Unit II

Classification of accounts - Rules of

debit and Credit – Journal – Ledger
– Preparation of Trial Balance. BRS
Single Entry System
• As the name itself implies, it deals
with only one aspect of
transaction. This system
recognizes cash and personal
items of the transactions and it
ignores the impersonal items. So it
is incomplete, inaccurate and
unscientific.
Double Entry System
• This is the most scientific system that
recognizes both the aspects of each
transaction and also records each
aspect. This system takes into
account every business transaction in
its double aspect, i.e., receiving
benefit by one party and giving the
like benefit by another. So it records
the two-fold aspect of every business
transaction.
• Example: When ‘A’ purchases a
car, he receives the benefit in the
form of a car and gives the benefit
in the form of money.
• Similarly, the car seller receives
the benefit in the form of money
and gives the benefit in the form of
a car.
• Definition
• The process by which the dual
aspects of business transactions
are recorded is known as the
double entry book-keeping. It is a
complete book-keeping in the sense
that it records all the two aspects,
debit and credit in each business
transaction, in equal value.
GAAP
• Generally accepted accounting principles, or GAAP
for short, are the accounting rules used to prepare
and standardize the reporting of financial
statements, such as balance sheets, income
statements and cashflow statements, for publicly
traded companies and many private companies in
the United States.
• GAAP-based income is measured so that the
information provided on financial statements is
useful to those making economic decisions about a
company, such as potential investors and creditors.
• GAAP is concerned with:
• the measurement of economic activity;
• the time when such measurements are to be made and
recorded;
• the disclosures surrounding this activity; and
• the preparation and presentation of summarized
economic information in financial statements.
• ]GAAP is established by the U.S.
Securities and Exchange Commission (SEC).
• MEANING OF ACCOUNTING
• The Committee on Terminology set up by the
American Institute of Certified Public
Accountants formulated the following
definition of accounting in 1961:
• “Accounting is the art of recording,
classifying, and summarising in a
significant manner and in terms of
money, transactions and events which
are, in part at least, of a financial
character, and interpreting the result
thereof.”
 Classification of Accounts

Personal A/c Real A/c Nominal A/c

Natural Person Tangible All expenses &

losses
Artificial Person Intangible All incomes & gains
Representative

DR = The Receiver DR = What comes IN DR = All expenses & Losses

CR = The Giver CR = What Goes OUT CR = All incomes & gains
• Business transactions of financial nature are classified
into various categories of accounts such as assets,
liabilities, capital, revenue and expenses. These are
debited or credited according to the rules of debit and
credit, applicable to the specific accounts. Every
business transaction affects two accounts. Applying the
principle of double entry one account is debited and the
other account is credited. Every transaction can be
recorded in journal. This process of recording
transactions in the journal is’ known as ‘Journalising’
• In case of big business houses as the transactions are
quite large in number, therefore journal is divided into
various types of books called Special Journals in which
transactions are recorded depending upon the nature of
transaction i.e. all credit sales in Sales Book, all cash
transactions in Cash Book and so on.
Proforma of Journal / Format

Date/[Link] Particulars LF Amount DR Amount CR

(1) (2) (3) (4) (5)
Example 01 Pass the necessary journal entries in the books of Anwar Ltd. For
2009
1. Purchase goods Rs. 2000
2. Goods sold Rs. 5000
3. Paid cash for stationary Rs. 500
4. Paid for trade expenses Rs. 500
5. Purchased furniture Rs. 1000
6. Sold goods Rs.2000
7. Paid to Vinod Rs. 6000
8. Cash received from Manoj Rs. 1000
9. Purchased building Rs. 10000
• 1. Date
• In this column, we record the date
of the transactions with its month
and accounting year. We write
year only once at the top and need
not repeat it with every date.
• Example :
• Date 2006 April 15
Particulars
• In the first line, the account which has to be debited is
written and then the short form of Debit i.e. Dr. is
written against that account’s name in the extreme right
of the same column.
• In the second line after leaving some space from the left
of the entry in the first line, the account which has to be
credited is written starting with preposition ‘To’ Then in
the third line, Narration for that entry which explains the
transaction, the affected accounts of which are entered,
is written within Brackets.
• Example :
• Rent paid in cash on 1st April,
2006 Date Particulars
April 1 Rent
A/c..................Dr
To Cash A/c ....Cr
(Rent paid in cash)
 Journal Entries in the Books of Anwar Ltd.
(for the year ending 31st 2009)

