UNIT 1 ACCOUNTING PROCESS

Basic Terms, Accounting Principles, Concepts and Conventions, Double entry system, Journal,
Ledger posting entries, Trial Balance (Practical Problems)

Accounting is the systematic process of recording, classifying, summarizing, and interpreting

financial transactions of a business. Its purpose is to provide accurate information about the financial
position and performance of an organization, enabling owners, managers, investors, and regulators to
make informed decisions.
Objectives of Accounting
1. Systematic Recording: To record all financial transactions in a structured manner for future
reference.
2. Determining Profit or Loss: To calculate the net result of business operations during a specific
period.
3. Assessing Financial Position: To prepare a balance sheet showing assets, liabilities, and capital at a
given date.
4. Providing Information: To supply reliable financial data to owners, investors, creditors, and
regulators.
5. Compliance with Law: To meet statutory requirements like tax filings, audits, and regulatory
reporting.
6. Decision-Making Support: To help managers plan, control, and evaluate business activities.
Importance of Accounting
a) Financial Control: Helps track income and expenses, preventing misuse of funds.
b) Performance Evaluation: Provides a basis to measure efficiency and profitability.
c) Investor Confidence: Transparent records build trust among shareholders and lenders.
d) Legal Evidence: Properly maintained books serve as proof in disputes or audits.
e) Future Planning: Historical data guides budgeting and forecasting.
f) National Importance: Reliable accounts contribute to taxation, economic planning, and policy-
making.
Basic Terms in Accounting
a) Here are the fundamental building blocks:
b) Assets: Economic resources owned by the business that provide future benefits (e.g., cash, buildings,
machinery).
c) Liabilities: Obligations payable to outsiders (e.g., loans, creditors).
d) Capital: Owner’s investment in the business; also called equity.
e) Revenue: Income earned from business operations (e.g., sales, service fees).
f) Expenses: Costs incurred to earn revenue (e.g., rent, salaries, electricity).
g) Drawings: Withdrawal of cash or goods by the owner for personal use.
Meaning of Accounting Principles
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 Accounting Principles are the fundamental guidelines and rules that govern how financial
transactions are recorded, classified, and reported. They ensure uniformity, consistency, and
reliability in financial statements, making them understandable and comparable across businesses.
Major Accounting Principles
1. Accrual Principle Transactions are recorded when they occur, not when cash is received or paid.
Example: Sales made on credit are recorded immediately, even if payment is received later.
2. Matching Principle Expenses must be matched with the revenues they help generate in the same
accounting period. Example: Depreciation on machinery is charged in the year it is used to earn
revenue.
3. Revenue Recognition Principle Revenue is recognized when it is earned, not necessarily when cash
is received. Example: A service completed in March is recorded as March revenue, even if payment
comes in April.
4. Historical Cost Principle Assets are recorded at their original purchase price, not at current market
value. Example: Land purchased for ₹10,00,000 remains recorded at that cost, even if its market
value rises.
5. Objectivity Principle Transactions must be supported by verifiable evidence (invoices, receipts,
contracts). Example: Recording purchase of goods only when a supplier’s bill is available.
6. Consistency Principle The same accounting methods should be applied year after year for
comparability. Example: If straight-line depreciation is used, it should continue unless a justified
change is made.
7. Full Disclosure Principle All material facts must be disclosed in financial statements. Example:
Contingent liabilities like pending lawsuits must be mentioned in notes.
8. Prudence Principle (Conservatism) Anticipate losses but not profits; record expenses and liabilities
as soon as possible, but revenues only when certain. Example: Creating provision for doubtful debts
even before they occur.
Accounting Concepts
Accounting concepts are the basic assumptions that form the foundation of accounting practices. They
ensure consistency and logical reasoning in recording transactions.
1. Business Entity Concept The business is treated as separate from its owner. Example: Owner’s
personal expenses are not recorded in business accounts.
2. Money Measurement Concept Only transactions measurable in monetary terms are recorded.
Example: Employee skills are valuable but not recorded in accounts.
3. Going Concern Concept Assumes the business will continue indefinitely. Example: Assets are
valued at cost, not liquidation value.
4. Accounting Period Concept Business life is divided into fixed intervals (usually one year) for
reporting. Example: Profit & Loss Account prepared annually.
5. Dual Aspect Concept Every transaction has two aspects – debit and credit. Example: Purchase of
machinery increases assets and decreases cash.

