Journal entries and

preparation of accounts

By : Gaurang Badheka
MA, Sem - 1
 Important accounting terms
1. Capital - It is the amount invested by the proprietor in the firm. For the
business it is liability towards the owner.
2. Asset – Assets are things of value owned. In other words anything,
which will enable the firm to get cash or a benefit in future, is called
asset
3. Liability – It is the amount, which the firm owes to outsiders
4. Revenue – It is the amount, which is added to the capital as a result of
operation. Receipts from sale of goods, rental income etc. are a few
examples of revenue.
5. Expense – It is the amount spent in order to produce and sell the goods
and services which produce the revenue. Some examples of expenses
are salaries, wages, rent, etc.
 Important accounting terms
5. Purchase – Cash and Credit purchases of goods.
6. Sale – Cash and Credit sales of goods.
7. Stock – Stock includes goods lying unsold on a particular date.
8. Debtors – A person who owes money to the firm.
9. Creditor – A person to whom the money owes by the firm.
10. Proprietor – The person who makes the investment and bears all
the risks connected with the business is called the proprietor.
11. Drawings – It is the amount of the money or the value of goods
which the proprietor takes for his domestic or personal use.
12. Transaction – exchange of goods or services for cash e.g. purchase
of a machinery etc.
 Accounting equation
• Total Assets = Total liabilities
= Capital + liabilities
• We can say
Assets = Total claims
= Liabilities + Capital
= (Outsider’s claim) + (Owner’s claim)
• Liabilities = Assets – Capital
• Capital = Assets – Liabilities
 Accounting equation - example
• Commence business with a capital of Rs.
2,00,000
• Purchase Furniture for Rs. 5,000 in cash
• Purchase goods for Rs. 10,000 on cash
and Rs. 10,000 on credit
• Business sells goods on credit for Rs.
30,000 the cost of the goods is Rs. 15,000
• The business pays Rs. 1,000 for rent and
Rs. 2,000 for salaries.
 Transaction
• Reminder: A business transaction is
anytime that an exchange of value
happens within the normal operation of a
business
– Every transaction must be recorded
– Every transaction affects at least two
accounts
• Up to now:
– We have been using T-Accounts
– Debits = Credits
 Transaction
• The concepts of “T-Accounts” remain
– Debits = Credits
– At least two accounts are affected
• But rather than entering transactions into
the T-Accounts immediately, we use the
General Journal
 What is the journal?
• Your personal diary

• The textbook says:

– “The journal records all parts of a transaction
in one place. The date, the debit, the credit
and an explanation for each transaction are
recorded together.”

• Can record manually or electronically.

 The journal
• ADVANTAGES
– The complete transaction is recorded in one
place
– Reduces Errors
• Easier to make a mistake in T-Accounts (Debit but
no credit, only one account, etc)
– Transactions are listed in chronological order
– Shows a picture of every day at the business
 The accounting cycle
• This unit is all about the different steps of
the accounting cycle
• The accounting cycle is the process an
accountant goes though during a fiscal
periods
– Begins with a business transaction
– Ends with the preparation of the Financial
Statements & Closing Entries
Accounting cycle and journal
Closing
Transaction
Entries

