Basic Accounting Process:

UNIT 3 BASIC ACCOUNTING PROCESS: Preparation of Journal,

Ledger and Trial Balance
PREPARATION OF JOURNAL,
LEDGER AND TRIAL BALANCE
Structure Page Nos.
3.0 Introduction
3.1 Objectives
3.2 Accounting Equation
3.3 Classification of Accounts
3.4 Definitions of Journal and Ledger
3.4.1 The Journalizing Process
3.4.2 Ledger Posting
3.4.3 Balancing an Account
3.5 Trial Balance
3.6 Objectives of Preparing Trial Balance
3.6.1 The Total Method of Preparing the Trial Balance
3.6.2 The Balance Method of Preparing the Trial Balance
3.6.3 The Limitations of Trial Balance
3.7 The Accounting Cycle
3.8 Key Words
3.9 Summary
3.10 Solutions / Answers to Check Your Progress
3.11 Further Readings

3.0 INTRODUCTION

The Double Entry System was developed in the 15th century in Italy by Luca Pocioli.
The Double Entry System is the basic framework of present day accounting. Every
transaction has two aspects and according to this system, both the aspects are
recorded. For example, if a business requires something then either it must have been
given by someone or it must have been acquired by giving up something. On purchase
of furniture, either the cash balance will be reduced, or a liability to the supplier will
arise. This has been made clear already. The Double Entry System is so named since it
records both the aspects of a transaction. This system has proved to be systematic, and
has been found of great use for recording the financial affairs for all institutions
requiring the use of money.

3.1 OBJECTIVES
After studying this unit, you should be able to:

 understand what is Double Entry System,

 understand how debit and credit are determined for business transactions,
 see classification of account as Personal and Impersonal accounts,
 learn the definitions of journal and ledger,
 learn the journalizing process,
 become familiar with the technique of ledger posting and how to balance an
account, and

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Accounting System  identify the techniques to prepare Trial Balance and familiarize about
accounting cycle.

3.2 ACCOUNTING EQUATION

The whole structure of the Double Entry system is based on the Accounting Equation
which explains the equal relationship between total claims and the total assets of the
firm. The accounting equation states that a company's total assets are equal to the sum
of its liabilities and its shareholders' equity. Total claims include the claims of
outsiders and of the proprietors. We can express the same as:
Assets = Total Claims
Assets = Liabilities + Capital
If there is any change in the amount of assets, or of the liability, the owner’s claim or
the capital is bound to change correspondingly. It is totally based on Double Entry
System principles.
The effect of transactions on Accounting Equation
1. Start business with Rs. 5000 as capital
Assets = Liabilities + Capital
5000 = 0 + 5000
5000 = 5000

2. Purchase furniture for Rs. 2000 cash

Assets = Liabilities + Capital
Cash + Furniture
3000 + 2000 = 0 + 5000
5000 = 5000

Note: On the purchase of furniture, the cash is reduced but another asset, furniture, is
increased by the same value.

3. Purchase goods for Rs. 3000 on credit

Assets = Liabilities + Capital
Cash + Furniture + Goods
3000 + 2000 + 3000 = 3000 + 5000
(Creditor)
8000 = 8000
Note: On purchase of goods on credit worth Rs. 3000, goods (another asset) worth Rs.
3000 has come in the business and liability of same value has been increased in the
form of creditors
4. Paid Rs. 1000 for rent
Assets = Liabilities + Capital
Cash + Furniture + Goods
3000 + 2000 + 3000 = 3000 + 5000
-1000 (Rent Paid) -1000 (Rent)
2000 + 2000 + 3000 = 3000 + 4000
7000 = 7000

Note: Rent as an expense will be charged from capital, because all expenses and
incomes are to be finally ‘owned’ by the proprietors as well as deducted from the cash
that a firm has.
5. Sold goods of Rs.3000 on credit for Rs. 4000
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Assets = Liabilities + Capital Basic Accounting Process:
Preparation of Journal,
Cash + Furniture + Goods+ Debtors Ledger and Trial Balance
2000 + 2000 + (3000 –3000) + 4000 = 3000 + 4000 + 1000

2000 + 2000 + 4000 = 3000 + 5000

8000 = 8000
Note: The net increase in assets (40003000 = 1000) will be added to the capital as a
profit.
Whatever we have done above is suitable only if the number of transactions is small.
But, if the number is large, a different procedure – putting increases and decreases in
different columns – will be required, and be useful for yielding significant
information.

