank 25,000
” 10 Sold to Mathur on credit 9,850
” 11 Purchases made, payment through cheque 2,900
” 14 Cash received from Kiyan on account 10,000
 ” 14 Cash paid to Rahil after deduction of discount ` 1300 24,700
” 17 Cash received from Mathur in full settlement of his account 9,750
”18Mayank becomes insolvent. A dividend of
50 paise in a rupee is received 4,040
” 18 Purchase of a Scooter for cash 30,000
” 20 Sold goods to Aggarwal 8,640
Sold to Nayak 3,780
” 24 Cartage paid in cash 150
” 24 Repairs to Scooter, payment not yet made 170
” 26 Payment of cash for petrol 550
” 26 Purchases of goods for cash 12,000
” 26 Purchases of Office Equipment for cash 12,100
” 27 Repairs bill paid in cash 170
” 28 Aggarwal returns goods 400
” 31 Depreciation in furniture 100
Depreciation on Scooter 200
” 31 Salary to clerk outstanding 1,800
” 31 Adjustment for the month’s rent 1,000
” 31 Bank charges for the month 50
” 31 Interest on capital for the month 1,250
Salary to be credited to proprietor 2,000
”31Rahil agrees to take some defective goods purchased
from him and immediately refunds the money 700
Solution:
JOURNAL
Date Particulars L.F. Debit Credit
` `
2022
Mar., 2 Cash Account Dr. 2,50,000
To Capital Account 2,50,000
(For cash brought in by proprietor as his capital)
” 4 Furniture Account Dr. 20,000
To Cash Account 20,000
(For purchase of furniture for cash)
” 4 Purchases Account Dr. 1,45,000
To Cash Account 1,45,000
(For purchase of goods in trade for cash)
” 5 Bank Account Dr. 30,000
To Cash Account 30,000
(For cash deposited in bank)
” 6 Purchases Account Dr. 40,000
To Kiyan 40,000
(For credit purchases of goods in trade, Kiyan being the
supplier)
” 6 Cash Account Dr. 14,300
To Sales Account 14,300
(For cash sales made to Noor)
Total c/f 4,99,300 4,99,300
Date Particulars L.F. Debit Credit
` `
Total b/f 4,99,300 4,99,300
2022
Mar. 7 Stationery Account Dr. 1,050
To Cash Account 1,050
(For purchase of stationery for cash)
” 7 Purchases Account Dr. 26,000
To Rahil 26,000
(For credit purchases of goods to Rahil)
” 7 Mayank Dr. 8,080
To Sales Account 8,080
(For credit sales of goods to Mayank)
” 9 Rent Paid in Advance A/c Dr. 24,000
To Cash Account 24,000
(For rent paid in advance)
” 9 Drawings Account Dr. 4,500
To Cash Account 4,000
To Purchases Account 500
(For drawings in cash and goods made by the proprietor)
” 9 Cash Account Dr. 25,000
To Bank Account 25,000
(For cash withdrawn from Bank)
” 10 Mathur Dr. 9,850
To Sales Account 9,850
(For sales to Mathur on credit)
” 11 Purchases Account Dr. 2,900
To Bank Account 2,900
(For purchases of goods, payment made by means of
cheque)
” 14 Cash Account Dr. 10,000
To Kiyan 10,000
(For cash received from Kiyan)
” 14 Rahil Dr. 26,000
To Cash Account 24,700
To Discount Account 1,300
(For cash paid to Rahil and discount received from him)
” 17 Cash A/c Dr. 9,750
Discount Account Dr. 100
To Mathur 9,850
(For cash received from Mathur and discount allowed)
” 18 Cash Account Dr. 4,040
Bad Debts Account Dr. 4,040
To Mayank 8,080
(For cash received from Mayank on his insolvency and
amount written off as bad debt)
Total c/f 6,54,610 6,54,610
Date Particulars L.F. Debit Credit
` `
2022 Total b/f 6,54,610 6,54,610
Mar. 18 Scooter Account Dr. 30,000
To Cash Account 30,000
(For purchase of a scooter)
” 20 Aggarwal Dr. 8,640
Nayak Dr. 3,780
To Sales Account 12,420
(For credit sales made to Aggarwal and Nayak on this day)
” 24 Cartage Account Dr. 150
To Cash Account 150
(Cartage paid)
” 24 Repairs Account Dr. 170
To Repairs Outstanding A/c 170
(For repairs charges, outstanding)
” 26 Petrol Expense Account Dr. 550
To Cash Account 550
(For petrol expenses paid in cash)
” 26 Purchases Account Dr. 12,000
To Cash Account 12,000
(For cash purchases)
” 26 Office Equipment Account Dr. 12,100
To Cash Account 12,100
(For purchase of office equipment)
” 27 Repairs Outstanding A/c Dr. 170
To Cash Account 170
(Repairs outstanding paid)
” 28 Sales Returns Account Dr. 400
To Aggarwal 400
(Sales returns from Aggarwal)
” 31 Depreciation Account Dr. 100
To Furniture Account 100
(For depreciation on furniture)
” 31 Depreciation Account Dr. 200
To Scooter 200
(For depreciation on scooter)
” 31 Salary Account Dr. 1,800
To Salary Outstanding A/c 1,800
(For salary outstanding)
” 31 Rent Account Dr. 1,000
To Rent Outstanding A/c 1,000
(For rent outstanding)
Total c/f 7,25,670 7,25,670
 

