Journalising Transactions

Accounting Cycle
 The stages involved in accounting cycle are:
 Creating Journal for recording transactions
 Creating Ledger for classifying the transactions
recorded in Journal
 Preparing Trial Balance, Trading Account, Profit
and Loss Account and Balance Sheet for
summarising the results of transactions

2
 Journal
 Journal is a book that records all daily
transactions in the chronological order of date.
 It is also known as book of original entry.
 The process of recording a transaction in
Journal is known as Journalising.
Debit Credit
Date Particulars L.F.
Rs. Rs.

3
 Types of Transactions
 All the business transactions are categorized
into three types:
 Transactions related to persons
 Transactions related to properties and assets
 Transactions related to income and expenses
 Depending upon the types of transactions, the
accounts under which the transactions are
recorded are classified into personal, real and
nominal accounts.

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 Personal Accounts
 Personal account includes accounts of persons and
organizations with whom the business deals.
 Types of personal accounts:
 Natural personal accounts: It includes accounts of
persons such as Amit’s Account.
 Artificial personal accounts: It includes accounts of
organizations such as accounts of company, club and
Government.
 Representative personal accounts: It includes accounts
that represent a group of persons.
 Rule of debit and credit
 Debit the receiver
 Credit the giver

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 Real Accounts
 Real accounts represent accounts of properties and
assets.
 Types of real accounts:
 Tangible real accounts: It represents accounts of things that
can be touched or measured, such as cash account, furniture
account and stock account.
 Intangible real accounts: It represents accounts of things
that cannot be touched, such as patent account and
goodwill account.
 Rule of debit and credit:
 Debit what comes in
 Credit what goes out
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 Nominal Account
 Nominal accounts represent accounts for
incomes, gains, expenses and losses.
 Example: rent account, rates account ,
insurance account, loss by fire account.
 Rule of debit and credit:
 Debit all expenses and losses
 Credit all incomes and gains

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From the following Transactions find out the nature of account
and also state which account should be debited and which
account should be credited
 Rent Paid
 Salaries Paid
 Interest received
 Dividend received
 Furniture purchased for cash
 Machinery sold
 Outstanding for salaries
 Telephone charges paid
 Paid to Suresh
 Received from Mohan(Proprietor)
 Lighting
8
SN Transaction Accounts Involved Nature of Account Dr./Cr.
Rent N Dr.
1 Rent Paid
Cash R Cr.
Salaries N Dr.
2 Salaries Paid
Cash R Cr.
Cash R Dr.
3 Interest Received
Interest N Cr.
Cash R Dr.
4 Dividend Received
Dividend N Cr.
Furniture R Dr.
5 Furniture purchased
Cash R Cr.
Cash R Dr.
6 Machinery sold
Machinery R Cr.
Salaries N Dr.
7 Outstanding for Salaries
O/S salaries P Cr.
Telephone Exp. N Dr.
8 Telephone charges Paid
Cash R Cr.
Suresh P Dr.
9 Paid to Suresh
Cash R Cr.
Cash R Dr.
10 Received from Mohan
Capital P Cr.
Lighting N Dr.
11 Lighting 9
Cash R Cr.
 Passing Entries to Journal
 Illustration: John starts a business with capital of Rs. 20,000
on Jan 1, 2000. He purchased furniture for cash of Rs. 5,000
on Jan 5, 2000. He paid rent for business premises of Rs. 2,000
on Jan 10, 2000.
Debit Credit
Date Particulars L.F.
Rs. Rs.
2000
Jan 1 Cash Account Dr. 20,000
To Capital Account 20,000
(Being commencement of business)
Jan 5 Furniture Account Dr. 5,000
To Cash Account 5,000
(Being purchase of furniture)
Jan 10 Rent Account Dr. 2,000
To Cash Account 2,000
(Being payment of rent ) 10
 Compound Entries

 Cash A/c Dr
Discount A/c Dr
To Sales A/c

 Cash A/c Dr
Mr. Amit A/c Dr
To Sales A/c

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 Advantages

 Chronological Order
 Explanation of Transaction
 Recording of Both Aspects

Limitations
 Classification of Account not provided
 Lack of availability of information of account
 Bulky & Voluminous

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 Opening Entry

The previous year’s balance of Assets & liabilities of a

running business have to be brought forward to the
current year’s Books of Account. This is done by the
means of a journal entry called ‘Opening Entry’. All
Assets accounts are Debited while all Liabilities
accounts are Credited. The excess of assets over
liabilities is the Proprietor's capital and is credited to the
Capital Account.
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 Special Entries
 Cash Discount
Cash a/c Dr.
Discount A/c Dr.
To Sales a/c