The procedure for large number is followed for a form, which is called the T form. In
this form, the two sides are put together. The left-hand side is called the Debit-side
and the right-hand side is called the Credit-side. It is called an account. When in an
account a record is made on the debit, or left hand side, one says the one has debited
that account; similarly to record an amount on the right side is to credit it.
The proper form of an account is as follows:
Dr. Cr.
Date Particulars Ref.* Amount Date Particulars Ref.* Amount
Rs. Rs.
*Ref. indicates the sources where information about the entry is available.

To put the entries in ‘T’ form account, we have to follow some standard rules of debit
and credit:

1. When there is an increase in the amount of assets, its account is debited; and
when there is a decrease in the amount of an asset, its account is credited. For
example, on the purchase of furniture, the assets have increased and the furniture
account will be debited. But if cash is paid for the purchase, the asset has
decreased and the cash account will be credited.
2. When there is an increase in the amount of liability, its account will be credited;
and when there is a decrease in the amount of liability, its account will be debited.
For example, if we borrow some money from “A”; A’s account will be credited.
But if we pay the money back to “A”, A’s account will be debited since the
liability no longer exists.
3. When there is an increase in the owner’s capital; the capital account will be
credited, and when there is a decrease in owner’s capital, it will be debited. For
example, if a proprietor introduces additional capital, the capital account will be
credited. But, if the owner withdraws some money, the capital account will be
debited.
4. Profit leads to an increase in the capital, and a loss leads to reduction. Since the
impact of profit or loss can directly be seen on the capital, it is clear that the rule
of capital will be applicable on profit / loss also. Profits may be directly credited,
and losses may be similarly debited.
These rules can be summaries as below:
1. Increase in assets are debits; decrease in credits
2. Increase in liabilities are credits; decrease in debits
3. Increase in owner’s capital are credits; decrease in debits

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Accounting System 4. Increase in expenses/losses are debits; decrease in credits
5. Increase in revenue/income are credits; decrease in debits.

It should be noted that an increase in assets is favourable to the firm, but an increase
in expenses is not so, even though, in both cases, the increase will be recorded on the
debit side. Similarly, an increase in liabilities is not favourable, but an increase in
revenue is, even though both will be recorded on the credit side.

Thus the terms debit and credit should not be taken to mean, respectively, favourable
and unfavourable things, they merely describe the two side of an account.
The system of recording into debits and credits is based on a very important
accounting concept – the Dual Aspect Concept. As per this concept, every transaction
is viewed as one that has a dual aspect, that is, one aspect of transaction has an impact
on the debit side, and another on the credit side. For example, if a firm purchases
machinery of Rs.20,000 for cash, this transaction has a dual aspect – one that affects
the debit side of the Machinery Account (assets have increased), and another affects
the credit side of the Cash Account (assets have decreased). The implication of the
dual aspect concept is that the total of all debits are always equal to the total of credits.

 Check Your Progress 1

1. Fill in the blanks with the words debits or credits.

a. Decrease in liability are ……………………

b. Increase in assets are ……………………….
c. Decrease in revenue are…………………….
d. Increase in expenses are…………………….

2. What is the Accounting Equation? Also, explain its working.

………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………

3. What is the Dual Aspect Concept?

………………………………………………………………………………………
………………………………………………………………………………………
………………………………………………………………………………………
4. What is the rule for debit and credit in respect of Owner’s capital?
………………………………………………………………………………………
……………………………………………………………………………………..
………………………………………………………………………………………

3.3 CLASSIFICATION OF ACCOUNTS

As per the accounting equation, the broad categories of the account are:

1. Assets: Includes all the resources which the firm has.

2. Liabilities: Amounts that the firm owes to outsiders.

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 Basic Accounting Process:
Preparation of Journal,
3. Capital: Amounts that the firm owes to the owners and proprietor who have
Ledger and Trial Balance
invested in the firm.

4. Expenses: Amounts that have been spent, or even lost, in carrying on operations.

5. Incomes: Amounts earned by the firm.

Accounts may be classified in another manner:
1. Personal Account : Personal accounts relate to personal, debtors, or creditors.
Example ABC & Co., Ram Account, etc.