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6. Realization Concept Revenue is recognized when goods/services are delivered, not when cash is
received. Example: Credit sales recorded immediately.
Accounting Conventions
Conventions are practices developed through usage to ensure uniformity and comparability in
financial reporting.
a) Convention of Consistency Same accounting methods should be applied year after year. Example:
If straight-line depreciation is used, it should continue unless justified.
b) Convention of Conservatism Anticipate losses but not profits. Example: Provision for doubtful
debts is created even before actual default.
c) Convention of Materiality Record only significant items that affect decision-making. Example:
Stationery expenses may be written off immediately instead of capitalized.
d) Convention of Full Disclosure All relevant information must be disclosed in financial statements.
Example: Pending lawsuits shown as contingent liabilities.
Accounting system:
Accounting systems are structured methods for recording, classifying, and summarizing financial
transactions. They can be classified by recording method (single-entry vs. double-entry), timing (cash
vs. accrual basis), delivery model (manual, desktop, cloud), and ledger architecture (flat, dimensional,
multi-entity). Each system serves different business needs, from small proprietorships to complex
multinational firms.
Types of Accounting Systems

1. Single-Entry System
Records only one side of each transaction (like a checkbook).
Simple but does not track assets, liabilities, or equity.
Suitable for very small businesses or individuals.

2. Double-Entry System
Records both debit and credit aspects of every transaction.
Ensures accuracy and maintains the accounting equation.
Standard for all professional businesses.

3. Cash Basis System

Records revenue when cash is received and expenses when paid.
Provides a clear picture of cash flow but may misrepresent profitability.
Common for small firms and service providers.

4. Accrual Basis System

Records revenue when earned and expenses when incurred, regardless of cash flow.
Provides a realistic view of financial performance.
Mandatory for public companies and preferred for larger businesses.

Double Entry System

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The Double Entry System is the foundation of modern accounting. It states that every
transaction has two aspects:
Debit (Dr.) – Receiving aspect
Credit (Cr.) – Giving aspect

This ensures that the Accounting Equation always holds true:

Assets=Liabilities + Capital

Classification of Accounts and Rules of Debit and Credit

Accounts are classified into 3 types:
They are: 1. Real Accounts
2. Personal Accounts
3. Nominal Accounts
1. Real Accounts
Meaning: Accounts related to assets and properties.
Rule: Debit what comes in,
Credit what goes out.
Examples: Cash A/c, Furniture A/c, Building A/c, Machinery A/c.
Ex1: If furniture worth ₹10,000 is purchased for cash →
Debit Furniture A/c ₹10,000
Credit Cash A/c ₹10,000

2. Personal Accounts
Meaning: Accounts related to persons, firms, or organizations.
Rule: Debit the receiver,
Credit the giver.
Types:
a. Natural persons (e.g., Ram’s A/c)
b. Artificial persons (e.g., XYZ Ltd. A/c)
c. Representative persons (e.g., Outstanding Salary A/c, Prepaid Rent A/c)

Ex2: If ₹5,000 is paid to creditor Mohan →

Debit Mohan’s A/c ₹5,000
Credit Cash A/c ₹5,000
3. Nominal Accounts
Meaning: Accounts related to expenses, losses, incomes, and gains.

Rule: Debit expenses/losses,

Credit incomes/gains.
Examples: Salary A/c, Rent A/c, Commission Received A/c, Interest Paid A/c.
Ex3: Salary paid ₹8,000 →
Debit Salary A/c ₹8,000
Credit Cash A/c ₹8,000

Meaning of Journal

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The Journal is called the book of original entry because all financial transactions are first
recorded here in chronological order before being posted to the ledger. It provides a complete
record of transactions with details of date, accounts affected, debit-credit amounts, and
narration.

