Financial Accounting - Journalising, Ledger Posting and Preparation of Trial Balance

 

Financial Accounting

Journalising,

Ledger Posting and

Preparation of Trial Balance

 

Journalising

Journalising is the process of accounting through which the transactions of a business unit are recorded in the journal books from the vouchers. A journal book is also known as a day book or a book of original/prime entry or a subsidiary book. A medium size business enterprise generally maintains the following types of journal books:

1.           Cash book – to record all cash transactions;

2.           Sales day book – to record credit sales of goods;

3.           Purchases day book – to record credit purchases of goods;

4.           Sales return day book – to record sales returns of goods;

5.           Purchases return day book – to record purchases returns of goods;

6.           Bills receivable day book – to record bills receivable;

7.           Bills payable day book – to record bills payable;

8.           Petty cash book – to record petty cash payments; and

9.           Journal proper (also known as “General journal”) – to record all such transactions which cannot be recorded in any of the above eight journal books, e.g. credit purchases of fixed assets, credit sales of old and obsolete fixed assets, credit purchases of stationery, depreciation of fixed asset, etc. Journal proper is also used for making opening entries, closing entries, transfer entries, adjustment and rectification entries.

 

Important definitions

Goods:

Goods are those things which are purchased for sale in course of regular business operation as the main business activity in order to earn revenue on continuous basis. Goods are also referred to as items forming part of the stock-in-trade of a business unit.

 

Fixed Assets:

Fixed assets are those things which are purchased for use in the business in order to facilitate carrying out of the regular business operation efficiently and effectively. Although assets are not purchased for sale, they may be sold when they are old and obsolete. As per AS − 10 “Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.”

 

Debtors:

Debtors are the customers of a business enterprise who have not yet paid their dues, partially or wholly, against the goods sold to them by the business enterprise.

 

Creditors:

Creditors are the suppliers of a business enterprise payments to whom, partially or wholly, against the goods supplied by them have not yet been made by the business enterprise.

 

Standard format of sales day book

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Standard format of purchases day book

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Standard format of sales return day book

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Standard format of purchases return day book

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Standard format of journal proper

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Ledger posting

Ledger posting is the process of accounting through which entries are made into the individual ledger accounts in the different ledger books from the different journal books. A ledger book is also known as a principal book. Most of the business organisations usually maintain the following three types of ledger books:

 

1.     Debtors’ ledger: It is also known as sales ledger. It contains the personal accounts of all those to whom goods have been sold on credit (separate accounts are opened and maintained for each separate customer). The total of the balances of all the customers’ accounts will give “sundry debtors” for the trial balance and the balance sheet.

 

2. Creditors’ ledger: It is also known as purchases ledger. It contains the personal accounts of all those from whom goods have been purchased on credit (separate accounts are opened and maintained for each separate supplier). The total of the balances of all the suppliers’ accounts will give “sundry creditors” for the trial balance and the balance sheet.

 

3. General ledger: All the accounts other than the individual debtors’ accounts and individual creditors’ accounts are opened and maintained in this ledger book. For example, all the real accounts such as land, building, plant, machinery, furniture, motor vehicles, office equipments, cash, etc. are opened in the general ledger. Similarly, all the nominal accounts such as sales, purchases, sales returns, purchases returns, salaries, wages, rent, rates, taxes, insurance premium, carriage, cash discount allowed, cash discount received, commission allowed, commission received, bad debts, depreciation, etc. are opened in the general ledger. Capital account and drawings account of the proprietor and the bank account are also opened in the general ledger.

 

Standard format of a ledger account

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Important notes regarding ledger posting

JOURNAL BOOK	LEDGER BOOK
Sales day book	Posting to individual debtor’s account is made on the same day when the transaction takes place, for the amount of the transaction.
	Posting to the sales account is made at the end of each month, with the amount of total credit sales for the same month.
Purchases day book	Posting to individual creditor’s account is made on the same day when the transaction takes place, for the amount of the transaction.
	Posting to the purchases account is made at the end of each month, with the amount of total credit purchases for the same month.
Sales return day book	Posting to individual debtor’s account is made on the same day when the transaction takes place, for the amount of the transaction.
	Posting to the sales returns account is made at the end of each month, with the amount of total sales returns for the same month.
Purchases return day book	Posting to individual creditor’s account is made on the same day when the transaction takes place, for the amount of the transaction.
	Posting to the purchases returns account is made at the end of each month, with the total purchases returns for the same month.

 

Ledger postings from all the other journal books to all the respective ledger accounts in the different ledger books are made on the same day when the transactions take place, for the relevant amount of the transactions.

 

Balancing of ledger accounts

Balancing is the process of identifying the difference between the total of the two sides of a ledger account at the end of the accounting period and putting the amount of difference on the shorter side of the account. If the total of the debit side of an account is greater than the total of the credit side of the account, the balance is called debit balance, whereas, if the total of the credit side of an account is greater than the total of the debit side of the account, the balance is called credit balance.

 

Preparation of trial balance

A trial balance is a five-column schedule listing the names and balances of all the accounts in the ledger and cash book. The listing is usually done in the order in which they appear in the ledger. Last two columns are used for listing the balances of different accounts. The debit balances are listed in the left-hand column and the credit balances in the right-hand column. The total of the two columns should agree. A format of trial balance may be as follows:

Trial Balance of...........…….

As on.....……….

Sl. No.	Heads of Account	LF	Debit (Rs)	Credit (Rs)
	Total

 

Click here for the detailed format of Trial Balance

Important notes regarding trial balance

1.     If all transactions are correctly recorded in the ledger accounts and if the balances of the ledger accounts have also been computed correctly, the debit and credit columns of the trial balance should agree.

2.     The trial balance is not part of the ledger. It is a statement of debit and credit balances in the ledger at a particular date.

3.     A trial balance ensures the arithmetical accuracy in maintaining the books of account (i.e. in journalising, ledger posting and balancing of ledger accounts).

4.     Errors of principle, errors of complete omission and compensating errors are not revealed by the trial balance.

5.     The trial balance facilitates the preparation of final accounts (i.e. trading account, profit and loss account and the balance sheet) at the end of the accounting year.

 

Passing of adjustment journal entries

After the trial balance is prepared some adjustment journal entries may be required to be passed before the final accounts are prepared –

 

1.     For recording those transactions which have not been entered into the books of account due to mistake or inadvertence or some unavoidable reasons;

 

2.     For rectifying some mistakes/errors which might have cropped up any time during the accounting year but have come to light only after the trial balance is prepared; and

 

3.     For making closing entries in order to prepare the final accounts at the end of the accounting year.