2. Real Account : Accounts which relate to assets of the firm. For example,
Machinery, Furniture, Cash, Plant, Land etc.
3. Nominal Account : Accounts, which related to expenses, losses, gains,
revenue etc. like wages, salary, interest, commission etc. The net result of
all the nominal accounts is reflected as profit or loss which is transferred to
the capital account. Nominal accounts are, therefore, temporary.
On the basis of the above, three classifications of accounts, three basic rules about
recording transactions are:
1. Personal account
Debit the receiver and credit the giver
2. Real Account
Debit what comes in and credit what goes out
3. Nominal Account
Debit all expenses/losses and credit all income/gains

Hence, a Debit denotes

1. In case of a person, that s/he has received some benefit against which s/he has
already rendered some service, or will render service in future. When a person
becomes liable to do something in favour of the firm, the fact is recorded by
debiting that person’s account.
2. In case of goods or properties, that the stock and value of such goods or properties
has increased; and
3. In case of other accounts like salary or rent, that the firm has enjoyed some
benefit, or has lost money.

A Credit denotes
1. In the case of a person, that some benefit has been received from him, entitling
him to claim from the firm, a return or a benefit in the form of cash, or goods, or
services. In other words, when a person becomes entitled to money, or money’s
worth, for any reason, the fact is recorded by crediting him/her;
2. In the case of goods or proprieties, that the stock and value of such goods, or
properties has diminished; and
3. In the case of other accounts like commission, that the firm has made a gain.
Illustration 1

1. Ram started business with Rs.15,000

2. He purchased furniture for Rs.3,000
3. Salary paid for Rs.1000
4. Received interest Rs.2500.
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Accounting System
Solution as per debit/ credit rules of accounting equation

Explanation Accounts Nature of How Dr. Cr.

involved accounts effected
Rs.15,000 cash Cash Assets Increased 15,000
invested in business Capital Liabilities Increased 15,000
by Ram
Purchased furniture Furniture Assets Increased 3,000
for Rs. 3,000 Cash Assets Decreased 3,000

Paid Rs.1000 for Salary Expense Increased 1000

salary Cash Assets Decreased 1000

Received interest Cash Assets Increased 2500

Rs.2500 Interest Income Increased 2500
Solution as per three basic rules of classification of accounts

Explanation Accounts Classification How Dr. Cr.

involved of accounts effected
Rs.15,000 cash Cash Real Comes in 15,000
invested in Capital Personal Giver 15,000
business by Ram
Purchased Furniture Real Comes in 3,000
furniture for Cash Real Goes out 3,000
Rs.3,000
Paid Rs.1000 for Salary Nominal Expenses 1000
salary Cash Real Goes out 1000

Received interest Cash Real Comes in 2500

Rs.2500 Interest Nominal Income/gain 2500

3.4 DEFINITIONS OF JOURNAL AND LEDGER

Journal: Transactions are first entered in this book to show which account should be
debited, and which should be credited. Journal is also called primary book, as it is a
book of first entry. Transactions are recorded in it in chronological order.

Ledger: Accounts are prepared on the basis of entries made in the journal. The book
that contains the accounts is called a ‘ledger’. A ledger is also called secondary book,
as the entries in the ledger are made subsequent to the journal.

3.4.1 The Journalizing Process

Transactions are either written as they occur in the various documents, or papers, are
filed, in the order in which transactions occur (chronological). On the basis of these
records, first, one writes out which accounts are to be credited, and which accounts are
to be debited. This is done in the Journal, the format of which is given below:

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 Basic Accounting Process:
Preparation of Journal,
JOURNAL
Ledger and Trial Balance

Date Particulars L.F. Dr. Amount Cr. Amount

(1) (2) (3) (4) (5)

A B
Note: The columns have been numbered for reference only.

1. In the first column, the date of the transaction is entered. The year is written at the
top, then the month and in the narrow part of the column the date is entered.

2. In the second column, the name of the account to be debited is written first, and it
is written close to the line marked (A). The word “Dr.” is written near the line
marked (B). In the next line the name of the account to be credited is written
preceded by the word “To”. This is written a few spaces away from the line (A).
There must be an explanation of the entry and this should be recorded. This is
known as narration. Narration records the facts leading to the entry and facilitates
quick understanding.

3. In the third column, the number of the page in the ledger on which the account is
written up is entered.
4. In the fourth column, the amounts to be debited to the various accounts concerned
are entered. The amount is written in the extreme right hand side of the column.

5. In the fifth column, the amount to be credited to various accounts is entered in the
extreme right hand side of the column.

Before one can journalize transactions, one must think from the basis of the rules,
either from the five accounting equation rule, or from the three basic classifications of
accounts rules given above. In accordance with the rules/effects, the accounts to be
debited, or credited will be determined. Then, the entry will be made in the journal as
indicated above.

