MODULE 3

BASIC ACCOUNTING PROCEDURES – 1

Journal

The word "journal" is derived from the French word "Jour" which means "a day." Journal is a
daily record of business transactions.

Journal is the book used to record the daily transactions of an organisation for the first time
from a source document. It is also called the Book of Original Entry and Book of Prime
Entry. It is a chronological record of the transactions of a firm. Transactions are recorded in
the Journal in the order in which they occur indicating-

a) the amount and name of the account to be debited

b) the amount and name of the account to be credited and

c) a brief explanation regarding the nature of the transaction.

Journal is a record of all daily transactions of a business in the order in which they occur.

Journalizing

The process of recording transactions in the journal is called journalizing. It is the act of
entering transactions in the journal.

Journal Entry

The record of a transaction in the journal is called journal entry. There are two types of
journal entries-

a) Simple journal entry and

b) Compound journal entry.

A journal entry having only one debit and one credit is known as simple journal entry.

Narration

A statement explaining the nature of the transaction given in the particulars column of the
journal with in brackets is called narration. Narration is a brief explanation of the transaction.

Advantages of Journal

The following are the advantages of journal-

 1. Journal is a chronological record of all transactions occurring in a firm. So, it provides
date wise information.

2. Entries in the journal are supported by narration. It indicates the history of the
transaction.

3. Journal is the basis for posting entries to the ledger.

4. Recording of both debit and credit aspects of all transactions in the journal reduces the
possibility of error.

Limitations of Journal

The following are the limitations of journal-

1. Recording all the transactions in a journal is time consuming.

2. Summarised information relating a particular transaction is not available.

3. For a large organisation, the journal is bulky and voluminous.

Source Documents

A document providing information about a business transaction is called sour document. It

indicates the nature, amount and date of the transaction. It helps verifying the nature and
correctness of the transactions. It serves as legal evident in case of dispute. All business
transactions should have documentary evidenc Invoices, vouchers, receipts, cash memos and
counterfoils of cheques are th important source documents.

Ledger

The term ledger is derived from the Dutch word ‘Legger’ which means to lie. Ledger,
therefore means a book in which various accounts lie (i.e., are kept). It is also known as Book
of Final entry. A ledger is a collection or set of accounts. It is the principal book or secondary
record.

It is a book where transactions of similar nature are grouped together in one place in the form
of an account.

Ledger is the most important book of an organization. So, it is known as King of All Books.

Ledger may be kept in any of the following two forms:

1. Bound Ledger

A ledger in the form of a bound register is known as bound ledger. Each account is opened on
a separate page.
 2. Loose Leaf Ledger

Card or separate sheet maintained for each account is called Loose Leaf Ledger.

Types of Ledgers

There are three types of ledgers

1. Sales or Debtors Ledger

Sales ledger contains the accounts of debtors. Debtors are persons to whom goods ae sold on
credit or cash is to be received on account.

2. Purchase or Creditors Ledger

Purchases Ledger contains the accounts of creditors. Creditors are persons from whom goods
are purchased on credit or cash is to be paid on account.

3. General or Nominal Ledger

General Ledger contains all the accounts other than the accounts of debtors and creditors of
an organization.

Difference between Journal and Ledger

The following are the important differences between journal and ledger.

Journal Ledger

It is a book of first or prime entry as It is a book of final entry as all transactions

all transactions are recorded first in are recorded finally in the ledger.
the journal.
Transactions are recorded in a Transactions are recorded in an analytical
chronological order. manner.

Source documents form the basis for Entries in the Books of Original Entry
writing books of original entry. (Journal) form the basis for writing ledger.

Balancing is not done in the books of All ledger accounts are balanced.
original entry.

The process of recording entries in The process of recording entries in the ledger is
the books of original entry is called called posting.
journalizing.
 There is no uniformity in the keeping There is uniformity in the keeping of the ledger;
of various books of original entry. there are two equally divided sides having
identical columns for all ledger accounts.

Posting

The process of transferring the entries recorded in the journal into appropriate accounts in the
ledger is called posting. A journal entry consists of two parts, debit aspect and credit aspect.
The debit aspect goes to debit side of an account in the ledger and the credit aspect goes to
the credit side of another account in the ledger.

For eg: When cash is received from Anand, cash account is debited and Anand’s account is
credited in the journal. In the ledger an entry is made on the debit side of cash account and a
corresponding entry on the credit side of Anand’s account. Thus the process of recording the
debit and credit aspect by reference to journal, to various ledger accounts is called posting.

