Recording of transactions

Journal, ledger and trial balance

JOURNAL

Journal is derived from the French word Jour which means a day. It is a daily record of business transactions It is the book of original entry because transaction is first written in the journal from which it is posted to the ledger at any convenient time. Journalising means recording a transaction in the journal and the form in which it is recorded is known as journal entry

NECESSITY OF JOURNAL
Convenient recording of transaction Maintaining and preserving the identity of transaction Ascertaining the true nature of transaction Maintaining permanent record of information

Analysis of transactions
1. Which are the two accounts involved in the transaction to be recorded? 2. Whether the two accounts involved in the transaction are personal, real or nominal? 3. What rules of debit and credit are applicable to the accounts concerned? 4. Which account should be debited or credited?

Format of journal
Date Particulars L.F. Debit Rs. Credit Rs.

FUNCTIONS OF JOURNAL
To analyse each transaction into debit and credit so as to enable their posting in the ledger To arrange transaction ,chronological i.e. in order of date.

ADVANTAGES OF JOURNAL
Show all necessary information relating to a transaction Provide the explanation of the transaction Date wise record of all the transaction can be obtained Help in locating and preventing the errors

LIMITATIONS OF JOURNAL
Recording all the transaction in a journal requires: 1)writing down name of account involved 2)individual posting of each account debited and credited Does not provide information on prompt basis Does not facilitate the internal check system since the journal can be handled only by one person Journal become bulky and voluminous

LEDGER
A ledger account may be defined as a summary statement of all the transactions relating to a person, asset, expense or income which have taken place during a given period of time and shows their net effect.

Format of Ledger
Date Particulars J.F Amount Date Particulars Rs. J.F Amount . Rs.

FEATURES OF LEDGER
Book of principal entry Classified and summarized record Posting-Process of transferring the transactions from the journal to ledger

ADVANTAGES
Transactions relating to a particular person, item or heading of expenditure or income are grouped in the concerned account at one place. When each account is periodically balanced it reflects the net position of that account. Ledger is the stepping stone for preparing Trial Balance - which tests the arithmetical accuracy of the accounting books. Since the entries recorded in the journal are referenced into ledger the possibility of errors of defalcations are reduced to the minimum. Ledger is the destination of all entries made in journal or subjournals. Ledger is the "store-house" of all information which subsequently is used for preparing final accounts and financial statements.

Trial balance
Trial Balance may be defined as a statement which contains balances of all ledger accounts on a particular date. To check the accuracy of posting in the ledger a statement is prepared with two columns i.e. debit column and credit column which contain debit balances of accounts and credit balances of accounts respectively. Total of the two columns are if equal, it means the ledger posting is arithmetically correct. This statement is called Trial Balance.

Features of trial balance

Particular date Agreement Arithmetical accuracy Errors Not conclusive Journalising and Ledger balances required

Objectives
To check arithmetic accuracy of books of accounts Completion of double entry system To detect errors Helps in making comparisons To facilitate preparation of financial statements Helps in dealing with adjustments

Preparation of 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

Standard format of a trial balance

Trial Balance of ................. as at .................(closing date) Name of the account L.F. Debit balance Rs. Credit Balance Rs.

Methods for preparation of trial balance

Total method Trail balance is prepared by taking into account the totals of debit and credit balances of each account recorded in the ledger. Balances method Trail balance is made on the basis of the balances of the accounts. it is also known as net trial balance.

Advantages
Correct ledger balance Helps in preparation of final accounts Arithmetical accuracy Errors are revealed

If the total debit is not equal to the credit,

Limitations
Trial balance can be prepared only if double entry system is followed Certain errors are not disclosed by trial balance Incorrect trial balance will lead to incorrect final accounts

Errors that can affect the Trial Balance:

Errors of calculation
Errors of omission of one entry Posting to the wrong side of an account Errors in amount

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