Date/[Link] Particulars Account LF Amount Amount

DR CR
1. Purchase A/c …………Dr. Real 2000
To Cash A/c Real 2000
(Being goods purchased)
2. Cash A/c………………Dr. Real 5000
To Sales A/c Real 5000
(Being goods sold)
3. Expenses A/c …………Dr. Nominal 500
To Cash A/c Real 500
(Being stationary purchased)
4. Trade expenses A/c …..Dr. Nominal 500
To Cash A/c Real 500
(Being trade exp. Paid)
Balance c/f 8000 8000
 Date/[Link] Particulars Account LF Amount Amount
DR CR

Balance b/d 8000 8000

5. Purchase A/c ……………Dr. Real 1000
To Cash A/c Real 1000
(Being furniture purchased)
6. Cash A/c ……………….Dr. Real 2000
To Sales A/c Real 2000
(Being goods sold)
7. Vinod’S A/c ……………Dr. Personal 6000
To Cash A/c Real 6000
(Being cash paid to vinod)
8. Cash A/c ……………….Dr. Real 1000
To Manoj A/c Personal 1000
(Being cash rec. form Manoj)
9. Building A/c……………Dr. Real 10000
To Cash A/c Real 10000
Being building purchased)
Total 28000 28000
Example 02 Pass the necessary Journal entries in the books of ABC Ltd. For 2010

1. Purchased building Rs.100000

2. Purchased goods for cash Rs. 30000
3. Purchased goods from Mohan Rs. 2500
4. Paid cartage Rs. 200
5. Sold goods for cash Rs 25000
6. Sold goods for cash to Avtar Rs. 2500
7. Sold goods to Ramesh on credit Rs. 10000
8. Paid freight charge Rs. 500
9. Deposited cash in bank Rs. 2000
10. Paid salary Rs. 50000
Journal Entries in the Books of ABC Ltd.
(for the year ending 31st 2010)

Date/[Link] Particulars Account LF Amount Amount

DR CR
1. Building A/c …………Dr. Real 100000
To Cash A/c Real 100000
(Being building purchased)
2. Purchase A/c………………Dr. Real 30000
To Cash A/c Real 30000
(Being goods purchased)
3. Purchase A/c …………Dr. Real 2500
To Mohan A/c Personal 2500
(Being goods purchased on CR)
4. Cartage A/c ………...…..Dr. Nominal
To Cash A/c Real 200 200
(Being exp. Paid)
Balance c/f 132700
132700
 Date/[Link] Particulars Account LF Amount Amount
DR CR

Balance b/d 132700 13200

5. Cash A/c ……………Dr. Real 25000
To Sales A/c Real 25000
(Being goods purchased)
6. Cash A/c ……………….Dr. Real 2500
To Sales A/c Real 2500
(Being goods sold)
7. Ramesh A/c ……………Dr. Personal 10000
To Sales A/c Real 10000
(Being good sold to Ramesh on CR)
8. Freight charge A/c …….Dr. Nominal 500
To cash A/c Real 500
(Being cash rec. form Manoj)
9. Bank A/c……….………Dr. Personal 2000
To Cash A/c Real 2000
Being building purchased)
balance c/d
Date/[Link] Particulars Account LF Amount Amount
DR CR

10. Salary A/c ……………Dr. Nominal 50000

To Cash A/c Real 50000
(Being salary paid)
TOTAL
Module III Subsidiary books -
Ledgers
• Meaning
• Formats
• Posting
• Practical
• Ledgers are the book of final entry, used, in a double-
entry system, for recording all debitsand credits, as
by transfer from a journal, according to the accounts to
which they belong.
•These transactions are recorded in the ledger in
different accounts. This list of accounts is most often
called the chart of accounts
•The general ledger or ledger is a record of all the
accounts that the company uses. In all modern
accounting systems, the general ledger is computerized.
A general ledger divides accounts into three account
types: personal real and nominal
Posting