Date Particulars L.F. Debit Credit

` `
Total b/f 7,25,670 7,25,670
2022
Mar., 31 Bank Charges Account Dr. 50
To Bank 50
(For bank charges)
” 31 Interest on Capital A/c Dr. 1,250
Salary to Proprietor Dr. 2,000
To Capital Account 3,250
(For interest on capital, Rs. 1250 and salary for the
proprietor credited with Rs. 2,000)
” Cash Account Dr. 700
To Purchase Returns A/c 700
(For cash received from Rahil on return of some defective
goods sold to him)
_______ _______
Total 7,29,670 7,29,670

7.2 LEDGER - PRINCIPAL BOOK OF ACCOUNTS

Ledger is the principal book of accounts where similar transactions relating to a particular person or property
or revenue or expense are recorded. In other words, it is a set of accounts. It contains all accounts of the
business enterprise whether real, nominal or personal. The main function of a ledger is to classify or sort out
all the items appearing in the journal or other subsidiary books under their appropriate accounts so that at the
end of the accounting period each account will contain the entire information of all the transactions relating to
it in a summarised or condensed form.

SPECIMEN RULING OF LEDGER

Dr. ACCOUNT Name of the Account Cr.

Date Particulars J.F Amount Date Particulars J.F Amount

` `
 .

Illustration 2:
Journalise the following transactions, post them in the ledger and balance the accounts in the books of Mr. Rajesh.

2022 `
Jan. 1 Started business with cash 2,00,000
Jan. 3 Purchased goods for cash 60,000
Jan. 5 Sold goods to Saroj 60,000
 

