STRUCTURE
9.0 Objectives 9.1 Introduction
9.2 Record Keeping Basics 9.3 Account Categories
9.4 Debit and Credit Concepts
9.5 Accounting and Columnar Accounting Mechanics 9.6 Journalising
9.7 Summary 9.8 Keywords 9.9 Problems
9.10 Terminal Questions
9.11 Answers to Terminal Questions
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9.0 OBJECTIVES
After studying this unit, you should be able to:
• Analyse the transactions and identify the accounts to be debited and credited Understand rules for debit and credit
• Know the business transactions and identify the accounts affected
• Know the purpose of journal
To post journal entries in the respective ledger accounts
• Prepare different types of cash book Post cash book entries into ledger Write petty cash book
• BaJance a ledger account and explain the significance of balance in an account
• Prepare a trial balance to test the arithmetical accuracy of recording the transactions in the books of account
9.1 INTRODUCTION
Business transactions involve the exchange of value either in the form of money or of goods or services measured in terms of money. Bookkeeping or accounting is the systematic recording of transactions with a view to ascertaining the financial position of the business. Maintenance of accounts of all recognised business concerns are in what is known as the 'Double Entry Book Keeping' system.
According to this system, every business transaction has a two-fold financial aspect, which means that it affects two accounts, one account to be debited, and the other credited with a like amount. This is the fundamental principle of double entry bookkeeping.
Bookkeeping has been defined as 'the art of recording business transactions with a view to having a permanent record of them and of showing their effect on wealth'. It is a science that records pecuniary transactions (i.e. transactions in money or money's worth) in such a manner that a trader is able to ascertain:
1. The nature and value of his assets, including the amount owed to him by sundry debtors.
2. The amount of his liabilities, including the amount owed by him to his creditors.
3. Whether he has made a profit or loss during a given period and how the amount that he has gained or lost is made up.
4. Whether, he is solvent or insolvent and the amount, of his capital or deficiency.
9.1.1 Journal
The form of a journal contains a column L.F., i.e. Ledger Folio. Journal records each transaction.
However, if anyone wants to find out transactions affecting a personal account or an expense account, he will have to turn over pages of journal, add all debits and credits and then find out the balance of a particular account. To overcome this difficulty, the transactions pertaining to a particular person, asset, liability, income or expense, are recorded on particular pages, in the ledger.
9.1.2 Cash Book
The book that keeps records of all cash transactions, i.e. cash receipts and cash payments is called a cash book. Its ruling is like a ledger account and is divided into two sides, viz., debit and credit. All
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receipts are recorded on the debit side whereas all payments are recorded on the credit side. Since it serves the function of cash account, there is no need for opening cash account in the ledger. Cash Book is book of original entry on the ground that all cash transactions are first recorded in it, and thereafter, recorded from cash book to the various ledger accounts. It is also called a ledger or book of final entry, since all cash receipts are entered on the debit side whereas all cash payments on the credit side, i.e. maintained under double entry principle. Thus, cash book is both a subsidiary book and a ledger account. By giving the cash book the shape of an account, the fundamental rule that every entry must at first be recorded in the book of prime entry and then posted to ledger has been ignored.
9.2 RECORD KEEPING BASICS
Accounting cycle includes the following:
1. Recording: In the first instance, all transactions should be recorded in the journal or the subsidiary books as and when they take place.
2. Classifying: All entries in the journal or subsidiary books are posted to the appropriate ledger account to find out at a glance the total effect of all such transactions in a particular account.
3. Summarising: The last stage is to prepare the trial balance and final accounts with view to ascertain the profit or loss made during a particular period and the financial position of the business on a particular date.
The 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 the 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. For instance, all the transactions that have taken place with Mr Prasad have been entered in the 'Prasad's Account'.
Similarly, all items relating to cash, sales, purchases, salaries, discount, etc., appear in their respective accounts. Hence, the ledger helps in finding out the combined effect of entries for each individual account and also for the entire business. The following is the specimen ruling of the standard form of ledger account.
The following are the important features of the ledger account cited above:
(i) The ledger account is divided into two sides - the left hand side is known as debit side while the right hand side is known as credit side. The abbreviations 'Dr' and 'Cr' are placed at the top left and right hand corners respectively. This is more by custom than under any law.
(ii) The name of account is written in the middle of the account.
(iii) J.F. denotes folio or page number on which its journal entry may be found.
