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Journal & Ledger

 Business transactions were recorded as and when they occur
in the Journal. Journal thus contains the date-wise record of
transactions.
 However we require another book, namely Ledger, to keep
the account-wise record of transactions.
 Account is the summary of all the monetary transactions
related to an entity, person, item or an object.
 Ledger is a group of accounts where you find all types of
accounts.
 Ledger is called the Principal book of account.
 This is the main Book i.e. a book of final entry and a gateway
for final accounts.
The format of an Account in the Ledger
Date Particulars JF Amount
Rs.
Date Particulars JF Amount
Rs.
Dt/M/
Yr
To Name of
A/c credited
-- ---------- Dt/M/
Yr
By Name of
A/c debited
-- ----------
Total --------- Total ---------
Dr. Title of the Account Cr.
Every account has a debit side and a credit side;
Journal Folio or J.F. indicates the number of the page of the
journal where the other affected account appears.
Ledger of …….
Posting of Entries
Consider the following Journal Entry :
Date Particulars
L
F
Dr.(Rs.) Cr.(Rs.)
7
th
Jan
2010
Purchases A/c------------- Dr.
To Bank A/c
(Being goods purchased).
5,000
5,000
Date Particulars JF Amount
Rs.
Date
2010
Particulars JF Amount
Rs.
7
th
Jan
2010
To Bank A/c
5000.00
Dr. Purchase Account Cr.
The above journal entry when posted to the ledger accounts
would appear as follows:
[The debit side of the Purchase A/c is greater. To maintain
symmetry the balance is carried down (c/d) at the end of the
month to the credit side and brought down again at the
beginning of the following month i.e. Feb 1 to the debit side.
Thus it can be seen that the Purchase A/c has a debit balance.]
Date Particulars J
F
Amount
Rs.
Date Particulars JF Amount
Rs.
7
th
Jan
2010
By Purchase
A/c
5,000
Dr. Bank Account Cr.
TRIAL BALANCE
 The next stage after posting accounts to the ledger is the
preparation of a Trial Balance.
 At the end of the financial period (or at some other date)the
list(statement) of debit balances and the credit balances
from the ledger is prepared called a Trial Balance.
 In the double entry system every entry has its
corresponding credit and debit.
 Thus the total of debit balances appearing in the Trial
Balance must agree with the total of credit balances of
appearing in the Trial Balance.
 An agreement indicates reasonable accuracy of the
accounting work.
 A Trial Balance consists of all the five financial
elements- assets, liabilities, equity, income and
expenses.
 A Trial Balance is not a part of books of accounts.
 It is prepared as a separate statement and is used as the
basic document to prepare financial statements
viz, Balance Sheet and Profit & Loss Account.
Objects of preparing Trial Balance :
 1. It forms the very basis on which final accounts are prepared.
 2. It helps in knowing the balance on any particular account in
the ledger.
 3. The trial balance used as a test in ascertaining arithmetical
accuracy of the ledger accounts
 4. It serves as a primary evidence of the fact that the double
entry system has been completed.
However, a Trial Balance is not a conclusive proof of absolute
accuracy of the accounts. It does not indicate the absence of an
error. Thus, a non-tallied Trial Balance indicates the presence of
book-keeping errors.
Particulars Debit Amount Credit Amount
Capital--------------------------------------------------------------------
Purchases---------------------------------------------------------------
Sales----------------------------------------------------------------------
Sales of Scrap----------------------------------------------------------
Sundry Debtors---------------------------------------------------------
Sundry Creditors-------------------------------------------------------
Purchases Returns----------------------------------------------------
Sales Returns-----------------------------------------------------------
Carriage Inward--------------------------------------------------------
Carriage Outward------------------------------------------------------
Bills Receivable--------------------------------------------------------
Wages--------------------------------------------------------------------
Salaries-------------------------------------------------------------------
Repairs of Plant--------------------------------------------------------
Repairs of Office Furniture------------------------------------------
Bills Payable------------------------------------------------------------
Commission received-------------------------------------------------
Cash at Bank-----------------------------------------------------------
Cash in Hand-----------------------------------------------------------
Plant & Machinery-----------------------------------------------------
Office Furniture---------------------------------------------------------
Rent Paid----------------------------------------------------------------
Lighting Expenses-----------------------------------------------------
Factory Insurance-----------------------------------------------------
General Expenses-----------------------------------------------------
Insurance----------------------------------------------------------------
Drawings-----------------------------------------------------------------
Land & Building--------------------------------------------------------
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Total xxxx xxxx
The Trial balance of -----------as on -------------
Trial Balance
 Transactions are recorded in Journal and posted in Ledger.