Features of Journal
Chronological Recording: Transactions are entered in the order they occur.
Double Entry System: Each transaction has a debit and credit aspect.
Narration: A brief explanation of the transaction is written below each entry.
Evidence: Serves as proof of transactions for audit and verification.

What is a Ledger?
The Ledger is known as the book of final entry.
It contains all individual accounts (assets, liabilities, capital, revenues, expenses).
Transactions recorded in the Journal are transferred (posted) to the ledger.
It provides a classified and summarized view of financial data.

Types of Ledger

General Ledger
Contains all main accounts: assets, liabilities, capital, revenues, and expenses.
Forms the basis for preparing the trial balance and financial statements.
Debtors Ledger (Sales Ledger)
Contains accounts of all customers to whom goods are sold on credit.
Shows amounts receivable.
Creditors Ledger (Purchase Ledger)
Contains accounts of suppliers from whom goods are purchased on credit.
Shows amounts payable.

Private Ledger
Contains confidential accounts like capital, drawings, and salaries.
Access restricted to management.

Importance of Ledger
Classification: Groups transactions under specific accounts.
Summarization: Provides total balances of accounts.
Financial Position: Helps prepare trial balance, profit & loss account, and balance sheet.
Control: Separate ledgers for debtors/creditors help track receivables and payables.
Audit Trail: Provides a clear record for verification and compliance.
Ledger Posting
Ledger posting is the process of transferring entries from the Journal to the Ledger.
Steps:
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a) Identify accounts to be debited and credited from the journal entry.
b) Post the debit amount to the debit side of the respective ledger account.
c) Post the credit amount to the credit side of the respective ledger account.
d) Write the corresponding account name in the particulars column.
e) Balance the ledger at the end of the period.

Meaning of Trial Balance

A Trial Balance is a statement prepared at the end of an accounting period that lists all ledger
account balances (both debit and credit).
It is the first step in preparing final accounts.
The total of debit balances must equal the total of credit balances, ensuring arithmetical
accuracy of ledger postings.

Methods of Preparing Trial Balance

Total Method
Debit and credit totals of each ledger account are entered in the trial balance.
Both sides are then totalled to check equality.

Balance Method
Only the net balance (debit or credit) of each account is entered.
This is the most commonly used method.
Total and Balance Method
Both the totals and balances of accounts are shown.
Rarely used in practice.

Objectives of Trial Balance

Check Arithmetical Accuracy: Ensures debit and credit postings are equal.
Summarize Ledger Accounts: Provides a consolidated list of balances.
Facilitate Preparation of Final Accounts: Acts as the basis for preparing the Profit & Loss
Account and Balance Sheet.
Detect Errors: Helps identify posting or calculation mistakes.
Provide Financial Snapshot: Shows balances of all accounts at a glance.

Importance of Trial Balance

Foundation for Financial Statements: Without it, final accounts cannot be prepared.
Internal Control: Ensures accuracy and reliability of records.
Error Detection: Reveals errors like wrong postings, omissions, or miscalculations.
Decision-Making: Provides management with a quick overview of balances.
Audit Trail: Serves as evidence for auditors.
JOURNAL

Journal is a book of accounts in which all day to day business transactions are recorded in a

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chronological order i.e. in the order of their occurrence. Transactions when recorded in a Journal are
known as entries. It is the book in which transactions are recorded for the first time. Journal is also known
as ‘Book of Original Record’ or ‘Book of Primary Entry’.

Format of Journal
Every page of Journal has the following format. It is a columnar book. Each column is given a name
written on its top. Format of journal is given below:
Journal

Date Particulars Ledger Dr. Cr.

Amount (`) Amount (`)
Folio
(1) (2) (3) (4) (5)

Name the debit account Dr Xx --

To Name of the Credit Account -- xx
(give the explanation to the entry )

Q1. Journalize the following transactions in the Journal of Bhagwat and Sons.