Illustration 2

Mohan’s transactions for the month of April 05 are given below. Journalize them.

2021 Rs.

April 1 Mohan started business with cash 5000

,, 2 Deposit in the bank 500
,, 3 Furniture purchased for cash 200
,, 5 Purchased goods for cash 400
,, 8 Purchased goods from M/s Ram Narain on credit 1000
,, 16 Goods sold to M/s Ram & Co. for cash 600
,, 24 Goods sold on credit to Ramesh 300
,, 28 Received cash from Ramesh 300
,, 30 Paid Rent 100
,, 30 Paid Salary 200

In the book of Mohan

JOURNAL ENTRIES

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Accounting System
Date Particulars L.F. Dr. Cr.
Amount Amount
2021
April 1 Cash Account 5000
Dr. 5000
To Capital Account
(Being the amount invested by Mohan in
the business as capital)
,, 2 Bank Account 500
Dr. 500
To Cash Account
(Being the amount paid into bank)
,, 3 Furniture Account 200
Dr. 200
To Cash Account
(Being furniture purchased for cash)
,, 5 Purchases Account 400
Dr. 400
To Cash Account
(Being goods purchased for cash)
,, 8 Purchases Account 1000
Dr. 1000
To M/s Ram Narain
(Being goods purchased for cash)
,, 16 Cash Account 600
Dr. 600
To Sales Account
(Being goods sold for cash)
,, 24 Ramesh 300 300
Dr.
To Sales Account
(Being goods sold to Ramesh on credit)
,, 28 Cash Account 300
Dr. 300
To Ramesh
(Being cash received from Ramesh)
,, 30 *Rent Account 100
Dr. 200
*Salary Account 300
Dr.
To Cash Account
(Being Rent and salary paid)

* When transactions of similar nature take place on the same date, they may be
combined while they are journalized.

Detailed discussion of the above solution:

April 1: Mohan started business with Rs.5,000
Firm received cash Rs.5,000 – Assets increases – Debited
Firm owes Rs.5,000 to proprietor – Capital increases – Credited
April 2: Rs.500 is deposited in the bank
Bank balance increased – Assets increased – Debited
Cash balance reduced – Assets decreased – Credited

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April 3: Furniture is purchased for cash Rs.200 Basic Accounting Process:
Preparation of Journal,
Furniture purchased – Assets increased – debited
Ledger and Trial Balance
Cash paid – Assets decreased – Credited
April 5: Purchased goods for cash Rs.400
Goods purchased – Assets increased – debited
Cash paid – Assets decreased – Credited
April 8: Purchased goods on credit for Rs.1,000 from M/s Ram Narain
Goods purchased – Assets increased – debited
Firm owes Rs.1,000 to M/s. Ram Narain – Liability increases – Credited
April 16: Goods sold to M/s. Ram & Co. for cash
Cash received – Assets increased – Debited
Sale to merchandise is revenue item so it is to be Credited or
On Sale stock decreases – assets decreases - Credited
April 24: Sold goods to Ramesh on credit for Rs.300
Ramesh owes – Assets increases – Debited
Sale to merchandise is revenue item so it is to be Credited or
On Sale stock decreases – assets decreases - Credited
April 28: Received cash from Ramesh Rs.300
Amount of cash increases- Assets increases – Debited
Ramesh is no longer owes to firm – Assets decreases – Credited
April 30: Paid rent and salary
Services enjoyed – Expenses increases – Debited
Cash decreased – Assets decreased – Credited

3.4.2 Ledger Posting

The ledger is the most important book of accounts. It is the principal book of accounts
and contains all the information regarding business. It is very difficult to prepare a
final account in the absence of the ledger. The ledger provides the necessary
information regarding various accounts. The personal account in the ledger shows
how much money the firm owes to debtors, and how much money creditors owe to the
firm. The real account shows the value of asset and the value of stock. Nominal
accounts reflect the sources of income, and amount spent on various items.

Till now, with the help of journal entries, we are able to ascertain how the accounts
are to be debited and credited and also the amounts involved. Through ledger posting
we will learn how to prepare a summarized and classified form of all the accounts.

Consider the following entry

April 8 Furniture Account Dr. 500

To ABC Furniture & Co. 500

From the above journal entry, we will prepare two ledger accounts: the Furniture
Account, and the ABC Furniture & Co.

While posting entries from journal to ledger, we have to remember the following:

 Nowhere in a given account, will the name of that account will appear. For
example, if we are in a journal entry, then its ledger account will be credited with
the name of the debited account of journal entry.