Jan. 6 Sold goods for cash 20,000

Jan. 9 Received cash from Saroj 40,000
Jan. 13 Goods purchased from Yuvaan 40,000
Jan. 20 Cash paid to Yuvaan 20,000
Jan. 25 Paid office rent 4,000
Jan. 31 Paid salaries to staff 20,000
Jan. 31 Returned goods by Saroj 10,000
Solution:
In the Books of Mr. Rajesh
Journal Entries
Date Particulars L.F. Debit (`) Credit (`)
2022
Jan. 1 Cash Account Dr. 2,00,000
To Capital Account 2,00,000
(Being capital introduced by the proprietor in cash)
Jan., 3 Purchases Account Dr. 60,000
To Cash Account 60,000
(Being goods purchased for cash)
”5 Saroj Dr. 60,000
To Sales Account 60,000
(Being goods sold on credit to Saroj)
”6 Cash Account Dr. 20,000
To Sales Account 20,000
(Being goods sold for cash)
”9 Cash Account Dr. 40,000
To Saroj 40,000
(Being the cash received from Saroj)
” 13 Purchases Account Dr. 40,000
To Yuvaan 40,000
(Being goods purchased on credit from Yuvaan)
” 20 Yuvaan Dr. 20,000
To Cash Account 20,000
(Being cash paid to Yuvaan)
” 25 Rent Account Dr. 4,000
To Cash Account 4,000
(Being office rent paid in cash)
” 31 Salaries Account Dr. 20,000
To Cash Account 20,000
(Being salaries paid to staff)
” 31 Sales Returns Account Dr. 10,000
To Saroj 10,000
(Being goods returned by Saroj)
_______ _______
Total 4,74,000 4,74,000
 Ledger Accounts
Dr. Cash Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022 2022
Jan. 1 To Capital A/c 2,00,000 Jan. 3 By Purchases A/c 60,000
”6 To Sales 20,000 ” 20 By Yuvaan 20,000
”9 To Saroj 40,000 ” 25 By Rent A/c 4,000
” 31 By Salaries A/c 20,000
_______ ” 31 By Balance c/d 1,56,000
2,60,000 2,60,000
Feb. 1 To Balance b/d 1,56,000
Dr. Capital Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
Jan. 31 To Balance c/d 2,00,000 Jan. 1 By Cash A/c 2,00,000
2,00,000 2,00,000
Feb. 1 By Balance b/d 2,00,000
Dr. Purchases Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022 2022
Jan. 3 To Cash A/c 60,000 Jan. 31 By Balance c/d 1,00,000
” 13 To Yuvaan 40,000 _______
1,00,000 1,00,000
Feb. 1 To Balance c/d 1,00,000
Dr. Sales Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022 2022
Jan. 31 To Balance c/d 80,000 Jan. 5 By Saroj 60,000
______ ”6 By Cash A/c 20,000
80,000 80,000
Feb. 1 By Balance b/d 80,000
Dr. Saroj Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022 2022
Jan. 5 To Sales Account 60,000 Jan. 9 By Cash A/c 40,000
” 31 By Sales Returns 10,000
_____ ” 31 By Balance c/d 10,000
60,000 60,000
Feb. 1 To Balance b/d 10,000
Dr. Yuvaan Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022 2022
Jan. 20 To Cash Account 20,000 Jan. 13 By Purchases A/c 40,000
”31 To Balance c/d 20,000 _____
40,000 40,000
Feb. 1 By Balance b/d 20,000
Dr. Rent Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022 2022
Jan. 25 To Cash Account 4,000 Jan. 31 By Balance c/d 4,000
4,000 4,000
Feb. 1 To Balance b/d 4,000
Dr. Salaries Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022 2022
Jan. 31 To Cash Account 20,000 Jan. 31 By Balance c/d 20,000
20,000 20,000
Feb. 1 To Balance b/d 20,000
Dr. Sales Returns Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022 2022
Jan. 31 To Saroj 10,000 Jan. 31 By Balance c/d 10,000
10,000 10,000
Feb. To Balance b/d 10,000

7.3 CASH BOOK

Cash book is the book in which all transactions concerning cash receipts and cash payments are recorded. Cash
Book is in the form of an account. It serves the purpose of Cash Account also. On the debit side, all cash receipts
are recorded while on the credit side, all cash payments are recorded. In case of cash transactions, only a single
aspect of transactions is recorded in ledger because the other aspect has to be recorded in Cash Book. Cash Book
thus serves the purpose of a book of original entry as well as that of a ledger account.

Types of Cash Book

(i) Single Column Cash Book: It is like an ordinary cash account. In this all cash receipts are recorded on
the left hand side (real account - debit what comes in) and all cash payments are recorded on the right hand
side (real account - credit what goes out).
Dr. Cash Book (Single Column) Cr.

Date Particulars L.F. Amount ` Date Particulars L.F Amount `

(ii) Two (Double) Columnar Cash Book: It has two amount columns on both sides; one is for cash and
another is for discount. Cash column is meant for recording cash receipts and payments while discount
column is meant for recording discount received and allowed. The discount column on the debit side
represents the discount allowed while discount column on the credit side represents the discount received.
 Dr. Cash Book (Double Column) Cr.