 Bad Debts
Cash a/c Dr.
Bad Debts a/c Dr.
To Mr. X a/c

 Bad Debts recovered

Cash a/c Dr.
To Bad Debts recovered a/c

 Outstanding Expenses
Salary a/c Dr.
To Salary O/s a/c

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 Prepaid
Prepaid Expense a/c Dr
To Expense a/c
 Depreciation
Depreciation a/c Dr.
To Asset a/c
 Interest on Capital
Interest on Capital a/c Dr.
To Capital a/c
 Interest on Drawing
Capital a/c Dr
To Interest on capital a/c
 Accrued Income
Accrued commission a/c Dr
To Commission a/c

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 Income received in advance
Cash a/c Dr
To Rent received in advance
 Drawing on goods
Drawing a/c Dr.
To goods a/c
 Charity
Charity a/c Dr.
To goods a/c
 Sample distributed
Advt. a/c Dr.
To goods a/c
 Loss by Theft or Fire
Loss by theft a/c Dr.
Loss by fire a/c Dr.
To goods a/c

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Ledger Posting
 Dr. Cr.
Increase in Assets Decrease in Assets

Increase in Expenses Decrease in Expenses

Decrease in Liability Increase in Liability

Decrease in Equity Increase in Equity

Decrease in Revenue Increase in Revenue

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 Ledger
 Ledger is a book that contains a set of
accounts.
 It organizes the transactions recorded in
Journal under their respective account heads.
 Two forms of Ledger are:
 Bound Ledger
 Loose Leaf Ledger
Dr. FURNITURE ACCOUNT Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
Rs Rs

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 Posting
 Posting is the process of transferring the Journal
entries to their corresponding accounts in Ledger.
 During posting, the names of accounts in Journal
should match with the names of accounts in
Ledger.
 Posting should be completed before the financial
statements are prepared.
 Active accounts such as Cash Account and
Personal Accounts of various parties should be
posted on a daily basis.

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 Methods of Posting
 Methods of posting are:
 Consider a particular side, say debit and make
complete posting of all debit entries from journal
to Ledger. Then make complete posting of all the
credit entries.
 Consider a particular account and post all the debit
and credit entries related to that account appearing
on a particular page of the Journal. Then consider
another account and perform the method
repeatedly.
 Consider a Journal entry and complete its posting.
Then proceed with the next Journal entry.
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 Difference between Journal & ledger
BASIS JOURNAL LEDGER
Entry Original Final
Nature of Book First Recording After Journal
Recording Chronological order Account wise
Object Further processing will be Position of account can be
easier due to date easily ascertained
Performa One column for particular, T-shaped A/c
divided into Dr & Cr
Narration Compulsory Not Required
A/c Maintained Not helpful for Final A/c Base for Final A/c
Process Journalising Posting
Reliability More Reliable & Less Reliable
Authentic
Accuracy Test of Accuracy not Through Trial Balance
possible
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 Rules of Posting
 Open separate accounts in Ledger for posting transactions
related to different accounts in the Journal.
 For a particular entry in the Journal, the account corresponding
to the debit entry should be debited in Ledger under the
account that corresponds to the credit entry.
 For a particular entry in the Journal, the account corresponding
to the credit entry should be credited in Ledger under the
account that corresponds to the debit entry.
 Write ‘To’ before the account that appears on the debit side of
a Ledger and ‘By’ before the account that appears on the credit
side of a Ledger.

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 Example of Posting
Journal

Debit Credit
Date Particulars L.F.
Rs. Rs.
2007
Jan 5 Cash Account Dr. 10,000
To Capital Account 10,000
Jan 7 Furniture Account Dr. 4,000
To Cash Account 4,000

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 Example of Posting (Contd..)
Ledger
CASH ACCOUNT
Date Particulars L.F. Amount Date Particulars L.F. Amount
2007 2007
Jan 5 To Capital A/c 10,000 Jan 7 By Furniture A/c 4,000
CAPITAL ACCOUNT
Date Particulars L.F. Amount Date Particulars L.F. Amount
2007
Jan 5 By Cash A/c 10,000
FURNITURE ACCOUNT
Date Particulars L.F. Amount Date Particulars L.F. Amount
2007
Jan 7 To Cash A/c 4,000
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 Balancing the A/c
•Only Real & Personal A/c are balance
•To Ascertain the Net effect of all transaction
posted to the A/c