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Accounting System Using the above rules, the posting of the given journal entry into the furniture account
is done as follows:

Dr. FURNITURE ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount
2021
April 8 To ABC Furniture & 500
Co

Since the furniture account is debited in the journal entry, the furniture account is
debited, but by writing the name of ABC Furniture & Co. , appearing as credit item in
journal entry. This ledger posting will be read as – The Furniture Account is debited
by ABC Furniture & Co. just, as ABC Furniture & Co. Account is credited in the
journal entry, the same will find an entry in its ledger account on credit side but with
the name of Furniture Account; and it is shown below:

Dr. ABC FURNITURE & Co. Cr.

Date Particulars Amount Date Particulars Amount
2021
April 8 By Furniture 500
Account

The above ledger posting will be read as: The ABC Furniture & Co. is credited by
Furniture account.
The transactions, which have been journalized in illustration 2, are posted below.

Dr. CASH ACCOUNT Cr.

Date Particulars Amt. Date Particulars Amt.

2021 2021
April 1 To Mohan’s Capital a/c 5000 April 2 By Bank Account 500
,, 16 To Sales Account 600 ,, 3 By Furniture Account 200
,, 28 To Ramesh Account 300 ,, 5 By Purchase Account 400
,, 30 By Rent Account 100
,, 30 By Salary Account 200
,, 30 By Balance c/d 4500

900 5900
May 1 To Balance b/d 4500

Dr. CAPITAL ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

2021
April 1 By Cash Account 5,000

Dr. BANK ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

2021 2021
April 2 To Cash Account 500
April 30 By Balance c/d 500

May 1 500 500

To Balance b/d 500
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 Basic Accounting Process:
Dr. PURCHASE ACCOUNT Cr. Preparation of Journal,
Ledger and Trial Balance
Date Particulars Amount Date Particulars Amount
2021
April 5 To Cash Account 400
April 8 To M/s Ram 1,000
Narain

Dr. SALES ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

2021
April 16 By Cash Account 600
April 24 By Ramesh 300

Dr. FURNITURE ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

2021 2021
April 3 To Cash Account 200
April 30 By Balance c/d 200

May 1 200 200

To Balance b/d 200
Dr. M/S RAM NARAIN Cr.

Date Particulars Amount Date Particulars Amount

2021
April 8 By Purchase 1,000
April 30 To Balance c/d 1,000 Account

1,000

1,000 May 1 1,000

By Balance b/d

Dr. RAMESH Cr.

Date Particulars Amount Date Particulars Amount

2021 2021
April 24 To Sales 300 April 28 By Cash Account 300
Account 300 300

Dr. RENT ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

2021
April 30 To Cash 100
Account

Dr SALARY ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

2021
April 30 To Cash 200
Account

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Accounting System 3.4.3 Balancing an Account
At the end of the each month, or year, or any particular day it may be necessary to
ascertain the balance in an account. The difference between the total of two sides is
said to be balancing figure. Balancing of an account is to total both debit and credit
sides of an account and putting the difference on that side which is shorter For
instance, if the total of the debit side is Rs.1,000, and the total of credit is Rs.850, then
the balancing figure is Rs.150 only. As the total of the debit side is greater than the
total of credit side, the balancing figure is called the debit balance. The debit balance
is written on the credit side as “By Balance C/d”. C/d means carried down. By doing
this, the two side will be balance. Then, this balance is written on the debit side as “To
Balance B/d” (i.e., brought down). This is the opening balance for the new period. The
similar, but reverse procedure is applied for credit balance. It should be noted that
Nominal Accounts (such as rent, salary, etc.) are not balanced. The balance at the end
of the accounting year is transferred to the profit and loss account. Only Personal and
Real Accounts show balances.

 Check Your Progress 2

1. Differentiate Between Real, Personal and Nominal Account.
2. Identify Personal, Real and Nominal Accounts.
a. Cash Account
b. Sales Account
c. Capital Account
d. Purchase Account
e. Discount Account

3. Give the narration of the following journal entries

a. Salary A/c Dr
To Cash A/c
b. Ram A/c Dr
To Cash A/c
To Discount A/c
c. Purchase A/c Dr
To Anil
d. Cash A/c Dr
To Capital A/c
e. Machinery A/ c Dr.
To Cash A/c