2025 Tarun started business with cash 1,00,000

January 1
January 2 Goods purchased for cash 20,000
January 4 Machinery Purchased from Vibhu 30,000
January 6 Rent paid in cash 10,000
January 8 Goods purchased on credit from Anil 25,000
January 10 Goods sold for cash 40,000
January 15 Goods sold on credit to Gurmeet 30,000
January 18 Salaries paid. 12,000
January 20 Cash withdrawn for personal use 5,000

Q2. Enter the following transactions in the books of Supriya, the owner of the Business.
2024
Jan 5 Business started with stock Rs. 25,000, Furniture Rs. 10,000 and Cash Rs 15,000
Jan. 8 purchased goods worth Rs 5,000 from Saritha on credit at 10% trade discount.
Jan. 12 Neha Purchased goods worth Rs 4,000 from Supriya on credit.
Jan. 18 Received a Cheque from Neha in full settlement of her account Rs 3,850, Discount
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 allowed to her Rs 150
Jan. 20 Payment made to Saritha Rs 4,400. Discount allowed by her Rs 100.
Jan 22 Purchased goods for cash Rs 10,000.
Jan. 24 Goods sold to Kavitha for Rs 15,000, Trade discount @ 20% is allowed to her.
Jan. 29 Payment received from Kavitha by Cheque at discount of 5%.
Q3. Enter the following transactions in Journal and post them into Ledger.

2026 Sushil & Co. started business with cash 1,00,000

Jan. 1
Jan. 2 Paid into Bank 60,000
Jan. 4 Purchased Machinery and paid bycheque 30,000
Jan. 6 Bought goods from Naresh 20,000
Jan. 14 Paid salaries 5,000
Jan. 15 Sold goods to Rajesh Kumar 15,000
Jan. 17 Paid for Sundry Expenses 8,500
Jan. 18 Cash deposited into Bank 20,000
Jan. 19 Received Rent 6,000
Jan. 22 Paid Naresh by cheque in full settlement of his A/c 19,750
Jan. 24 Withdrawn cash for personal use 8,000
Jan. 26 Salary paid in advance to Surjeet 2,500
Jan. 28 Rajesh made the payment on A/c 10,000
Jan.30 Cash Sales for the month 16,500

Q4. The following transactions of Kumar for the month of January. Prepare Journalise.
Jan. l Capital paid into Bank 3,00,000
Jan. 1 Bought Stationery for cash 400
Jan. 2 Bought Goods for cash 25,000
Jan. 3 Bought Postage Stamps 600
Jan. 5 Sold Goods for Cash 10,000
Jan. 6 Bought Office Furniture from Mahindra Bros. 40,000
Jan. 11 Sold goods to Jacob 12,000
Jan.12 Received cheque from Jacob 12,000
Jan.14 Paid Mahindra Bros. by cheque 40,000

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 .
Jan.16 Sold goods to Ramesh & Co 5,000
Jan.20 Bought from S. Seth & Bros 15,000
Jan.23 Bought Goods for cash from Narajan & Co 22,000
Jan.24 Sold Goods to Prakash 17,000
Jan. 26 Ramesh & Co. Paid on account 2,500
Jan.28 Paid Seth& Bros. by cheque in full settlement 14,800
Jan.31 Paid Salaries 2,800
Jan.31 Rent is due to S. Sharma but not yet paid 2,000

LEDGER
All the accounts identified on the basis of transactions recorded in different journals/ books such
as Cash Book, Purchase Book, Sales Book etc. will be opened and maintained in a separate book
called Ledger. So a ledger is a book of account; in which all types of accounts relating to
assets, liabilities, capital, expenses and revenues are maintained. It is a complete set of
accounts of a business enterprise.
A ledger is formed after the journal and is the secondary step of bookkeeping. After the
preparation of the journal, there comes the classification of journal entries into separate accounts
and posting them in the ledger like a cash account, salary account, payable accounts, etc., in
chronological order.
A Ledger records transactions from the journal and forms separate accounts for them. A
Ledger is a date-wise record of all the transactions related to a particular account. Ledgers are
crucial sources of financial records
Format of Ledger
Ledger is a T-format account where the debit is depicted on the left side, and the credit is depicted
on the right side. The columns include date, particulars, journal folio (JF), and amount.
Debit: The debit side of an account represents when the debit increases. Credit: The credit side
of an account represents when the credit increases. Date: The date on which the transaction takes
place.
Particulars: The contra entry of the concerned account according to the double entry system is
shown under this head.
Journal Folio: The reference number of the journal entry from the journal.
Amount: It is the amount debited or credited to a particular amount during the transaction.
Dr ----------- Account Cr

