BLOCK 1

Unit 2

 ACCOUNTING PROCESS:

First of all financial transactions or events are identified & measure in terms of money.

Then it is recorded in the book of original entry, i.e. in journal.

Then they are classified & posted to the main book of account known as the ‘ledger’

Then they are summarized in a manner which is understandable & useful to internal as well as

external end-users of accounting statements.

Then final stage in the accounting process is analyzing & interpreting the financial data

contained in the final accounts.

JOURNAL

It is a book containing a chronological (day-to-day) record of transactions. Under

Double Entry system the books in which a transactions is recorded for the first
time from a source document are called ‘Books of Original Entry’ or ‘Journal’
In Accounting words “A book of original entry in a double-entry system, listing all
transactions and indicating the accounts to which they belong.”

CLASSIFICATION OF ACCOUNTS AND THEIR RULE:

1) Personal Accounts: It include the accounts of persons with whom the business deals these

accounts can be classified into the three categories.

(i) Natural Personal Accounts: The term natural persons means persons who arem creation of

god. For example, Mohan’s account, Sohan’s Account, Abha’s Account, etc.

(ii) Artificial Personal Accounts: These accounts include accounts of corporate bodies or

institutions which are recognized as persons in business dealings. For example, the accounts of a

limited company, the account of a co-operative society, the account of a club, the account of the

government, etc.

(iii) Representative Personal Account: These are the accounts which represent a certain person

or group of persons. For example, if the rent is due to the landlord and outstanding rent account

will be opened in the books. Similarly for salaries due to the employees, an outstanding salaries
 account will be opened. All such accounts are therefore termed as ‘Representative Personal

Accounts’.

The Rule is: DEBIT THE RECIEVER

CREDIT THE GIVER

For example, if the cash has been paid to Ram, the account of Ram will have to be debited.

Similarly, if cash has been received from Keshav, the account of Keshav will have to be credited.

2) Real Accounts: Real accounts may be of the following types:

(i) Tangible Real Accounts: Tangible real accounts are those which relate to such things which

can be touched, felt, measured, etc. Examples of such accounts are cash account, building

account, furniture account, stock account etc. It should be noted that bank account is a personal

account, since it represents the account of the banking company-an artificial person.

(ii) Intangible Real Accounts: These accounts represent such things which cannot be touched.

Of course, they can be measured in terms of money. For example, Patents account, goodwill

account, etc.

The Rule is: DEBIT WILL COMES IN

CREDIT WHAT GOES OUT

For Example, if building has been purchased for cash, building account should be debited (since

it is coming in the business) while cash account should be credited (since cash is going out the

business)

3) Nominal Accounts: These accounts are opened in the books to simply explain the nature of the

transactions. They do not really exist. For example, in a business, salary is paid to the Manager,

rent is paid to the landlord, commission is paid to the salesman, cash goes out of the business

and its is something real; while salary, rent or commission as such do not exist. Nominal
accounts include accounts of all expenses, losses, incomes and gains. The examples of such

accounts are rent, rates lighting, insurance,, dividends, loss by fire, etc.

The rule is: DEBIT ALL EXPENSES AND LOSSES

CREDIT ALL GAINS AND INCOMES



 QUES: JOURNALIZE THE FOLLOWING TRANSACTIONS OF MR. SATISH:

2008 Particulars Rs.

Jan1 Rahul started business with cash 10000

Jan2 Paid into bank 6000

Jan3 Bought goods from M/s Singh & Co. on credit 2000

Jan4 Purchased furniture 200

Jan4 Purchased adding machine 800

Jan4 Purchased typewriter 600

(Payment in all cases made by cheque)

Jan6 Paid for postage 15

Jan8 Sold goods for cash 400

Jan9 Sold goods on credit to M/s Sharda & Co. 1000

Jan15 Paid to M/s Singh & Co. 1950

Discount allowed by them 50

Jan25 Sold goods to M/s Ray & Co. 560

Jan27 Received cheque from m/s Sharda & co In full settlement of

amount due from them 975

Jan31 Paid for electric charges 10

Jan31 Paid rent (Half of building is used by the proprietor as residence) 500

Jan31 Drew for personal use 350

Sol:

Date Particulars L.F Dr. (Rs) Cr. (Rs)