 Ledger includes details (and hence balances) of all
accounts.
 Next step is to check the arithmetical accuracy of ledger
balances.
 Trial Balance is prepared to test the arithmetical accuracy
of the account balances.
FINANCIAL STATEMENTS
Financial Statements refer to such statements which
report the profitability and the financial position of the
business at the end of accounting period. It includes
Manufacturing/Trading and Profit & loss a/c – which
shows the results (performance) of the business
operations during an accounting period. It is a periodic
statement.
Balance Sheet – which shows financial position (i.e., the
position of assets, liabilities and equity) of an enterprise
at a specified point of time.
The Balance Sheet is a position statement as on a
particular date.
Final Accounts
 Manufacturing/Trading and Profit & loss a/c
 Consists of elements of income (including gains)
and expenses (including losses).
 The balance of Profit and Loss Account represents
profit (when income is more than expenses) or loss
(when expenses are more than income).
 Final Accounts are prepared from the Trial
Balance.
MANUFACTURING/TRADING
ACCOUNT
Trading account is prepared to show the results of
buying and selling of goods.
 All expenses which either related to the factory for
the production and to purchase goods or services are
recoded in the trading account.
Such expenses are called direct expenses.
 E.g. op. stock, purchases of goods or raw material,
wages, power & fuel, factory supervision, factory
rent, carriage inwards, freight charges.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening Stock
To Purchases
Less: Purchase return or
Returns outward
To Wages
To Freight
To Carriage or
Carriage Inwards or
Carriage on Purchase
To Gas, fuel & Power(factory)
To freight, octroi & cartage
To Dock charges
To Clearing charges
To Import duty & custom duty
To Factory Rent & Rates,
To Factory Lighting etc.
To Excise duty
To Royalty
To Gross Profit c/d
(transferred to P&L A/c)
x x x
x x
x x x
xxx
x x x
x x x
x x x
x x x
x x x
x x x
x x x
x x x
x x x
x x x
x x x
x x x
x x x
By Sales
Less : Returns Inward or
Sales return
By Sale of Scrap
By Closing stock
By Gross Loss c/d
(transferred to P&L A/c)
x x x
x x x x x
x x x
x x x
x x x
XXX XXX
Manufacturing and Trading Account
for the year ended-------------
Dr. Cr.
Preparation of Manufacturing and Trading Account
Items written on the Dr. side of the Manufacturing and
Trading Account :
1 Opening Stock
2 Purchase & Purchase Return
3 Direct Expenses - All expenses incurred in purchasing
the goods, bringing them to the godown and
manufacturing of goods are called direct expenses.
Direct Expenses
Wages -
 If the item 'Wages and Salaries' is given in the
question it will be shown on Manufacturing and Trading
a/c. On the contrary, if 'Salaries and Wages’ is given it will
be shown on the profit & loss account.
 If wages are paid for bringing or installing a new
machinery it will be added to the cost of machine and
hence will not be shown in the trading account.
 Carriage Inwards or Freight
 Manufacturing Expenses -All expenses incurred in the
manufacture of goods are shown on the debit side of
the Manufacturing and Trading Account
such as Coal, Gas, Fuel, Water, Power, Factory Rent &
Rates, Factory Lighting etc.