Financial
Statements journal

Adjusting
Ledger
Entries

Trial
Balance
Journal - format
Date Particulars P DR CR
r
 Accounts

Personal a/c Non personal a/c

Nominal
Debtors, Real a/c
a/c
creditors,
owners
Expense,
Assets loss, gain,
revenue, etc
 Rules for transaction
I. Personal Account
- Dr. the receiver and Cr. The giver.
II. Real Account
- Dr. what comes in and Cr. what goes out.
III. Nominal Account
- Dr. all the expenses and losses and Cr.
all the incomes and gains.
 Rules for debit and credit
I Increase in Asset – Dr.
Decrease in Asset – Cr.
II. Increase in Liabilities – Cr.
Decrease in Liabilities – Dr.
III. Increase in capital – Cr.
Decrease in Capital – Dr.
IV. Increase in Expenses – Dr.
Decrease in Expenses – Cr.
V. Increase in Income – Cr.
Decrease in Income – Dr.
 Quick check ……
Capital drawing
Building purchase Purchase
Sales Carriage paid
Cash received Interest received
Discount allowed Electricity
Repair Bad debt recovered
Furniture purchase Outstanding salary
Bank overdraft Interest recd in adv.
Interest accrued
 Quick check ……
Capital – p Drawing – p
Building purchase – r Purchase - n
Sales – n Carriage paid – n
Cash received – r Interest received – n
Discount allowed – n Electricity – n
Repair – n Bad debt recovered – n
Furniture purchase – r Outstanding salary – p
Bank overdraft – p Interest recd in adv. – p
Interest accrued - p
 Quick check ……
Capital – c Drawing – c
Building purchase – a Purchase - e
Sales – r Carriage paid – e
Cash received – a Interest received – r
Discount allowed – e Electricity – e
Repair – e Bad debt recovered – r
Furniture purchase – a Outstanding salary – l
Bank overdraft – l Interest recd in adv. – l
Interest accrued - a
 Journal entry - format
Date Particulars L.F. Debit Credit
(Rs.) (Rs.)
 Useful abbreviations in account
• a/c – account
• B/S – Balance Sheet
• c/d – carried down
• b/d – brought down
• b/f – brought forward
• Dr – Debit record
• Cr – Credit record
• G/L – General Ledger: (or N/L – Nominal Ledger)
• P&L – Profit & Loss
• TB – Trial Balance
 Journal entry - example
1. Ramesh starts a business by Rs. 100000
2. Purchase furniture Rs. 50000 on cash.
3. Purchase goods for Rs. 10,000 for Cash
and Rs. 10,000 on credit.
4. Sold goods for cash Rs. 10000
5. Sold goods to Ram on credit Rs. 1000
6. Rs. 1000 received from Ram
7. Paid Rs. 5000 as salary in cash
 Journal entry - example
I. Ramesh starts business with Rs. 1, 00,000
Cash A/C Dr. 1, 00,000 (Increase in Cash – Dr.)
To Capital A/C 1, 00,000 (Increase in Liab – Cr.)

II. Purchase furniture for Rs. 50,000

Furniture A/C Dr. 50,000 (Dr. what comes in and
To cash 50,000 (Cr. What goes out)

III. Purchase goods for Rs. 10,000 for Cash and Rs. 10,000 on credit
Purchases A/C Dr. 20,000 (Stock is increased)
To cash Rs. 10,000 (cash is Decreased)
To creditors Rs. 10,000 (liability is increased)
 Journal entry - example
IV. Sale of goods for cash Rs. 10,000
Cash A/C Dr. 10,000 (Cash is increased)
To sales A/C. Rs. 10,000 (stock of goods is decreased)
V. Sale of goods to Ram on credit for Rs. 1,000
Ram A/C Dr. 1,000 (Debtors increased)
To sales A/C 1,000 (stock decreased)
VI. Rs. 1,000 received from Ram
Cash A/C Dr. 1,000 (Cash increased)
To Ram 1,000 (Debtors decreased)
VII. Paid Rs. 5,000 as salary in Cash
Salary A/C Dr. 5,000 (Dr. the Exp.)
To Cash 5,000 (Decrease in Cash)
 Journal entry - format
Date Particulars L.F. Debit Credit
(Rs.) (Rs.)

1-4-13 Cash A/c Dr 100000

To capital A/c 100000
(Ramesh brings the capital to start busi.)
50000
2-4-13 Furniture A/c Dr 50000
To Cash A/c
(purchase furniture on cash)
3-4-13 Purchase A/c Dr 20000
To cash A/c 10000
To creditor A/c 10000
(Purchase goods on cash and credit)
 Do it yourself
• Exercise 1: Journal entries
Ledger
posting
 General Ledger entries
• After recording the transaction in the journal,
the next step is the transfer of transaction in
the respective account in journal.
• The process of writing entries in the ledger on
the basis of journal is known as “ledger
posting”.
• In previous example, it was very easy to find
out number of cash entries. But in real life, it
becomes extremely difficult to do so.
 Journal vs. ledger
• Nature of book
• Basis of preparation
• Stage of recording
• Objective
• Narration
• Help in final account
 General ledger - format
DR CR