Date Particular L. Amount Date Particular L. Amount

F. F.
2007 2007
Jan 5 To Capital 10,000 Jan 7 By Furniture A/c 4,000
A/c
6,000
Jan 31 By Balance c/d
10,000 10,000

Feb. 1 To Balance 6,000

b/d

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Subdivision of Journal
 Importance of Subdivision of Journal
 Subdivision of Journal means dividing the
Journal into various subsidiary books.
 It reduces the size of Journal and thus handling
of Journal becomes easier.
 It helps in division of labour by allowing
different persons to write different Journals.
 It helps in classifying information by
associating a Journal with a particular aspect
of the business.

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 Types of Journals
 Journals can be broadly categorized into two
types:
 Special Journal: Helps record transactions of specific
type. It is further divided into the following types:
 Cash Journal
 Goods Journal

 Bills Journal

 General Journal: It is also known as Journal Proper.

It records all such transactions that do not occur
frequently in business. Examples of such transactions
are opening entries, closing entries, adjustment entries,
transfer entries and purchases of fixed assets.
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 Cash Journal
 Cash Journal is used for recording all cash
transactions.
 It is also known as Cash Book.
 Types of Cash Journal:
 Simple Cash Book

 Two Columnar Cash Book

 Three Columnar Cash Book

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 Simple Cash Book
 Simple Cash Book is just like an ordinary Cash
account.
 It is also known as Single Column Cash Book.
 It functions both as a book and as a Ledger
account.
Dr. SIMPLE CASH BOOK Cr.
Amount Amount
Date Particulars L.F. Date Particulars L.F.
Rs Rs

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 Two Columnar Cash Book
 Two Columnar Cash Book consists of two
columns for recording cash details:
 Cash column: It records cash receipts and
payments.
 Discount column: It records discount received and
discount given.
TWO COLUMNAR CASH BOOK

Dr. Dis- Dis- Cr.

Particula L. Count/ Cash Dat Partic Count/Ba Cash
Date L.F.
rs F. Bank Rs e ulars nk Rs
Rs Rs

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 Three Columnar Cash Book
 Three Columnar Cash Book consists of three
columns for recording cash details.
 The first two columns are same as the Two
Columnar Cash Book.
 Bank column is the additional column in Three
Columnar Cash Book.
 Bank column records money deposited and
money withdrawn from the bank.

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 Three Columnar Cash Book (Cont…)
 Format of Three Column Cash Book:

Dr. CASH BOOK Cr.

Dis- Dis-
Cash Bank Cash Bank
DateParticulars L.F. count DateParticulars L.F. Count
Rs Rs Rs Rs
Rs Rs

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 Petty Cash Book
 It is used for recording the payment of petty
cash expenses.
PETTY CASH BOOK

Cash Year Date Partic V. No. Total Carriage & Postage Conv Printing Mis
Received ulars Cartage & eyan & cella
Telegram ce Stationar neo
y us

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Cash Receipts and Cash Payments
Books

 Cash Receipts Book:

 Cash Payments Book:

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 Goods Journal
 Goods Journal is used for recording all
transactions related to goods.
 Types of Goods Journal are:
 Purchases Journal: It records all credit purchases
of goods.
 Sales Journal: It records all credit sales of goods.
 Purchases Returns Journal: It records all returns
of goods purchased on credit.
 Sales Returns Journal: It records all returns of
goods sold on credit.

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 Bills Journal
 Bills Journal is used to record all bills of
exchange and promissory notes received or
issued by the business.
 Types of Bills Journal are:
 Bills Receivable Journal: It records all bills of
exchange and promissory notes received by the
business from its debtors.
 Bills Payable Journal: It records all bills of
exchange and promissory notes issued by the
business in favour of its creditors.
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 Sale/ Purchase Book
Date Particular Invoice No L.F. Details Total
Amount(Rs.)

Sale Return/ Purchase Return Book

Date Particulars Credit L.F. Details Total
/Debit Note Amount
No.