 Import Duty or CustomDuty -
 Excise Duty
 Octroi
Dock Charges
 If dock charges are paid on import of goods then they
are shown on the debit side of Manufacturing and
Trading Account .
 In the absence of specific instructions, these are
debited to trading account.
Trading Account- Cr. Side
Sales & Sales Returns
They are credited to the P & L A/c . If there are
sales returns then the same is deducted from the
gross sales and the net sales are shown in the
outer column.
e.g. Gross Sales 10000
Less: Sales Returns 500
Net sales 9500
Opening & Closing stock
• Opening stock
• The Opening stock of the year is the closing stock of
the previous year.
• Since an opening stock is the opening balance in
stock , therefore it appears in the Trial Balance.
• Closing stock
• The Cost of closing stock is not readily available.
• At the year end while preparing the financial
statements the closing stock is physically counted
and evaluated.
Preparation of Profit & Loss account
 Debit side of the P& L A/c
 All the indirect expenses are debited to Profit and Loss
account.
 Indirect Expenses
 The economic benefit from these is realized during the
current accounting year. These are related to
administrative, sales and distribution activities.
 E.g. Office rent, carriage outwards, sales promotion
expenses, salary, interest on loan, electricity charges,
advertising expenses, discount allowed, depreciation etc
P& L A/C –Cr Side
 The economic benefit is realized during the current
accounting year
 E.g. Interest earned, commission earned, discount
earned etc.
Balance Sheet
 A balance sheet is a statement of those assets and
liabilities of a business enterprise that can be given a
value in terms of money;
 It shows both the assets and how the assets are
financed;
i.e. It is a position statement of Assets and Liabilities.
 The liabilities indicate what money has been made
available to the enterprise, and fromwhere.
 The assets show how the enterprise has used the
money made available to it.
 Total assets must always equal total liabilities to
creditors and shareholders.
 Every balance sheet must include the name of
enterprise and the date to which the figures in the
balance sheet refer.
Assets
 The ASSETS of a business enterprise are usually
listed on a balance sheet in the following groups :
Fixed assets, investment, current assets and
fictitious assets.
 FIXED ASSETS: are those which are acquired for
continued use and last for many years such as
Land, building, Plant , machinery etc
 Fixed assets can be tangible or intangible assets.
 INTANGIBLE ASSETS: Assets which cannot be
touched or seen, like goodwill, patent etc.
Assets
 CURRENT ASSETS: those which are either in
the form of cash or can be easily converted into
cash within one year of the date of balance
sheet such as debtors, account receivable, bills
receivable, Stock, etc.
 FICTITIOUS ASSETS:
 e.g.. misc. expenditure to the extent not written
off Preliminary Expenses
Investments
 Investment include are investment in government
securities, in shares, debentures or bonds and also
in immovable properties and in the capital of a
partnership firm.
 Out of these investments, only “marketable
securities” which are readily converted into cash
should be taken as part of current assets for all
practical purposes.
THE FUNDING SIDE OF THE BALANCE SHEET
– LIABILITIES
 The liabilities are listed on a balance sheet into following
main groups :
 Capital or Share holders fund (in case of a company)
 Reserves
 Fixed liabilities
 Current liabilities.
 CAPITAL OR SHARE HOLDERS FUND (IN CASE OF A
COMPANY) is the owner’s contribution towards the
business
 CURREN LIABILITIES AND FIXED LIABILITIES are
together referred to as “outside liabilities” i.e. the outsider’s
contribution towards business
Liabilities
 FIXED LIABILITIES represent the company’s
long-term finance, and include items on which
interest is payable, such as long-term loans from
financial institutions.
 CURRENT LIABILITIES represent the company’s
short-term finance, and include items like short-
term loans, bank overdrafts , trade creditors, Bills
payables etc
 Interest always has to be paid on bank loans, but
most other current liabilities do not require the
payment of interest. Apart from bank financing,
current liabilities generally represent low-cost
finance for the company.