DATE PARTICULAR J.F AMOU DATE PARTICULAR J.F AMOU

S NT(RS) S NT RS.
 General ledger - format
• On 1/4/13, Mahesh, a customer paid Rs. 1000 for goods
taken on credit.
Cash A/c Dr 1000 (1)
To Mahesh 1000 (2)

Cash A/c
DR CR
DATE PARTICULARS J.F AMOUNT DATE PARTICULARS J.F AMOUNT
(Rs.) (Rs.)
1/4/13 To Mohan A/c 1000
 General ledger - format
• On 1/4/13, Mahesh, a customer paid Rs. 1000 for goods
taken on credit.
Cash A/c Dr 1000 (1)
To Mahesh 1000 (2)

Mohan A/c
DR CR
DATE PARTICULARS J.F AMOUNT DATE PARTICULARS J.F AMOUNT
(Rs.) (Rs.)
1/4/13 By Cash A/c 1000
 General ledger
• Go back to our exercise 1 of Journal
entries.
 Balancing the account
• At the end of each month or year or any
particular day, it may be necessary to
ascertain the balance in an account. This
is not a difficult thing to do – suppose a
person has bought goods worth Rs. 1,000
and has paid only Rs. 850 he owes Rs.
150 and that is the balance in his account.
To ascertain the balance in any account,
one has to total the two sides and
ascertain the difference.
 Balancing the account
• If the credit side is bigger than the debit side
it will be a credit balance and vice versa. The
credit balance is written on the Debit side as
“To Balance carried down” (To BAL C/D) and
the debit balance is written in the credit side
as “By Balance carried down“(by Bal c/d).
After these two sides totals will be equal. The
totals are written on the two sides opposite
one another with one line above and two
lines below like this.
 Balancing the account
• It should be noted that nominal accounts
are not balanced, the balance in them are
transferred to Profit and Loss A/C. Only
personal and real accounts ultimately
show balances.
 Balancing the account
• Let us take one example:
• Journalise following transactions. Prepare
Ram’s A/C

1.1.06 Purchased goods from Ram Rs. 10,000

3.1.06 Purchased goods from Ram on Credit Rs. 12,000
4.1.06 Amount paid to Ram Rs. 10,000
 Balancing the account
Date Particulars L.F. Dr. Cr.
Amount Amount
1.1.06 Purchases A/C Dr. 10000
To Ram 10000
(Goods purchased from Ram
on credit)
3.1.06 Purchases A/C Dr. 12000
To Ram 12000
(Goods purchased from Ram
on credit)
4.1.06 Ram A/C Dr. 10000
To Cash 10000
(Cash paid to Ram)
General ledger
Trial balance
 Trial balance - Meaning
• Trial Balance may be defined as a
statement which contains balances of all
ledger accounts on a particular date.
 Trial balance - Meaning
The trial balance is a list of all the debit and credit balances
in the ledger.
The trial balance has two functions:
1. It provides a list of balances from which the financial
statements are prepared.
2. It acts as a preliminary check on the arithmetical
accuracy of the double entries carried out in the ledger.
It should be noted that the trial balance, or “T-B”, is not part
of the double entry system. It is a summary of the
balances on the individual ledger accounts.
 Trial balance - objective
• To check arithmetical accuracy
• To helps in preparing financial statement
• Helps in locating error
• Helps in comparison
• Helps in making adjustments
 Trial balance
• Trial Balance is not an account. It is only a list or
schedule of balances of ledger accounts including
cash and bank balances. It is prepared on a
particular date. The accounts having a debit
balance are entered in the debit amount column
and credit balance accounts are entered in the
credit amount column. The totals of the two sides
of the accounts may also be used to prepare trial
balance. The sum of each column should be
equal.
 Little help…..
• The following mnemonics will assist you in
remembering the type of balances that the
following accounts are expected to have:
• DEAL - Debtors, Expenses, Assets and
Losses accounts have debit
balances
• CLIPP- Creditors, Liabilities, Income,
Provisions and Profits accounts
have credit balances
 Identify the balance of A/c
Capital Account
Land and Buildings
Plant and Machinery
Equipment
Furniture and Fixtures
Current Asset Accounts
Cash in Hand
Cash at Bank
Accounts Receivables
Bills Receivable
 Identify the balance of A/c
Stock of Raw Materials
Work in progress
Stock of Finished goods
Purchases
Carriage inwards
Carriage outwards
Sales
Sales Returns
Purchase Returns
Interest paid
Commission/Discount received
Salaries
 Identify the balance of A/c
Long term loan
Bills Payable
Accounts payable
Outstanding Salaries
Prepaid Insurance
Outstanding interest earned
Advances from Customers
Drawings
Reserves and Surplus
Provision for bad and doubtful debts
 Identify the balance of A/c
Capital Account – Cr
Land and Buildings - Dr
Plant and Machinery - Dr
Equipment – Dr
Furniture and Fixtures - Dr
Current Asset Accounts
Cash in Hand - Dr
Cash at Bank - Dr
Accounts Receivables - Dr
Bills Receivable - Dr
 Identify the balance of A/c
Stock of Raw Materials - Dr
Work in progress - Dr
Stock of Finished goods - Dr
Purchases - Dr
Carriage inwards - Dr
Carriage outwards - Dr
Sales - Cr
Sales Returns - Dr
Purchase Returns - Cr
Interest paid - Dr
Commission/Discount received - Cr
Salaries - Dr
 Identify the balance of A/c
Long term loan - Cr
Bills Payable - Cr
Accounts payable - Cr
Outstanding Salaries - Cr
Prepaid Insurance - Dr
Outstanding interest earned - Cr
Advances from Customers - Cr
Drawings - Dr
Reserves and Surplus - Cr
Provision for bad and doubtful debts - Cr
 Do it yourself
• Exercise A2: Trial Balance