Date Particulars L.F. Discount Amount Date Particulars L.F Discount Amount
` ` ` `

Note: Discount columns do not serve the function of a discount account. Discount columns are merely
memorandum columns. Discount allowed account and discount received account are opened in the ledger
and the totals of discount columns are posted in these accounts.
Illustration 4:

Record the following transactions in Cash Book of Mr. Singh:

2023 `
April 1 Mohan Lal commenced business with cash 1,00,000
” 2 Bought goods for cash 65,700
” 3 Sold goods for cash 4,320
” 6 Received cash from Fateh Singh 1,800
” 6 Allowed him discount 50
” 9 Paid cash to Rashi 19,500
Discount allowed by Rashi 500
” 12 Paid for Office Furniture 5,680
” 18 Sold goods for cash 7,810
” 23 Received cash from yuvaan 9,870
” Discount allowed to him 120
” 27 Paid for advertising 500
” 28 Cash paid to Asia Trading Co. 20,300
Discount received 250
” 30 Cash sales 1,280
” 30 Cash received from Fateh Singh 2,850
Discount allowed to him 100
Salary paid in cash 3,150
Solution:
Mr. Singh
Dr. Cash Book Cr.
Date Particulars L.F Discount Cash Date Particulars L. Discount Cash
` ` F ` `
2023 2023
April April
1. To Capital A/c 1,00,000 2. By
3. To Sales A/c 4,320 Purchases
6. To Fateh Singh 50 7,810 A/c 65,700
18. To Sales A/c 1,800 9. By Rashi
23. To Yuvaan By Furniture 500 19,500
30. To Sales A/c 120 9,870 12. A/c
30. To Fateh Singh 1,280 By 5,680
100 2,850 Advertising
27. By Asia 500
Trading Co.
28. By Salary 250 20,300
By Balance 3,150
c/d 13,100
30.
30.
___ _______ ___ _______
May1 To Balance B/d 270 1,27,930 750 1,27,930
13,100

REVIEW QUESTIONS
1. ____ Cash book has two account columns on both sides
Double/Triple).

2. Only _____ transactions are recorded in cash book (cash/credit).

3. Bills Payable is _____ for the organization (asset/liability).

(iii) Three Columnar Cash Book: This type of cash book contains the following three amount columns on
each side:
(a) Discount column for discount received and allowed;
(b) Cash column for cash received and cash paid; and
(c) Bank column for money deposited and money withdrawn from the bank.
Dr. Cash Book (Triple Column) Cr.

Date Particulars L.F. Discount Cash Bank Date Particulars L.F Discount Cash Bank
` ` ` ` ` `
When triple column cash book is prepared, there is no need for a separate bank account in the ledger. The
bank account maintained by the enterprise is a personal account and the cash account is a real account. For
recording transactions in the bank column of the cash book the rule of debit and credit applicable to personal
accounts should be followed i.e. debit the receiver and credit the giver. Thus, when cash is deposited into
bank, the bank would be the receiver and would be debited in the bank column of the cash book. Similarly, for
cash withdrawn from the bank the bank would be the giver and would be credited in the bank column of the
cash book.
Contra Entry: If a transaction involves both cash and bank account, it is entered on both sides of the cash
book, one in the cash column and second in the bank column, though on opposite sides. This is called contra
entry and word ‘C’ is indicated against that item in L.F. column. e.g. when cash is withdrawn from the bank, it
is recorded on the debit side in cash column and on the credit side in the bank column. Similarly, when cash
is deposited with the bank, the amount is recorded on the debit side in bank column and on the credit side in
the cash column.
Illustration 5:

On 1st May, 2021 the columnar cash book of Mitra showed that he had ` 2,000 in his cash box and that there
was a bank overdraft of ` 8,000. During the day the following transactions took place:

Cash withdrawn from bank for office use 10,000

Paid salaries in cash 3,000

Cash paid to Harish & Co. 6,500

Drawings in cash made by Mitra for household expenses 1,000

Received from G. Guha in settlement of an account of ` 10,000,

` 1,800 in cash and a cheque of ` 8,000. The cheque was

immediately deposited in bank

Cash sales 6,500

Bank returns a cheque of ` 9,900 received from Kulu & Sons in

settlement of an account of ` 10,000

Paid rent by cheque 1,500

Cash deposited with bank 6,000

Write up the Cash Book for the day and balance it.
Solution:
Dr. Cash Book (Triple Column) Cr.