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Relationship between Journal' and 'Ledger'
Both Journal and Ledger are important books used under double entry system of bookkeeping. The following are the points of comparison between the two:
(i) The transactions are recorded first in the journal and then they are posted to the ledger. Thus, journal is the book of first or original entry while the ledger is the book of second entry.
(ii) The journal is a book for chronological record while the ledger is a book for analytical record.
(iii) Journal is more reliable as compared to the ledger since, it is the book in which the entry is passed first.
(iv) The process of recording transactions is termed as "Journalising' while the process of recording transactions in the ledger is known as 'posting'.
The term 'posting' means transferring the debit and credit items from the journal to their respective accounts in the ledger. It may be noted that the exact names of accounts used in the journal should be carried to the ledger. The following rules should be observed while posting transactions in the ledger from the journal:
(a) Separate accounts should be opened in the ledger for posting transactions relating to the different accounts recorded in the journal.
(b) The concerned account that has been debited in the journal should also be debited in the ledger, i.e. the debit of the journal entry is posted to the debit side. However, a reference should be made of the other account that has been credited in the journal.
(c) The concerned account that has been credited in the journal should also be credited in the ledger, i.e. the credit of the journal entry is posted to the credit side, but a reference should be given of the other account that has been debited in the journal.
(d) It is customary to use the words 'To" and 'By' while posting in the ledger. The word "To' is used with accounts shown on the debit side of the ledger account while the word 'By' is used with accounts which appear on the credit side of the ledger account.
(e) In the folio column, the page number of the journal from where the entry is transferred to ledger account is written.
(f) The date of the transaction is written on the date column.
Balancing of an account means the process of equalising the two sides of an account by putting the difference on the side where amount is short. Where the debit side of an account exceeds the credit side, then the difference is put on the credit side, and the account is said to have a debit balance. This balance is brought down on the debit side while opening the account. Similarly, where the credit side of an account exceeds the debit side, the difference is put on the debit side, and the account is said to have a credit balance. This is also brought down on the credit side while opening the account. The following steps are followed for balancing the accounts:
(i) Total the amounts of debit and credit entries in the account.
(ii) If the debit and credit sides are equal then there is no balance. The account stands automatically balanced or closed.
(iii) If the debit side total is more, put the difference on the credit side amount column, by writing the words 'By Balance c/d'. If the credit side total is more, put the difference on the debit side amount column by writing the words 'To Balance c/d'.
(iv) After putting the difference in the appropriate side of the account, add both sides of the account and draw a thin line above and below the total.
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(v) Bring down the debit balance on the debit side by writing the words 'To Balance b/d'. Similarly, bring down the credit balance on the credit side by writing the words LBy Balance b/d'.
The debit balance of an account may represent either an asset or an expense. If such balance relates to a "Personal Account' it reflects debtors; if it relates to a 'Real Account', it is a property, if it relates to a
"Nominal Account' it is an expense or loss. Similarly, credit balance of an account represents either a liability or a gain. If such balance relates to a "Personal Account', it is a creditor, if it relates to a
"Nominal Account'; it is a gain or income. Real Accounts usually show a debit balance. In case there is a credit balance in a "Real Account', it reflects a loss on sale of the asset. It may be noted that when the 'Nominal Accounts' have balances on the last day of an accounting year their balances are not carried down but are transferred to the 'Trading and Profit and Loss Account'.
Illustration 1
Journalise the following transactions and post them into ledger:
January 2004 1 Cash on hand 15,000
1 Purchased goods from Ashoka 5,000
6 Sold goods to Madhav 4,000
8 Pinto invoiced goods 8,000
9 Purchased goods 7,000
15 Cash sales made 12,000
18 Paid cash to Ashoka 4,000
20 Received from Madhav on account 2,000 Solution
Journal
J.R 10
Date Particulars J.R Debit Credit
(Rs.) (Rs.)
2004
Jan. 1 Purchases a/c Dr. 51 5,000
To Ashoka 52 5,000
(Being purchase of goods on credit)
Jan. 6 Madhav a/c Dr. 53 4.000
To Sales 55 4,000
(Being sale of goods on credit)
Jan. 8 Purchases a/c Dr. 51 8,000
To Pinto 54 8,000
(Being purchase of goods on credit)
Jan. 9 Purchases a/c Dr. 51 7,000
To Cash 56 7,000
(Being cash, purchase made)
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