Date Particulars JF Amount Date Particulars JF Amount

To ( credit a/c in By (debit a/c in
journal) journal)

Balancing of Accounts

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 1. The debit and credit columns of every ledger account are compared when all the journal entries are
posted in the ledger accounts. The difference between the total of debit and credit side is ascertained.
The difference is to be placed in the amount column of the side having a lesser total.
2. 'Balance c/d’ is to be entered in the particulars column against the difference, and in the date
column, the last day of the accounting period is entered. Now both the debit and credit columns are to
be totalled, and the totals will be equal. The totals of both sides are to be recorded in the same line
horizontally. The difference has to be brought down to the opposite side below the
total. 'Balance b/d’, is to be entered in the particulars column against the difference brought down,
and in the date column, the first day of the next accounting period is entered.
3. If the total on the debit side of an account is higher, the balancing figure is the debit balance, and if
the credit side of an account has a higher total, the balancing figure is the credit balance. If the two
sides are equal, that account will show nil balance.

Ledger posting:
It is the process of transferring debit and credit items from the Journal to their respective accounts
in the Ledger is called Ledger posting.
Features of Ledger
Some of the features of a ledger account are:
Classification
The ledger contains various accounts. Every aspect is grouped into these accounts.
All accounts
The ledger contains all accounts such as purchase account, sales account, expenses account,
income account, asset account, liabilities account etc. In other words, the ledger is a book or
register, which contains all accounts.
Significant Information
It provides all accounting information required for owners, Govt dept etc.
Trial Balance
The ledger plays a significant role in preparing Trial balance which helps in preparing final account.

Advantages of Ledger
Some of the advantages of the ledger are:
a) It is the ledger through which effective use of the double-entry system of accounting
is guaranteed.
b) It provides complete and reliable data at a place.
c) A separate account is opened for every person, expense, income, assets and liabilities.

Disadvantages of ledger
a. There are chances of the ledger being totally unsafe if someone else gets access to the book or system
file. If the user is careful, then the ledger is way safer.
b. You will have to keep a constant eye on the ledger files as they can contain very serious and sensitive
files along with other such information.
c. Ledger depends on the transaction data entered in it. If an error occurs in the transaction data, the entire
results will have an error and will thus become undependable.

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d. The ledger will take a lot of users’ time and energy. It is also difficult as we have to keep a check if
our records are safe or not, also.

Q1. Prepare Aparna’s account in the books of Suparna.

2019 Jan. 1 Balance due from Aparna ₹ 60,000
4 Sold goods to Aparna ₹ 15,000 at 10% Trade Discount.
7 Goods returned by Aparna ₹ 1,500 (Gross)
11 Received crossed cheque from Aparna ₹ 50,000
17 Invoiced goods to Aparna ₹ 12,000
25 Sold goods to Aparna in cash ₹ 6,000
30 Received cash from Aparna ₹ 33,000 in full settlement of her account.

Q2. Prepare Roy’s account from the following.

2024 Jan. 1 Balance due to Roy ₹ 50,000
4 Purchased goods from Roy ₹ 10,000 at 10% Trade Discount.
7 Goods returned to Roy ₹ 1,500
11 Received crossed cheque from Roy ₹ 50,000
17 Invoiced goods to Roy ₹ 12,000
25 Sold goods to Roy in cash ₹ 6,000
30 Roy’s account settled at 5% discount.