Jan 1 Cash A/c 10000
To Rahul’s Capital A/c 10000
(Being capital introduced by owner in cash)
Jan 2 Bank A/c 6000
To Cash A/c 6000
(Being cash deposited with bank)
Jan 3 Purchases A/c 2000
To M/s Singh & Co. 2000
(Being goods bought on credit from M/s Singh &
Co.)
Jan 4 Furniture A/c 200
To Bank A/c 200
(Being payment of furniture by cheque)
Jan 4 Machinery A/c 800
To Bank A/c 800
(Being payment of adding machine by cheque)
Jan 4 Machinery A/c 600
To Bank A/c 600
(Being payment of typewriter by cheque)
Jan 6 Postage A/c 15
To Cash A/c 15
(Being payment made for postage)
Jan 8 Cash A/c 400
To Sales A/c 400
(Being goods sold for cash)
Jan 9 M/s Sharda & Co. 1000
To sales A/c 1000
(Being goods sold on credit to M/s Sharda & Co.)
Jan 15 M/s Singh & Co. 1950
Discount A/c 50
To Cash A/c 2000
(Being payment made to M/s Singh & Co.
for goods bought on credit previously)
Jan 25 M/s Ray & Co. 560
To Sales A/c 560
(Being goods sold to M/s Ray & Co. on credit)
Jan 27 Bank A/c 975
To M/s Sharda & Co. 975
(Being cheque received for goods sold on credit
previously)
Jan 31 Electricity A/c 10
To Cash A/c 10
(Being payment made for electricity consumed by
 the business in cash)
Jan 31 Rent Payable A/c 500
To Bank A/c 500
(Being rent paid for building by cheque)
Jan 31 Drawings A/c 350
To Cash A/c 350
(Being cash withdrawn from bank for personal
expenses)
Total 25410 25410

Ledger Posting, preparation of Ledger

Ledger
Ledger is a book which contains various accounts. In other words, ledger is a set of accounts.
Ledger can be defined as collection of an entire group of similar accounts in double-entry
bookkeeping. It may be kept in any of the two forms.
 Bound Ledger
 Loose leaf ledger

It is common to keep ledger in the form of loose leaf cards these days. This helps in posting
transactions when mechanised system of accounting is used and nowadays almost all the
business organisations, whether big or small, use computerised system of accounting.

Relationship between ledger and journal/ Difference between ledger and

journal

The journal and the ledger are the most important books of the double entry system of
accounting. Their relationship can be expressed as follows.

1) The journal is the book of first entry (original entry); the ledger is the book of second
entry.
2) The journal is the book of chronological record; the ledger is the book for the analytical
record.

3) The journal, as a book of source entry, ordinarily has greater weight as legal evidence
than the ledger.
4) The process of recording in the journal is called journalising; the process of recording in
the ledger is called posting.

Posting

Posting is the process of transferring entries from a journal to a ledger book

Rules regarding posting

1) Separate accounts should be opened in the ledger for posting transactions relating to different
accounts recorded in the journal.

2) The concerned account which has been debited in the journal should also be debited in the
ledger. However, a reference should be made of the other account which has been credited in the
journal. For example, for salaries paid, the salaries account should be debited in the ledger, but
reference should be given of the cash account which has been credited in the journal.
3) The concerned account which has been credited in the journal should also be credited in the
ledger. However, a reference should be made of the other account which has been debited in the
journal. For example, for salaries paid, cash account has been credited in the journal, it will be
credited in the ledger also but reference will be given of the salaries account in the ledger.

Example:

2012

Aug., 31 Paid salary to Karan Rs. 5,000

Journal
Date Particulars L.F. Debit Credit
2012 Salary A/c Dr. 5,000
Aug., 31 To Cash A/c 5,000
(Being salary paid )

Ledgers

Salary A/c

Dr. Cr.

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

2012 To Cash A/c 5,000

Aug.,
31

Cash A/c

Dr. Cr.

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

 2012 By Salary A/c
Aug., 31

Balancing of an account

The technique of finding out the net balance of an account, after considering the totals of both
debits and credits appearing in the accounts is known as ‘Balancing the Account’. The balance is
put on the side of the account which is smaller and a reference is given that it has been carried
forward or carried down (c/f or c/d) to the next period. On the other hand, in the next period a
reference is given that the opening has been brought forward or brought down (b/f or b/d) from
the previous period.

Problem: Pass the journal entries and post them to ledger.

Aug. 1. Arjun commenced a business with a capital of Rs.1,00,000
Aug. 2. Bought goods for Rs. 20,000
Aug. 8. Bought goods from Sultan for Rs. 10,000
Aug. 10. Received Rs. 1,000 for rent
Aug. 16. Paid wages Rs. 200
Aug. 21 Sold goods for cash Rs. 10,000
Aug. 22. Sold goods to Nidhi Rs. 2,000
Aug. 31 Withdrew for personal use Rs. 1,000