4. Record the following transactions in general journal and post them to ledger.

a. Commenced business with cash of Rs.50,000

b. Purchased goods for cash Rs.16,000.
c. Paid rent for the month, Rs.2,000.
d. Purchased equipments for cash, Rs.6,000.
e. Paid miscellaneous expenses, Rs.2,600.
f. Paid creditors, Rs. 11,000.
g. Received Rs. 4,200 as commission.
h. Received from cash sales, Rs.12,000.
5. On April 1, 2021, Sanjeev established an enterprise under the name DP Sons.
Transactions completed during the months were as follows:
a. Started business with cash Rs.60,000.
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 b. Opened a business bank account with a deposit of Rs.20,000. Basic Accounting Process:
Preparation of Journal,
c. Purchased sundry equipment for Rs.22,000, paying cash of Rs.15,000, and
Ledger and Trial Balance
the balance on account.
d. Purchased supplies for the office for cash, Rs.1,500.
e. Paid creditors on account, Rs.3,000.
f. Paid office rent for the month, Rs.1,150.
g. Earned commission (in cash), Rs.9,000.
h. Paid miscellaneous expenses, Rs.25.
i. Withdrew cash Rs.2,700 from bank.
You are required to give entries in the general journal, and post them to ledger.

3.5 TRIAL BALANCE

A statement which is prepared to show the debit balances and credit balances
separately for each account is known as the Trial Balance. It is prepared after posting
the accounts in the ledger, and the balance of each account has been found. It is
prepared by listing each and every account, and entering their balances into separate
columns of the debit and credit. The totals of the debit and credit columns of a trial
balance must be equal. An equality indicates that the trial balance does not contain an
arithmetical error. This follows from the fact that under the Double Entry System, the
amount written on the debit side of various accounts is always equal to the amounts
entered on the credit side of other accounts, and vice-versa. Hence, the total of the
debit side must be equal to the total of credit side. Also, the total of the debit side
balances will be equal to the total of the credit side balances. Once this agreement is
established, there is reasonable confidence that the accounting work is free from
arithmetical errors, though it is not proof of cent per cent accuracy, because some
other error (such as principle and compensating errors) may still remain.

Errors which are Undetectable by a Trial Balance

A trial balance can trace the mathematical inaccuracy of the general ledger. However,
there are a number of errors that cannot be detected by the Trial balance: Let us
discuss those errors in brief:

 Error of complete omission: The transaction was not entered into the system.
 Error of original entry: The double-entry transaction includes the wrong
amounts on both sides.
 Error of reversal: When a double-entry transaction was entered with the correct
amounts, but the account to be debited is credited and the account to be credited is
debited
 Error of Principle: The entered transaction violates the fundamental principles of
accounting. For example, the amount entered was correct and the appropriate side
was chosen, but the type of an account was wrong (e.g., expense account instead
of liability account).
 Error of Commission: The transaction amount is correct, but the account debited
or credited is wrong. It is similar to the principle error described above, but
commission error is usually a result of oversight, while principle error is a
consequence of a lack of knowledge of accounting principles.

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Accounting System
3.6 OBJECTIVES OF PREPARING TRIAL
BALANCE
1. The trial balance enables one to establish whether the posting and other
accounting processes have been carried out without committing arithmetical
errors.

2. Financial statements are normally prepared on the basis of agreed trial balance,
otherwise the work may be cumbersome.

3. The trial balance serves as a summary of what is contained in the ledger.

4. Trial balance helps in locating errors in book-keeping work.

The format of Trial Balance is as follow:

TRIAL BALANCE
As at…………..
S.No. Name of Account L.F. Dr. Amount Cr. Amount
(Total /Balance) (Total /Balance)

3.6.1 The Total Method of Preparing the Trial Balance

In this, the total of each side of the account is entered respectively in the debit and
credit columns of the Trial Balance. This is known as the Gross Trial Balance.

TRIAL BALANCE
As at April 30, 2021
S.No. Name of Account L.F. Dr. Amount Cr. Amount
(Total) (Total)

1. Cash Account 5900

2. Capital Account 1400
5000
3. Bank Account 500
4. Purchase Account 1400
5. Sales Account 900
6. Furniture Account 200
7. M/s Ram Narain Account 1000

8. Ramesh Account 300 300

9. Rent Account 100
10. Salary Account 200

8600 8600

3.6.2 The Balance Method of Preparing the Trial Balance

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In this, balances are entered separately in the debit and credit columns of the Trial Basic Accounting Process:
Preparation of Journal,
Balance. This is known as the Net Trial Balance.
Ledger and Trial Balance
TRIAL BALANCE
As at April 30, 2021
S.No. Name of Account L.F. Dr. Amount Cr. Amount
(Balance) (Balance)
1. Cash Account 4500
5000
2. Capital Account
3. Bank Account 500
4. Purchase Account 1400
900
5. Sales Account
6. Furniture Account 200
1000
7. M/s Ram Narain Account
9. Rent Account 100
10. Salary Account 200
6900 6900