Date Particulars L.F. Discount Cash Bank Date Particulars L.F. Discount Cash Bank
` ` ` ` ` `

2021 2021
May To Bal b/d 2,000 May By Bal b/d 8,000
1
1 To Bank (C) 10,000 By Cash (C) 10,000
To G.Guha 200 1,800 8,000 By
To Sales Salaries
3,000
A/c
A/c 6,500
By Harish 6,500
To Cash (C) 6,000
By
To Bal c/d 15,400
Drawings
A/c 1,000

By Kulu & 100 9,900

Sons
By Rent 1,500
A/c
By Bank (C) 6,000
______ _____ _____
By Bal c/d ______ ___3,800 _____
___200 20,300 29,400
___200 20,300 29,400

May To Balance 3,800 May By 15,400

2 b/d Balance
2
b/d

7.4 PETTY CASH BOOK

Payments in cash of small amounts like traveling expenses, postage, carriage etc. are petty cash expenses.
These petty cash expenses are recorded in the petty cash book. The petty cash book is maintained by
separate cashier known as petty cashier. It is also called the Imprest System of maintaining petty cash. The
petty cashier is given a certain sum of money at the beginning of the fixed period (e.g. a month/fortnight)
which is called float. The amount of float is so fixed that it may be adequate to meet petty expenses of the
prescribed period. The balance in the petty cash book shows cash lying with the petty cashier.
Petty Cash Book

Amount Date Particulars Voucher Total Analysis of Payments

Received No. Amount
Paid Cartage Postage Conveyance Misc. or
Sundries
8.0 Preparation of TRIAL BALANCE

A trial balance is a schedule or list of balances of both debit and credit extracted from various accounts in the
ledger including cash and bank balances from cash book. Since every transaction has a dual effect i.e. every
debit has a corresponding credit and vice versa, the total of the debit balances and credit balances extracted
from the ledger must tally. Thus, at the end of the accounting period or at the end of each month, the
balances of the ledger accounts are extracted and trial balance is prepared to test as to whether the total
debits are equal to total credits.

8.1 Objectives of Preparing Trial Balance

(i) It is a check on the accuracy of posting. If the trial balance agrees it proves that:
(a) the books are arithmetically accurate, and
(b) both the aspects of the transactions have been correctly recorded in the books of original
entry as well as in the ledger.
(ii) It brings together the balances of all the accounts at one place and this facilitates the preparation of
profit and loss account and balance sheet.
8.2 Methods of Preparing the Trial Balance
(i) Totals Method: In this method, the totals of debit and credit sides of the ledger accounts are shown in
the trial balance. The sum totals of debit and credit columns of the trial balance must be equal. This is
less popular method.
(ii) Balances Method: In this method, the balances of ledger accounts are taken to respective debit and
credit columns of the trial balance and then grand total is taken out. The total of balances in the debit
column must be equal to the total balances in the credit column of the trial balance.
Specimen of Trial Balance
Trial Balance as at ________

Sl. Particulars L.F. Amount (Dr.) Amount (Cr.)

No.
(`) (`)

Illustration 8:
Ravish started business on 1st January 2022. You are required to pass entries, in journal & subsidiary books,
post them in ledger and prepare trial balance under totals & balances method for January 2022. His
transactions for the month were follows:
2022 `
Jan. 1 Cash brought in by Ravish as his capital 2,00,000
Furniture purchased on credit from Mehak Furniture Home 25,000
” 2 Goods purchased from Modi & Sons on credit 61,400
” 3 Goods purchased for cash 35,000
” 4 Goods purchased from Delhi Traders on credit 73,300
” 5 Cash Sales 4,600
” 8 Sold goods to Bhatia & Co. on credit 19,860
” 11 Purchased stationery for cash 1,050
”12Paid Modi & Sons cash to settle account
Received 5% discount from him ......
” 13 Received from Bhatia & Co. in full settlement of account 19,800
” 17 Cash sales 10,700
” 18 Sold on credit to Ganesh & Co. 5,000
” 19 Received cash from Ganesh & Co. 1,000
” 21 Sold on credit to Kiran Singh 4,000
” 23 Purchased goods for cash 26,000
”27Kiran Singh becomes insolvent. A first and final
dividend of ` 3,000 is received from his estate
” 31 Ganesh & Co. pays cash 3,900
” 31 Discount allowed to Ganesh & Co. 100
” 31 Cash paid for rent 2,800
” 31 Depreciation on furniture 250
” 31 Payment to Delhi Traders in full settlement 73,000
Solution:
In the books of Ravish
Journal Entries

Date Particulars L.F. Dr. Cr.