Balancing an account

The difference between the total of debit side and the total of credit side of an account is
called balance of an account. The process of ascertaining the balance of an account is known
as balancing of an account.

If the debit side of an account is more than the credit side, it is called debit balance. If the
credit side of an account is more than the debit side it called credit balance.

The following is the procedure of balancing

1. Find out the total of debit side and total of credit side

2. Ascertain the difference between the total of the debit side and the total of the credit
side

3. If the debit total is more than the credit total, put the difference on the credit side and
write the words “by balance c/d” in the particulars column. If the credit total is more
than the debit total, put the difference on the debit side and write the words “to
balance c/d” in the particulars column

4. Close the account by writing the total amount on the debit side and the credit side and
draw double lines below it.

5. Put the debit balance on the debit side of the account and write “to balance b/d” in the
particulars column. Ut the credit balance on the credit side of the account, and write
“by balance b/d” in the particulars column.
  Only personal and real accounts balanced

 Nominal accounts are not balanced, they are only totaled. Debit total indicates
expenses.

 Credit total indicates income.

 The total of nominal account is transferred to trading and profit and loss account.

Personal accounts may show a debt balance or a credit balance. A debit balance in personal
account means that the person is a debtor. A credit balance in personal account means that the
person is a creditor.

Real accounts will show only a debit balance, it indicates the value of the asset.

Sub Division of Journal

Subsidiary books are nothing but sub-division of journal. A subsidiary book is a divided part
of journal meant for recording specific types of business transactions. Sub-divided books
(journal) on the basis of nature of transactions like sales, purchases etc. are called subsidiary
books.

When a journal is divided into many sub-parts, each of those sub-parts is called as subsidiary
books. Subsidiary books are also known as the books of original entry or prime entry because
transactions are first recorded in Subsidiary books and then posted to the ledger.

Need of Subsidiary Books

The need of subsidiary books is as follows:

Division of work: Since Journal is divided into number of books, if facilitates division of
work among clerks, it avoids overburdening clerks.

Specialization: When a person a assigned same type of work it will lead to specialization and
increased efficiency.

Time saving: Since the work and responsibility is divided among a number of people, various
accounting processes can be undertaken simultaneously which helps in saving time.

Ready information: When separate books are kept for each type of transaction, the
information relating to each transaction is readily available.

Effective internal audit: Subsidiary books, due to it’s effective design, helps in achieving
effective internal audit or check.

Types of Subsidiary Books

In order to meet the requirement of modern business the original journal is divided into the
following.

1. Purchase Book or Bought Book

2. Sales Book or Sold Book

3. Purchase Return Journal Book or Return Outward Book

4. Sales return Journal Book or Return Inward Book

5. Cash Journal Book

6. Bills receivable Book

7. Bills Payable Book

8. Journal Proper

1. Purchases Book

Purchases Book is used to record credit purchase of goods. It is also known as Bought Book
and Purchases Journal.

The following types of transactions are not recorded in the Purchases Book-

a. Cash purchase of goods and

b. Credit purchase of assets.

Periodically, the Purchases Book is totalled. It indicates the total credit purchases made
during a period. The total of the Purchases Book is debited to purchases account and credited
to supplier's account.

2. Sales Book

Purchases Book is used to record credit purchase of goods. It is also known as Bought Book
and Purchases Journal.

The following types of transactions are not recorded in the Purchases Book-

a. Cash purchase of goods and

b. Credit purchase of assets.

Periodically, the Purchases Book is totalled. It indicates the total credit purchases made
during a period. The total of the Purchases Book is debited to purchases account and credited
to supplier's account.

3. Purchases Return Book/Returns Outward Book

Purchases Returns Book is used to record return of goods purchased on credit. It is also
known as Returns Outwards Book.

Periodically, the Purchases Returns Book is totaled. It indicates the total amount of goods
returned by business to suppliers during a period. It is debited to supplier's account and
credited to purchases returns account.

Debit Note

A statement business and send to prepared by the supplier along with the goods returned is
known as debit note. It indicates the reason for return of goods, quantity and value of goods
returned. It states that the account of the supplier is debited with the amount of goods
returned.

4. Sales Returns Book/Returns Inward

Sales Returns Book is used to record the return of goods sold on credit. It is also known as
Returns Inwards Book.

Periodically, the Sales Returns Book is totalled. It indicates the total amount of goods
returned by customers to business during a period. It is debited to sales returns account and
credited to customer's account.

Credit Note

A statement prepared by business and send to the customer on return of goods is known as
credit note. It indicates the reason for return of goods, quantity and value of goods returned. It
states that the account of the customer is credited with the amount of goods returned.