3.6.3 The Limitations of Trial Balance

One should note that the agreement of trial balance is not conclusive proof of
accuracy. In simple words, in spite of the agreement of the trial balance some errors
may remain. These may be of the following types:
1. The transactions have not been entered at all in the journal.
2. An incorrect amount has been written in both column of the journal.
3. An incorrect account has been mentioned in the journal.
4. An entry has not been completely posted in the ledger.
5. Entry is posted twice in the ledger.

3.7 THE ACCOUNTING CYCLE

The accounting cycle is a process of identifying, analyzing, and recording the
accounting transactions of a company. It has 7 to 8 steps in process that begins when
a transaction occurs and ends with its inclusion in the financial statements . The
following is a depiction of the steps in the accounting cycle. Let us discuss them in
brief:

1. Financial transactions occur, such as selling inventory, buying raw

materials, or making lease payments, for example.
2. Those transactions are noted in the appropriate financial journal, depending
on what the money was spent on or originated from. Debits are used to
indicate money spent and credits are used for money that is received.
3. The transactions are then posted to the account in the general ledger, which
is the list of all the business’ financial accounts that it impacts, such as rent
or wages or marketing.
4. At the end of the accounting period, you run a trial balance to see if all the
numbers balance.
5. The next step is trying to find the cause of the imbalance and correcting it.
6. At the end of the accounting period, adjustment entries must be posted to
accounts for accruals and deferrals.
7. Once the accounts are balance, financial statements are prepared.

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Accounting System 8. At the end of the period, the books are closed out and new revenue and
expense accounts created with zero balances. These are used for the next
accounting period.
Similar to information technology process (input – process – output), the accounting
cycle accepts data input- monetary transactions which is processed according to
predefined accounting principles, and the output is in the form of final statements.

 Check Your Progress 3

1. From the following transactions of M/s Divya Sharma & Co., write up the journal
in proper form, post the ledger, and take out a trial balance.

2021 Rs.
April 1 Started business with cash 1000
,, 2 Deposit in the bank 50
,, 3 Furniture purchased for cash 20
,, 5 Purchased goods for cash 40
,, 7 Old furniture sold for cash 80
,, 8 Purchased goods from M/s Sanjeev Tomar on credit 100
,, 9 Received cheque of money due to M/s Sanjeev Tomar
,, 12 Deposited the cheque into bank
,, 15 Paid taxes in cash 50
,, 16 Goods sold to M/s Ram & Co. for cash 560
,, 24 Goods sold on credit to Ramesh 210
,, 28 Received cash from Ramesh 310
,, 30 Bank interest credited 70
,, 30 Paid Rent 150
Paid Salary 150
,, 30

2. What is trial balance? What are the objectives of preparing it?

3. Point out the errors disclosed by trial balance:

a) An item omitted from subsidiary records.
b) An error in balancing an account
c) Correct amount posted to correct account.
d) An error in carry forward of a total of one page to another page.

4. Prepare the trial balance for question numbers 4 and 5 (Check Your Progress 2).

3.8 KEY WORDS

Accounting Equation explains the equal relationship between total claims, and total
assets of the firm.

Double Entry System: Every transaction has two aspects and according to this
system, both the aspects are recorded.

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Journal: Transactions are first entered in this book to show which account should be Basic Accounting Process:
Preparation of Journal,
debited, and which one should be credited. The journal is also called a subsidiary
Ledger and Trial Balance
book.

Ledger: Accounts are prepared on the basis of entries made in the journal. The book,
that contains the accounts is called a ‘ledger’. The ledger is also called the principal
book.

Total Claims = Liabilities + Capital

“T” Form Account:, Two sides are put together, and the left-hand side is called the
“Debit-side”, while the right-hand side is called the ‘Credit-side”.

Trial Balance is a statement which is prepared to show the debit and credit balances
separately.

3.9 SUMMARY
The basic unit accounting procedure is a combination of various subunits. Double
entry accounting system is a scientific system for recording transactions in which each
transaction has its two effects debit and credit. By this process the total of debit
becomes equal to the total of credit. As per the accounting equation, transactions are:
journalized on the basis of five elements (assets, liabilities, capital, expenses (loans),
and revenue (profit)). Further, the accounts are classified by real and nominal account.
Trial balance is prepared just to check the arithmetical accuracy of all the ledger
accounts. It is drawn by taking the balances of all ledger accounts periodically, or at
the end of the accounting period. In the accounting cycle, how transactions and events
are recorded and processed to get final result is explained.