• Exercise A3: Trial Balance

• Exercise A4: Trial Balance

 Errors
• The trial balance is prepared to check the
arithmetical accuracy of accounts. If the trial
balance does not tally, it implies that there
are arithmetical errors in the accounts which
require location, detection and rectification
thereof. Even if the trial balance tallies, there
may still exist some errors. There are two
types of errors: (a) errors which are not
revealed by the trial balance, and (b) errors
which are revealed by the trial balance.
 Errors
There are times when the trial balance columns fail to agree. When this
happens, the following checks should be carried out.
1. Add up both the debit and credit columns of the trial balance to see if
a computational error was made.
2. Check to see if debit balances and credit balances were entered in
the correct column of the trial balance.
3. If this exercise does not reveal the error, check the ledger accounts
to see if they were properly balanced.
4. Is the figure still outstanding? Check back all transactions to see if
the postings from the journal to the ledger account were correctly
carried out.
5. If the problem is still not solved, check the journal entries along with
the source documents, such as the invoices, receipts etc., to see if
the data from these documents were correctly recorded.
 Types of errors
A. At Recording Stage
1. Errors of principle
2. Errors of omission
3. Errors of commission
B. At Posting Stage
1. Error of omission
i. Complete
ii. Partial
2. Error of commission
i. Posting to wrong account
ii. Posting on the wrong side
iii. Posting of wrong amount
 Types of errors
C. Balancing Stage
1. Wrong totaling
2. Wrong balancing
D. Preparation of Trial Balance
1. Error of Omission
2. Error of Commission
i. Taking wrong amount
ii. Taking wrong account
iii. Taking to the wrong side
 Types of errors
• Errors can be classified into the following
four categories on the basis of the nature
of errors.
i. Errors of commission
ii. Errors of omission
iii. Errors of principle
iv. Compensating (offsetting errors)
• Trial Balance do not disclose all types of errors. In other
words in spite of the agreement of the Trial Balance some
errors may remain. These may be of the following types:-
1. A transaction has not been entered at all in the journal.
2. Wrong amount has been written in both columns of the
journal.
3. A wrong amount has been mentioned in the journal.
4. An entry has not all been posted in the ledger.
5. An entry is posted twice in the ledger.
 Try yourself
• Exercise A5 : Errors in TB

• Exercise A6 : Errors in TB