` `
2022
Jan. 1 Furniture Account Dr. 25,000
To Mehak Furniture Home 25,000
(For furniture purchased on credit from
Mehak Furniture Home)
” 27 Bad Debts Dr. 1,000
To Kiran Singh 1,000
(Bad debts written off on the insolvency of
Kiran Singh)
” 31 Depreciation A/c Dr. 250
To Furniture A/c 250
(For depreciation provided on Furniture)
______ ______
Total 26,250 26,250
50 FP-FA&A
Purchases Book
Month : January, 2022

Date Particulars Invoice No. L.F. Details Amount

`
2022
Jan. 2 Modi & Sons Goods 61,400
Jan. 4 Delhi Traders Goods 73,300
Totals 1,34,700

Sales Book
Month : January, 2022

Date Particulars Invoice No. L.F. Details Amount

`
2022
Jan. 8 Bhatia & Co. 19,860
” 18 Ganesh & Co. 5,000
” 21 Kiran Singh 4,000
28,860

Dr. Cash Book Cr.

Date Particulars L.F. Discount ` Date Particulars L.F. Discount `
2022 2022
Jan. 1 To Capital A/c 2,00,000 Jan. 3 By Purchases 35,000
”5 ” Sales 4,600 ” 11 ” Stationery 1,050
” 13 ” Bhatia & Co. 60 19,800 ” 12 ” Modi & Sons 3,070 58,330
” 17 ” Sales 10,700 ” 23 ” Purchases 26,000
” 19 ” Ganesh & Co. 1,000 ” 31 ” Rent 2,800
” 27 ” Kiran Singh 3,000 ” 31 ” Delhi Traders 300 73,000
” 31 ” Ganesh & Co. 100 3,900 ” 31 ” Balance c/d _____ 46,820
160 2,43,000 3,370 2,43,000
Feb. 1 To Balance b/d 46,820

Dr. Capital Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 31 To Balance c/d 2,00,000 Jan. 1 By Cash 2,00,000
2,00,000 2,00,000
Feb. 1 ” Balance b/d 2,00,000
Dr. Furniture Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 1 To Mehak Furniture Jan. 31 By Depreciation 250
Home 25,000 ” Balance c/d 24,750
25,000 25,000
Feb. 1 To Balance b/d 24,750

Dr. Mehak Furniture Home Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 31 To Balance c/d 25,000 Jan. 31 By Furniture 25,000
25,000 Feb. 1 ” 25,000
Balance b/d 25,000

Dr. Modi & Sons Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 12 To Cash A/c 58,330 Jan. 2 By Purchases 61,400
” Discount A/c _3,070 _____
61,400 61,400

Dr. Purchases Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 3 To Cash A/c 35,000 Jan. 31 By Balance c/d 1,95,700
” 23 ” Cash A/c 26,000
” 31 ” Sundries as per
Purchases Book 1,34,700 _______
1,95,700 1,95,700
Feb. 1 ” Balance b/d 1,95,700

Dr. Delhi Traders Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 31 To Cash A/c 73,000 Jan. 4 By Purchases 73,300
” Discount A/c ___300 _____
73,300 73,300
Dr. Sales Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 31 To Balance c/d 44,160 Jan. 5 By Cash A/c 4,600
Jan. 17 ” Cash A/c 10,700
Jan. 31 ” Sundries as per
_____ Sales Account 28,860
44,160 44,160
Feb. 1 By Balance b/d 44,160

Dr. Bhatia & Co. Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 8 To Sales A/c 19,860 Jan. 13 By Cash A/c 19,800
______ ” Discount A/c ____60
19,860 19,860

Dr. Stationery Account Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 11 To Cash A/c 1,050 Jan. 31 By Balance c/d 1,050
1,050 1,050
Feb. 1 To Balance b/d 1,050

Dr. Ganesh & Co. Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 18 To Sales A/c 5,000 Jan. 19 By Cash A/c 1,000
” 31 ” Cash A/c 3,900
_____ ” Discount A/c __100
5,000 5,000

Dr. Kiran Singh Cr.