5. Cash Book

The book recording all cash receipts and cash payments is called cash book It is similar to an
account. It has two sides - debit and credit. All cash recebook recorded on the debit side and
all cash payments are recorded on the credit side. Cash Book is both a journal and a ledger. It
is a journal because all cash receipts and cash payments are recorded in it for the first time
from a source document. It is a ledger because cash book is similar to an account. Cash
payments can never exceed cash receipts. So, cash book always shows a debit balance.

Advantages of Cash Book

The following are the advantages of cash book-

 It records all cash receipts and cash payments.

 It is a journal as well as a ledger.
 All cash transactions are recorded chronologically.
  No separate cash account is to be prepared in the ledger if cash book is maintained.
 It shows the amount of cash in hand.

Types of Cash Book

Cash Book may be any of the following types-

a. Single Column Cash

b. Two Column Cash Book
c. Three Column Cash Book
d. Petty Cash Book

a. Single Column Cash Book

A cash book with one amount column on either side of the cash book is called Single
Column Cash Book or Simple Cash Book. It is similar to a cash account cash receipts are
debited and all cash payments are credited. The difference between cash receipts and cash
payments is closing cash in hand.

b. Two Column Cash Book

A cash book with two amount columns on either side of the cash book is called Two Column
Cash Book or Double Column Cash Book or Cash Book with Cash and Discount
Columns. Cash column is for recording cash receipts and cash payments and discount
column is for recording discount allowed and discount received. Cash received and discount
allowed are entered on the debit side of the cash book. Cash paid and discount received are
entered on the credit side of the cash book. Discount columns are totalled and not balanced.
The total of the discount column on the debit side indicates the total amount of discount
allowed. The total of the discount column on the credit side indicates the total amount of
discount received. The difference between cash receipts and cash payments is closing cash in
hand.

c. Three Column Cash Book

A cash book with three amount columns on either side of the cash book is called Three
Column Cash Book or Triple Column Cash Book or Cash Book with Cash, Bank and
Discount Columns. Cash column is for recording cash receipts and cash payments, discount
column is for recording discount allowed and discount received and bank column is for
recording cash deposited into and cash withdrawn from bank. Cash received, discount
allowed and cash deposited in to bank are entered on the debit side of the cash book. Cash
paid, discount received and cash withdrawn from bank are entered on the credit side of the
cash book. Discount columns are totalled. Cash and bank columns are balanced. Cash column
will always show a debit balance indicating closing cash in hand. Bank column may show a
debit balance or a credit balance. A debit balance in bank column of the cash book means
cash at bank. A credit balance in bank column of the cash book means bank overdraft.

Contra Entry

A journal entry appearing on both the debit side and credit side of an account is known as
contra entry. To indicate contra entry, the letter "C" is marked against the entry in the LF
column on both sides of the cash book. Cash deposited into bank and cash withdrawn from
bank for office use are examples of contra entry.

Treatment of Cheque

If cheque received from a party is sent to the bank for collection on the same day, debit bank
account and credit the party's account. On the other hand, if cheque received from a party is
sent to the bank for collection at a later date, treat the cheque as receipt of cash by debiting
cash account and crediting party's account and deposit of cash in the bank when cheque is
sent for collection to bank by debiting bank account and crediting cash account.

d. Petty Cash Book

Expenses involving small amount of money are called petty expenses. (Examples: - postage,
stationery, carriage, office cleaning etc.) The cash book maintained to record petty expenses
of a firm is called Petty Cash Book. The cashier appointed to make payment of petty
expenses is called Petty Cashier. He is under the supervision of the Chief Cashier.

There are two types of petty cash book

 Simple Petty Cash Book and

 Analytical Petty Cash Book.

Simple Petty Cash Book

A petty cash having only one amount column for recording the various expenses incurred by
a firm is called Simple Petty Cash Book. The petty expenses are not classified into different
heads of expenses.

Analytical Cash Book

A petty cash having a number of amount columns for recording the various expenses incurred
by a firm is called Analytical Petty Cash Book. The petty expenses are classified into
different heads of expenses. Each head of expense will have a separate amount column in the
petty cash book. The total expenses incurred under each head is debited to the concerned
nominal account and credited to petty cash account.
The difference between the amount of petty cash received and total payments made on
account of petty expenses is petty cash in hand. It is an asset.