Definition: Posting is the act of moving debit and

credit account balances from individual journals to
their corresponding ledgers. These ledgers are later
used to create a trial balance used to generate the
income statement, balance sheet, and other financial
statements.
Ledger Posting

• What is a Ledger? = Ledger is a group or set of several accounts. In other words

ledger is a book in which various accounts of personal, real and nominal nature are
opened. It is the main book of account.
• What is the difference between Journal and Ledger ?

Point of Difference Journal Ledger

1. Nature Journal is the primary It is the primary record
record of business. of business.
2. Information Info. Of a day is Info of a particular
recorded at one place. account is recorded at
one place.
Journal is base of Ledger is based on
3. Basis Journal, trial balance is
preparing Ledger.
prepared form ledger.
Proforma of Ledger

Dat Particulars J.F Amoun Date Particulars J.F Amount

e t
1 2 3 4 5 6 7 8
To…….. By………….

Use of “To” and “By” = To is written in the debit side and By in the credit
side.
Balancing of accounts = If the credit balance is bigger than debit side it is
called credit balance and written on the debit side. On the other hand if debit
side is bigger than credit it is debit balance and written on credit side.
 Objective of balancing the Accounts

• To know which account has a debit or credit balance.

• Debit balance means = loss (-) or Negative balance.
• Credit balance means = Profit (+) or Positive balance.
• To know what is due and what is due from others.
• To know how much amount is invested in an assets.
• To know total expense incurred.
Example 03 Journalize the following transaction in the books Ratam Ltd
for the year 2008
Dec 1. Ratan started business with cash Rs. 40000
Dec 3. He deposited in the bank Rs 2000
Dec 5. Purchased goods for cash Rs. 15000
Dec 8. Sold goods for cash Rs. 6000
Dec.10 Purchased furniture paid by cheque Rs. 5000
Dec 12 Sold goods to Arvind Rs. 4000
Dec 14 Purchased goods from Amar Rs. 10000
Dec 15 Paid telephone expenses Rs 1000
Dec 16 goods distributed as Free sample Rs. 1000
Dec 17 paid for stationary Rs. 500, paid rent Rs. 500, paid salary to staff
Rs. 1000
Module IV - Subsidiary Books

• Use and classification

• Purchase Book
• Sales Book
• Purchase Return Book
• Sales Return Book
• Bills Receivable Book
• Bills Payable Book
• Cash Book
• Petty Cash BooK
• Purchase Day book (Purchase Re
gister)is the bookof original entry in
which all the transactions relating
to only credit purchase are
recorded. Cash purchasesdo not
find place in purchase day book as
they are recorded in Cash book. At
the end of every
monthpurchase day book is total-
led.
Columnar Purchase book
• Sales Book
• Sales book records all credit sales made by
a business. It is one of the secondary book
of accounts and unlike cash sales
which are recorded in cash book, sales
book is only to record credit sales. The
amount entered in the sales book is on
behalf of invoices supplied to purchasers,
however, a copy remains with the firm.
• Sales book is also called Sales Journal or
Sales Day Book.
• Journal Entry for Credit Sale
• Debtor’s A/C Debit
• To Sales A/C
Credit
Purchase Returns or Returns Outward
Book
At times it may be necessary to return few goods back to
a supplier when an order is received, this may be due to
poor quality, inaccurate quantity, untimely delivery or
other reasons. Purchase returns are also called returns
outward and an appropriate purchase returns/returns
outward book is maintained.
All returns are primarily recorded in the purchase returns
book unless the returns are not that frequent, in which
case they are recorded in the journal.
 Format of Trial Balance

Dr Cr
All Assets – CA/FA All liabilities FL/CL

All Expenses/ losses All Income / Gains

Purchases Purchases Ret.