Date Particulars J.F. ` Date Particulars J.F. `

2022 2022
Jan. 21 To Sales A/c 4,000 Jan. 27 By Cash A/c 3,000
____ ” Bad Debts A/c 1,000
4,000 4,000
Dr. Bad Debts Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022 2022
Jan. 27 To Kiran Singh 1,000 Jan. 31 By Balance c/d 1,000
1,000 1,000
Feb. 1 ” Balance b/d 1,000
Dr. Rent Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022
Jan. 31 To Cash A/c 2,800 Jan. 31 By Balance c/d 2,800
2,800 2,800
Feb. 1 ” Balance b/d 2,800
Dr. Depreciation Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022 2022
Jan. 31 To Furniture 250 Jan. 31 By Balance c/d 250
250 250
Feb. 1 ” Balance b/d 250
Dr. Discount Account Cr.
Date Particulars J.F. ` Date Particulars J.F. `
2022 2022
Jan. 31 To Sundries for Jan. 31 By Sundries for
Discount Discount
Allowed as Received
per debit side as per
of Cash Book 160 credit side
of Cash Book 3,370
” 31 ” Balance b/d 3,210 _____
3,370 3,370
Ravish’s Trial
Balance
(Totals Method)
as on 31st January, 2022
Sl. Particulars Debit Credit
No. Totals ` Totals `

1. Cash 2,43,000 1,96,180

2. Capital Account 2,00,000
3. Furniture Account 25,000 250
4. Mehak Furniture Home 25,000
5. Modi & Sons 61,400 61,400
Sl. Particulars Debit Credit
No. Totals ` Totals `
6. Purchase Account 1,95,700
7. Delhi Traders 73,300 73,300
8. Sales Account 44,160
9. Bhatia & Co. 19,860 19,860
10. Stationery Account 1,050
11. Ganesh & Co. 5,000 5,000
12. Kiran Singh 4,000 4,000
13. Bad Debts Account 1,000
14. Rent Account 2,800
15. Depreciation Account 250
16. Discount Account 160 3,370
6,32,520 6,32,520

Ravish’s Trial Balance

(Balances Method)
as on 31st January, 2022
Sl. Particulars Debit Credit
No. Balances ` Balances `
1. Cash 46,820
2. Capital Account 2,00,000
3. Furniture Account 24,750
4. Mehak Furniture Home 25,000
5. Purchases Account 1,95,700
6. Sales Account 44,160
7. Stationery Account 1,050
8. Bad Debts Account 1,000
9. Rent Account 2,800
10. Depreciation Account 250
11. Discount Account _______ 3,210
2,72,370 2,72,370

sums
 Lesson 2  Accounting Process-I 55
–


9.0 SELF-TEST QUESTIONS

Theory Questions:
1. Distinguish between journal and ledger.
2. What do you mean by contra-entries in a columnar cash book?
3. What is meant by columnar cash book?
4. What is meant by analytical petty cash book?
5. Describe the imprest system.
Practical Questions:
1. Journalise the following transactions:

2023 `
(i) Jan. 1 Bought office furniture from Kantha & Co. 6,000
(ii) ” 5 Bought goods from F. Ravi 5,000
(iii) ” 10 Bought goods from P. Gupta 10,000
(iv) Feb. 1 Sold goods to K. Peter 4,000
(v) ” 5 Sold goods to P. Turpin & Co. 7,000
(vi) ” 12 Bought goods from C. Harish 4,500
(vii) ” 17 Bought goods from J. Jack 2,000
(viii) ” 20 Sold goods to S. Sorab & Co. 18,000
(ix) ” 23 Sold goods to B. Balu 1,750
(x) ” 25 Received cash from P. Tata & Co. 3,000
(xi) ” 27 Received cash from K. Peter 2,500
(xii) ” 28 Paid cash to F. Ravi 1,000
 (xiii) ” 28 Paid cash to P. Gupta 5,000
(xiv) Mar. 4 Paid salaries 2,000
(xv) ” 5 Paid office rent 750
(xvi) ”. 7 Sold goods for cash 2,750
(xvii) ” 8 Bought goods for cash 1,250
(xviii) ” 11 Paid for stationery 250
(xix) “ 15 Received cash from S. Sorab & Co. 14,750
(xx) ” 15 Received cash from B. Balu 1,750
(xxi) ” 17 Paid cash to C. Harish 3,500
(xxii) ” 17 Paid cash to J. Jack 2,000
(xxiii) ” 20 Purchased goods for cash 1,000
(xxiv) ” 25 Paid Kantha & Co. 6,000