Imprest System of Petty Cash Book

Maintaining the same amount of petty cash both at the beginning and at the end of the
accounting period is known as imprest system of petty cash book. Under this system, a fixed
sum is advanced to the Petty Cashier at the beginning of the period by the Main Cashier. At
the end of the period, the Petty Cashier submits a statement of account of expenses incurred
during the period and gets a fresh advance equivalent to the amount spent. Thus, the Petty
Cashier has a fixed balance at the beginning of every period. The amount advanced by the
Chief Cashier to the Petty Cashier for meeting petty expenses is termed as imprest on float.

6. Bills Receivable Book

Bills Receivable Book is used to record the details of bills of exchange received by a firm.
The monthly total of Bills Receivable Book is debited to Bills Receivable account and
credited to acceptor's account.

7. Bills Payable Book

Bills Payable Book is used to record the details of bills of exchange issued by a firm. The
monthly total of Bills Payable Book is credited to Bills Payable account and debited to
drawer's account.

8. Journal Proper

Journal proper is the book used to record transactions that cannot be recorded in other
subsidiary books. It is similar to the Journal.

The following types of transactions are recorded in the Journal Proper-

a. Opening entries
b. Closing entries
c. Transfer entries
d. Rectification entries
e. Adjusting entries
f. Purchase of fixed assets on credit

Practical Problems

Journal
 1. Journalise the following transactions in the books of R. Suresh-
2018
April
1 Started business with cash Rs. 50,000.
5 Paid into bank Rs. 10,000.
7 Purchased goods for cash Rs.4,000.
10 Purchased Furniture and paid by cheque Rs.3,000.
12 Sold goods to Mathew Rs.7,000
13 Withdrew cash from bank for office use Rs.2,000.
15 Purchased stationery Rs.500.
28 Paid Rent Rs.1,000.
30 Paid Salaries Rs.3,500.

2. On April 01, 2016 Aneesh started business with Rs. 100,000 and other transactions for
the month are:
2 Purchase Furniture for Cash Rs. 7,000.
8 Purchase Goods for Cash Rs. 2,000 and for Credit Rs. 1,000 from Khalid
Retail Store.
14 Sold Goods to Khan Brothers Rs. 12,000 and Cash Sales Rs. 5,000.
18 Owner withdrew of worth Rs. 2,000 for personal use.
22 Paid Khalid Retail Store Rs. 500.
26 Received Rs. 10,000 from Khan Brothers.
30 Paid Salaries Expense Rs. 2,000
3. Record Journal entries for the following transactions in the books of John
2020 April
1 Started business with cash ₹ 45,000.
5 Paid into bank ₹ 7,500.
7 Purchased goods for cash ₹.6000
10 Purchase furniture & paid by cheque ₹ 2800
12 Sold goods to Sam ₹ 7000
15 Withdraw cash from bank for office use ₹1800
18 Purchased stationery ₹ 700
25 Paid rent ₹ 2000
28 Paid salaries ₹ 5500
4. Develop Journal entries in respect of the following transactions.
2024 Jan
 1 Rama commenced business with cash ₹ 1,00,000.
2 Paid wage ₹ 5000
3 Paid into bank ₹ 80,000.
5 Purchased goods for cash ₹ 5,000.
8 Bought Furniture ₹ 4,000.
11 Drew from bank cash for office ₹10,000.
13 Sold goods to Gopu ₹ 6,000.
17 Bought goods of Sunil ₹ 4,100.
20 Received cash from Gopu ₹ 5,900, Allowed him discount ₹100.
30 Paid Sunil in full settlement of his account ₹ 4,000, received discount ₹ 100

Ledger
5. Prepare Furniture account from the following particulars:
2023 April
1 Bought 5 tables for cash ₹ 50000
5 Bought 7 chairs from Galaxy Furniture Mart ₹ 4900
12 Sold 4 table for cash ₹ 60000
17 Returned 2 chairs to Galaxy Furniture Mart ₹ 1400
19 Bought 2 table for cash ₹ 5000
20 Returned 1 table to Galaxy Furniture Mart ₹10000
23 Sold 4 chairs for cash ₹ 4000
26 Sold 1 table for cash ₹15000
6. Prepare a Cash Account from the following:
2019 June
1 Balance of cash in hand 7500
2 Sold goods for cash 2000
3 Paid to Mohan 3000
5 Purchased goods for cash 1000
6 Paid Rent 300
8 Received Commission 200
10 Purchased stationery for cash 130
15 Received from Hari 700
20 Paid Salary 650
7. From the following particulars, prepare the account of Mr. Sen, as it would appear in the
books of Mr. Roy.
 2018
July
1 Debit balance brought forward Rs.2000.
7 Sold goods to Mr. Sen Rs.3000.
15 Mr. Sen returned goods Rs.500.
18 Mr. Sen paid on account Rs.1000.
20 Discount allowed to Mr. Sen Rs.300.
21 Received a cheque from Mr. Sen and deposited into bank Rs.700.
25 Mr. Sen's cheque returned dishonoured by bank.
30 Paid cash Rs.700.
(Ans: Debit balance Rs.2500)