3.10 SOLUTIONS / ANSWERS TO CHEK YOUR

PROGRESS

 Check Your Progress 1

1. a) Dr. b) Dr. c) Dr. d) Dr.

2. Assets = capital + liabilities

3. Every transaction has two aspectsThe first is the debit and the other credit.

 Check Your Progress 2

1. Real accounts relate to assets of the firm where personal accounts relate to persons
dealing with the firm, and nominal accounts related to expense, losses, gains and
revenue etc.

2. a) Real b) Real c) Personal d) Real e) Nominal

3. a) Being salary paid in cash
b) Being payment made to Ram and discount allowed.
c) Being goods purchased on credit
d) Being the capital invested in cash
e) Being machinery purchased for cash.

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Accounting System
4.

Date Particulars L.F. Dr. Cr.

Amount Amount

Cash Account 50,000

Dr. 50,000
To Capital Account
(Being the amount invested by Mohan in the
business as capital)
16,000
Purchase Account 16,000
Dr.
To Cash Account
(Being goods purchased for cash) 2,000
2,000
Rent Account
Dr.
To Cash Account 6,000
(Being Rent paid for cash) 6,000

Equipment Account
Dr. 2,600
To Cash Account 2,600
(Being equipment purchased for cash)

Miscellaneous Expenses Account 11,000

Dr. 11,000
To Cash
(Being Expenses paid for cash)
1,200
Creditors Account 1,200
Dr.
To Cash Account
(Being creditors paid on account) 12,000

Cash Account 12,000

Dr.
To Commission Account
(Being Commission received)

Cash Account
Dr.
To Sales account
(Being cash received from sales)

Dr. CASH ACCOUNT Cr.

Date Particulars Amt. Date Particulars Amt.
2005 2005
April 1 To Capital Account 50000 April 2 By Equipment 6000
,, 16 To Commission Account 1200 ,, 3 Account 2600
,, 28 To Sales Account 12000 ,, 5 By Misc.exp. 16000
,, 30 Account 2000
,, 30 By Purchase 11000
,, 30 Account 25600
By Rent Account

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 63200 By Creditors 63200 Basic Accounting Process:
May 1 To Balance b/d 25600 Account Preparation of Journal,
By Balance c/d Ledger and Trial Balance

Dr. CAPITAL ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

To Balance c/d 50,000 By Cash Account 50,000

By Balance b/d 50,000

Dr. MISC. EXPENSES ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

2005
To Cash Account 2600
By Balance c/d 2600

2600 2600
To Balance b/d 2600
Dr. PURCHASE ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

To Cash Account 16000 By Balance c/d 16000

To Balance b/d 16000

Dr. SALES ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

By Cash Account 12000
To Balance c/d 12000
By Balance b/d 12000

Dr. EQUIPMENT ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

To Cash Account 6000

By Balance c/d 6000

6000 6000
To Balance b/d 6000

Dr. COMMISSION ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

By Cash Account
To Balance c/d 1200 1200
By Balance b/d 1200

Dr. CREDITORS ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

To Cash Account 11000
By Balance c/d 11000
To Balance b/d 11000

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Accounting System Dr. RENT ACCOUNT Cr.

Date Particulars Amount Date Particulars Amount

To Cash Account 2000
By Balance c/d 2000
To Balance b/d 2000

5. (Similar to Question no. 4).

 Check Your Progress 3

1. Similar to Question no.4 (Ref. Check Your Progress 2).

2. The Trial Balance is a list of all the accounts and their balance.

3. a) True b) True c) False d) True.

4. TRIAL BALANCE
As at April 30, 2021

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

(Total) (Total)
1. Cash Account 25600
2. Capital Account 50000
3. Misc. exp. 2600
4. Purchase Account 16000
5. Sales Account 12000
6. Equipment Account 6000
7. Commission Account 1200
8. Creditors Account 11000
9. Rent account 2000

63200 63200

3.11 FURTHER READINGS

Financial Accounting, Dr. R.K. Sharma and Dr. R.S. Popli, Kitab Mahal, 2021.

Basic Financial Accounting, J.R. Monga, Girish Ahuja, Mayur Paperbacks, 2021.

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