Q3. M/s. A&Co has the following transactions. Record them into the journal and show postings in
the ledger and Prepare Trial balance.

2025 Started business with a Cash Rs 75,000, Machinery Rs 15,000 and

July 1st Furniture Rs 10,000
1 Purchased goods from Manu Rs 25,000
2 Sold goods to Sonu 20,000
5 Purchased goods from Manu 15,000
7 Sold goods to Tejas for cash 16,000
9 Goods retuned to Manu 2,000
11 Bought furniture for 15,000
11 Bought goods from John 12,000
14 Cash paid to Manu 10,000
16 Sold goods to John 13,500
19 Goods returned from Sonu 3,000
21 Cash received from John 5,500
21 Goods taken for domestic use 3,000
23 Returned Goods to John 1,000
25 Cash received from Sonu 12,000
27 Bought machinery for 18,000
28 Sold part of the furniture for 1,000
28 Cash paid for the purchase of bicycle for personal use 1,500
29 Cash sales 15,000
30 Cash purchases 13,500

Q 4. Journalise the following transactions and post them into the ledger and prepare Trial Balance
for the month of August 2025.

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 10 Moon commenced business with a capital of 1,50,000
11 Cash deposited into bank 50,000
12 Bought equipment for 15,000
13 Bought goods worth 20,000 from Star and payment made by cheque
14 Sold goods to Sun for 15,000 and payment received through cheque
16 Paid rent by cheque 5,000
17 Took loan from Mr. Storm 25,000
18 Received commission from Mr. Air by cheque 5,000
19 Wages paid 15,000
20 Withdrew from bank for personal use 3,000
21 Withdrew from bank for office use 10,000
22 Bought goods for 25,000
23 Cash paid into bank 30,000
24 Interest paid through cheque 2,000
25 Gave loan to [Link] 10,000
26 Amount paid to Mr. Storm on loan account 15,000
27 Salary paid to Manager Mr. Liquid 5,000
28 Postage paid 1,000
29 Received cheque from Mr. Wind on loan account 3,000
30 Sold part of the equipment for 2,000

Q5. From the following balances extracted from the books of a trader, prepare Trial Balance as on
31st March, 2026.
Capital ₹2,00,000; Sales ₹3,70,000; Purchases ₹1,70,000; Creditors ₹50,000; Debtors ₹1,00,000;
Building ₹2,50,000; Opening Stock ₹50,000; Cash at Bank ₹50,000; Commission Paid ₹11,000 Rent
received ₹15,000; Drawings ₹4,000
Answer: Total of Trial Balance₹6,35,000

Q6. The following balances were extracted from the ledger of Mr. Sachin as on 31st March 2025.
You are required to prepare a trial balance as on that date.
Drawings- 60,000; Salaries- 95,000; Capital- 4,40,000; Sales return- 10,000;
Sundry creditors- 2,30,000; Purchases return- 11,000; Bills payable- 40,000;
Commission paid- 1,000; Sundry debtors- 5,00,000; Trading expenses- 25,000; Bills receivable-
52,000; Discount earned- 5,000; Plant & Machinery- 45,000; Rent- 20,000; Opening stock-
3,70,000; Bank Overdraft- 60,000; Cash in hand- 9,000; Purchases- 7,08,000: Cash at bank- 25,000;
Sales- 11,80,000; Investment- 46,000.
Closing Stock- 80,000

Q7. From the following balances extracted from the books of Mr. K.K, prepare Trial Balance as on
31st March 2024.
Cash in hand ₹14,200; Cash at Bank ₹6,800; Bills Receivable₹ 28,000; Bills payable ₹26,000
Sundry debtors ₹54,600; Sundry creditors₹ 62,400; Capital ₹60,000; Drawings ₹ 28,000
Sales₹2,05,000; Purchases ₹1,75,000; Carriage ₹Inward 2,700; Salaries ₹12,000 Advertisement
₹2,400; Insurance ₹1,600; Furniture ₹7,500; Opening Stock ₹18,600;
Office Rent ₹2,000

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