8. Show the ledger account of Ganesh in the books of Girish-

2018
April
Sold goods to Ganesh Rs. 1500.
15 Received cash from Ganesh Rs.800.
20 Received goods returned by Ganesh Rs.150
(Ans: Debit balance - Rs.550)

Subsidiary Books

9. Construct Purchases Book from the following particulars of M/s Sam & Jo.
2023 April
1 Purchased 200 pieces of silk garments from Das & Sons at ₹ 50 per piece less
Trade Discount 10%.
17 Purchased from Kalyan Silk House, 250 meters of silk at ₹ 50 per meter less Trade
Discount at 8% and Sales Tax at 10%.
26 Purchased from Lakshmi Woollen Stores, 70 pieces of woollen garments at ₹.80
per piece less Trade Discount at 5% and Carriage ₹ 250.
29 Purchased 100 pieces of cotton garments from Jaya Trading Corporation at ₹ 25
per piece less Trade Discount at 10%

10. Construct Sold Book using following information:

2023 Dec
3 Sold to M/s Gupta & Verma
 30 shirts at ₹ 200 per shirt
20 trousers at ₹ 300 per trouser
Less Trade Discount at 10%
10 Sold old Furniture to M/s Sen & Co. on credit ₹ 2,000
14 Sold 50 shirts to M/s Jain & Sons at ₹ 400 per shirt
20 Sold 10 shirts to Cheap Stores at ₹ 250 each for cash
28 Sold to M/s Mathew & Bros
100 shirts at ₹ 300 per shirt
10 overcoats at ₹ 500 per overcoat
Less Trade Discount at 10%

11. Make use of following transaction and prepare Sales Return Book.
2018 May
4 Returned by Bharat traders, 10 woollen shawls at ₹ 150 each sold at 10% trade
discount
10 Returned by Lal traders, 20 cotton shirts at ₹ 50 each sold at 5% trade discount
24 Returned by Sen Bros, 2 dozen woolen garments at ₹ 350 per dozen sold at 10%
trade discount
27 Soman traders returned goods worth ₹ 1075
30 Allowance granted for Manohar for damaged goods ₹ 750

12. Prepare Purchases Book from the following particulars of K&K Company,
2023 October
8 Purchased 12 pieces of timber from AB ltd at ₹ 1150 per piece less Trade Discount 15%.
19 Purchased from Govt teak House, 7 pieces of teak at ₹ 2500 per piece. Trade Discount at
11.5% and Sales Tax at 10%.
24 Purchased from Lakshmi Woos, 9 pieces of raw woods at ₹ 1200 per piece less Trade
Discount at 5% and Carriage ₹ 1500.
29 Purchased 10 pieces of timber from Jaya Trading Company at ₹ 1250 per piece less Trade
Discount at 13%.

13. Make use of the following transactions and prepare Sales Book:
2023 Dec
3 Sold to Mr. Kartha
300 plates at ₹ 20 per plate
200 bowls at ₹ 90 per bowl
Less Trade Discount at 10%
10 Sold old utensils to M/s Jo&Jo. on credit ₹ 4,000
14 Sold 450 plates to M/s Jain & Sons at ₹18 per plate
20 Sold 600 bowls to Cheap Stores at ₹ 70 each for cash
22 Sold 170 Tea cups to Mr. Joe at ₹17 per cup
28 Sold to M/s Antony & Bros
100 plates at ₹ 25 per plate
250 Tea cups at ₹15 per cup
Less Trade Discount at 10.5%

14. Construct a petty cash book under imprest system

2023 Jan
1 Cash in hand 90
2 Received from cashier300
3 Office cleaning 100
7 Postal charge 30
11 Postage 28
17 Tiffin to clerk 50
24 Paper and ink 60
27 Paid to Thomas 150

15. Build a Single Column Cash Book.

2018 April
1 Balance of cash in hand 8000
2 Received cash from Anand on account 2000
5 Paid to Raju on account 1500
10 Purchased goods for cash 2400
12 Received interest 150
15 Received commission 250
18 Paid wages 1500
21 Sold goods for cash 1800
25 Paid cash to Manu 2100
28 Received cash from Jayan 1050
30 Paid salaries 550