Bills Payable Book

Date To Whom given Period of Due Date L.F. Amt. How
the bill Disposed

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TRIAL BALANCE
 An Overview…
General Special
Journal Journals

Ledger Accounts

Trial Balance

Adjustments

Prepare Simple Financial Statements

 What is a Trial Balance?
• It is a statement of all the balances
from the ledger and cash book on a
particular date.
• Total debits should be equal to total
credits.
Total Total
Debits Credits
 Method to prepare Trial Balance

•Total Method( Gross Total Method):

The total of all debits and credits of all ledger
accounts are shown in the Debit and Credit
columns.
•Balance Method:
All ledger accounts are balanced and these
balances are taken for the preparation of
Trial Balance.
 A trial balance looks like this…
Trial Balance as at 31 Dec 2009

Debit Credit
Rs Rs
Capital 10,500
Cash 700
Bank 7,650
Purchases 3,900
Returns Outwards 150
Sales 5,680
Debtors 2,930
Returns Inwards 450
Drawings 100
Wages 600
16,330 16,330
 Features of a Trial Balance

•Summary of various account

•Proof of double entry

•Ensuring the arithmetical accuracy

•Facilitate preparation of final account

Uses and Limitations of Trial Balance…

Uses
• Test the equality of the recorded debits and
credits.
• If the total debit is not equal to the credit,
it reveals the presence of some errors during
the process of journalising or posting.
Uses and Limitations of Trial Balance…

Limitations
• A Trial Balance that balances does not
necessarily prove that all the transactions
have been recorded.

• There are some kinds of error that can still

cause the Trial Balance to balance and not
easy to detect.
Errors that can affect the Trial Balance:
•Wrong casting and wrong carried forwards
•Wrong balancing of an account
•Posting an amount on the wrong side of an account
•Posting wrong amount on correct side of an account
•Omission to post an amount from the subsidiary book to the ledger
•Omission of an account balance from the trial Balance
•Omission to post the total of the subsidiary books to the ledger
•Posting the same amount twice in the account
•Writing the balance of an account on the wrong side of the trial
balance
•Wrong totaling of the trial balance
Errors not revealed by the Trial Balance:

• Errors of Commission
• Errors of Omission
• Errors of Principle
• Compensating errors
• Errors of Original entry
•Complete Reversal of entries
Ch 4: The Balancing of Accounts, The Trial Balance, Income Statement, and
Balance Sheet

However, a trial balance will not disclose the following types of errors: (Errors not
revealed by the trial balance)
1) Errors of commission

This happens when original figure incorrectly entered. (Correct double

entries but incorrect amounts was recorded. Eg. Instead of Rs. 256 amount
recorded are 265)

2) Errors of omission

Complete omission of a transaction, because neither a debit nor a credit

is made.

3) Errors of principles

This happens when the wrong type of account had been used (eg the
purchase of a motor van is debited to a expense account, such as motor
expenses, rather than a fixed asset account)
Ch 4: The Balancing of Accounts, The Trial Balance, Income Statement, and
Balance Sheet

4) Compensating errors

This happens where errors cancel out each other. (Eg an error of Rs.100 is
exactly cancelled by another Rs. 100 error elsewhere).

5) Error of Original Entry:

This happens when an entry is made in a wrong book or in the proper

subsidiary book with a wrong amount.( Eg. Instead of 500 the amount
recorded as 5000)

6) Complete reversal of entries

This happens when an account should be debited but was credited (and
vice versa)
 Finally an EASY way to recall errors
not revealed by the Trial Balance
Just remember the simple mnemonic
“C O P C O R”
One error for each error
 C- error of commission

 O- error of omission

 P- error of principle

 C- error of compensation

 O- error of original entry

 R- error of complete reversal of entries

 Steps To Locate Errors

•Check out totals

•Ensure inclusion of all balances

•Recompute the ledger balances

•Check the total of debtors and creditors

•Recheck for the cash and bank balances written in the trial
balance

•Check the posting from the book of original entry

into the ledger account

 Rectification of Errors
If it is certain that the error has been committed, immediately
after making that entry, it should be corrected by making fresh
entry after neatly crossing out the wrong entry.
If the errors are detected only after some time, it should be
corrected by making a rectification entry. The entry pass
through journal proper for rectifying the errors in the books of
accounts are known as rectifying errors
•One Sided Errors

•Two Sided Errors(wrong entry, correct entry and

rectifying entry)
•Suspense Account
Ganesh quit his job and started WoodCraft company. The transactions of the
business for September are as follows:

20XX
Sep 1 Began business by investing cash Rs. 10000 in company’s share capital
4 Paid two month’s rent in advance for a shop, Rs. 2000
5 Bought Equipment for cash, Rs. 1200
7 Bought supplies on credit, Rs. 700
10 Received payment for remodeling a kitchen, Rs. 8600
14 paid for an advertisement that appeared in the local
newspaper, Rs. 140
17 Received payment for furnishing office room, Rs. 11200
23 Billed customers for work done other than on cash
terms, Rs. 13100
25 paid wages to assistant, Rs. 1500
28 Paid electricity charges, Rs. 240
29 Received part payment from customers billed on September 23, Rs. 4800
30 Paid a dividend, Rs. 2500
You are required to prepare the Journal Entries, Post them into the ledgers and also
prepare the Trial Balance
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 JOURNAL ENTRY
Date Particulars LF Debit( Rs.) Credit(Rs.)
(20XX)
1 Sep. Cash a/c Dr
To share Capital a/c
(being Cash invested in the capital)

4th Sep. Advance rent a/c Dr

To Cash a/c
(being rent paid in advance)
5th Sep. Equipment a/c Dr.
To Cash a/c
(being Equipment bought in cash)
7th Sep. Goods a/c Dr
To Creditors a/c
(being supplies bought on credit)
10th Sep. Cash a/c Dr.
To Remodeling of Kitchen a/c
(being remuneration received for
remodeling the kitchen)
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Date Particulars LF Debit( Rs.) Credit(Rs.)
(20XX)
14th Sep. Advertisement Exp. a/c Dr.
To Cash a/c
(being advt. charges paid)
17th Sep. Cash a/c Dr.
To furnishing the office room
(being remuneration received for
furnishing the office room)
25th Sep. Salaries Exp. a/c Dr.
To Cash a/c
(Being wage paid to assistant)
28th Sep. Electricity Exp. a/c Dr
To Cash a/c
(being electricity charges paid)
29th Sep. Cash a/c Dr.
To B/R or, Debtors a/c
(being amount received from
debtors)
30th Sep. Dividends a/c Dr.
To Cash a/c
57
Being dividend paid
 Voucher System
 Voucher system is defined as a method for
verifying, recording and making payment of
all items that require the disbursement of cash.
 The basic activities involved in Voucher
system are:
 Preparing voucher for each item of expenditure
 Making payment after properly verifying an
authorized voucher
 Developing an efficient system for determining the
amount to be paid at the end of each day

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 Voucher System (Contd..)
 Documents used in Voucher system are:
 Vouchers
 Voucher Register
 Unpaid Voucher File
 Cheque Register
 Paid Voucher File
 Vouchers Payable Account

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 Advantages of Voucher System
 Safeguards cash disbursements
 Reduces book-keeping work
 Records all current liabilities
 Strengthens the internal check system
 Provides ways for planning future cash
requirements

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 Limitations of Voucher System
 Is unsuitable for small business enterprises
 Requires proper personnel and finances
 Fails to provide overall account position of a
creditor
 Is difficult to maintain in case of partial
payment returns

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Journalise the following transactions, post them
into the ledgers and prepare a trial balance .
Debit Balance on 1st January 2010:
Cash in hand Rs. 8000, cash at Bank Rs. 25000, Stock of Goods
Rs. 20000, Furniture Rs. 2000, Building Rs. 10000, sundry
debtors: Vijay Rs. 2000, Anil Rs. 1000 and Madhu Rs. 2000.
Credit balance on 1st January 2010:
Sundry creditors: Anand Rs. 5000, Loan from Bablu Rs. 10000
Following were further transaction in the month of January 2010:
1st Jan. 2010, Purchased goods worth Rs. 5000 for cash less 20%
trade discount and 5% cash discount
4th Jan 2010, Received Rs. 1980 from Vijay and allowed him Rs. 20
as discount
6th Jan. 2010, Purchased goods from Bharat Rs. 5000
62
8th Jan. 2010, Purchased plant from Mukesh for Rs. 5000 and
paid Rs. 100 as cartage for bringing the plant to the factory and
another Rs. 200 as installation charges.
12th Jan 2010, Sold goods to Rahim on credit Rs. 600
15th Jan. 2010, Rahim became insolvent and could pay only 50
paise in the rupee.
18th Jan. 2010, Sold goods to for cash Rs. 1000
20th Jan. 2010, Paid salary to Ratan Rs. 2000
21st Jan. 2010, Paid Anand Rs. 4800 in full settlement
26th Jan. 2010, Interest received from Madhu Rs. 200
28th Jan. 2010, Paid to Bablu interest on loan Rs. 500
31st Jan. 2010, Sold goods for cash Rs. 500
31st Jan.2010, Withdrew goods from business for personal use
Rs. 200
63