2. Rolly Polly was carrying on business as a cloth dealer. His transactions during April, 2022 were as
follows:
2022 `
Apr., 1 Sold cloth on credit to Gifloo 5,000
” 2 Purchased cloth from Amboo on credit 20,000
” 3 Paid rent for April by cheque 3,000
” 4 Cash purchases of cloth (paid by cheque) 8,000
Cash sales 4,500
” 6 Paid for stationery and postage 500
” 8 Drawn cash for private use 2,500
” 10 Drawn cash from Bank for office 15,000
” 13 Purchased goods on credit from Minoo 25,000
” 16 Sold goods on credit to Gopal 18,000
” 17 Paid telephone charges 4,800
” 18 Cash sales 3,000
Paid for advertising 3,500
” 22 Cash purchases 9,000
” 24 Purchased filing cabinet and paid by cheque 5,000
” 27 Purchased Government securities 30,000
Paid wages for the month 8,000
Journalise the transactions and prepare ledger accounts.
 Lesson 2  Accounting Process-I 57

10.0 Summary

 Double Entry Accounting: Each transaction affects two accounts, maintaining balance.
 Classification (Traditional): Divides accounts into Personal, Real, and Nominal.

 Classification (Accounting Equation): Focuses on Assets, Liabilities, and Equity.

 Accounting Trail: Steps from recording transactions to financial statements.

 Transactions & Events: Actions that impact financial records.

 Debit & Credit: System showing increases/decreases in accounts.

 Accounting Equation: Assets = Liabilities + Equity.

 Books of Accounts: Records all transactions.

 Journal: Initial transaction recording.

 Ledger: Account-wise transaction summary.

 Cash Book: Records all cash transactions.

 Trial Balance: Ensures debit equals credit before financial statements.

11.0 Glossary

- Double Entry: Accounting method recording dual aspects of transactions.

- Classification: Traditional (Personal, Real, Nominal); Modern (Assets, Liabilities, Equity).

- Accounting Trail: Steps from transaction recording to statements.

- Debit & Credit: Shows account changes.

- Trial Balance: Verifies debit-credit equality.

12.0 Terminal questions

1. Compare traditional and modern approaches.

2. Explain the Accounting Trail.

3. Define transactions, events, debit, credit.

4. What is the Accounting Equation?

5. Explain the purpose of Journal, Ledger, Cash Book?

6. Give the detailed steps to prepare a Trial Balance?

13.0 Answers to SAQ’s

1. Journal: The initial record of transactions, organized chronologically. Each entry includes the
date, accounts affected, and amounts.

Ledger: A collection of all accounts where transactions from the journal are posted,
organized by account type.

2.Contra-entries: Transfers between cash and bank accounts.

3. Columnar cash book: Multiple columns for detailed cash tracking.

4. Analytical petty cash book: Categorizes small expenses for easy tracking.

5. Imprest system: Fixed petty cash amount replenished when low.

14.0 References:
 Ashok Banerjee (2009) Financial Accounting, 3rd Edition, Excel Book.
 R. Narayanaswamy (2008) Financial Accounting, A Managerial perspective, 3rd
Edition, Prentice Hall of India.
 P. C. Tulsian (2009) Financial Accounting, Fifth impression, Pearson Education
 Barry .J. Epstein, Eva K. Jermakowicz (2009-10) IFRS, Wiley India.
 R. L. Gupta, Radhaswamy (2010). Financial Accounting, S. Chand and Company
 Maheshwari S. N. and S. K. Maheshwari (2009), Advanced Accountancy, Vikas
Publishing House.
 M. C. Shukla (2010). Advanced Accountancy. S. Chand and Company.

 N. Ramachandra, Ramkumar Kakani, (2008) Financial Accounting for Management,

Second Edition, Tata Mcgrawhill.

E- References:

 http://www.answers.com/topic/cash-discount#ixzz1EZ60tk00