RESERVES
 Profits made in the course of normal operation of an
enterprise and retained in the business are called
revenue reserve
 The amounts on the balance sheet for revenue reserve
and capital reserve do not reflect the amount made
during the year. Rather, they are cumulative totals for
the years up to the date of balance sheet.
IN CASE OF COMPANY-SHAREHOLDER’S FUND
 SHARE HOLDERS FUND: The shareholders are the
owners of the company. On the balance sheet the funds
they provide are shown separately from those of
“outsiders” who have loaned money to the company.
 When a company is formed, it needs money to carry on
its activities; a good deal of this money usually comes
from the shareholders, who buy shares in the company.
 The money which the shareholders put into the
company in this way is described on the balance sheet
as the capital issued and paid up.
 In return, at the discretion of the directors, the
company makes payments, to shareholders (pays
dividends) out of the profits made by the company.
 In addition to the capital subscribed, shareholders’
funds also include capital reserve and revenue
reserve, which represent profits retained in the
business and not paid to shareholders.
BALANCE SHEET OF XYZ as on 31
st
March ____
Liabilities Amount Assets Amount
Capital:
Bal b/d (opening) xxx
Add: Fresh capital brought in xxx
Add: Net profit for the year xxx
Less: Drawings (xxx)
Less: Net loss for the year (xxx)
Reserves:
General Reserve
Fixed liabilities:
Long term loans
Current Liabilities:
Bank overdraft
Bills payable
Sundry creditors
Outstanding expenses
Income received in advance
Provisions
Total
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxxx
Fixed Assets:
Land
Building xxxx
Less: Depreciation (xx)
Furniture xxx
Less: Depreciation (xx)
Motor Vehicle xxx
Less: Depreciation (xx)
Plant & Machinery xxx
Less: Depreciation (xx)
Goodwill
Investments:
Long Term Investment
Current Assets:
Closing Stock
Sundry Debtors xxx
Less: Provision for Bad debts (xx)
Less: Provision for Discounts (xx)
Bills Receivable
Short Term Investment
Prepaid Expenses
Accrued Income (Receivables)
Cash at Bank
Cash in hand
Misc. Exp. to the extent not written off.
Total
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxxx
Final accounts & Adjustments
 Adjustments in final accounts mean bringing into
accounts the items which have not been included in
the Trial Balance.
 Eg.-Expenses incurred but not paid, Pre paid
Expenses , income earned but not actually received,
income received in advance, depreciation on assets ,
reserves for bad & doubtful debts etc.
 Adjustments always have 2 effects
 One effect always be in Trading A/c or P& L A/c
 Second effect be in Balance Sheet in liabilities or
Assets
Adjustments
 The process of determining income and financial
position is based on the accrual basis of accounting.
 This emphasizes that while ascertaining the
profitability, the revenues be considered on earned
basis and not on receipt basis,
 the expenses be considered on incurred basis and
not on paid basis. Hence, many items need some
adjustment while preparing the financial statements.
Need for Adjustments
 According to accrual concept of accounting, the profit or loss
for an accounting year is not based on the revenues realised
in cash and the expenses paid in cash during that year
because there may be some receipts of incomes and
payments of expenses during the current year which may
partially relate to the previous year or to the next year.
 Also, there may be some incomes and expenses relating to
the current year that are still to be brought into books of
account. So, unless such items duly adjusted, the final
accounts will not reflect the true and fair view of the state of
affairs of the business.
Adjustments
Credit Trading a/c
Show as an asset in the
Balance Sheet
Closing Stock
1.
Adjustment to be
made
Particulars S.No
Adjustments
Reduce from expenses in
the P &L a/c (from debit less)
Show as Current Asset in the
Balance Sheet
Prepaid expenses
( Expenses already paid
but not fully utilized)
3.
Add to expenses in the
P & L A/c (debit)
Show as a liability in the
Balance Sheet
Outstanding Expenses
( Expenses incurred but
not paid)
2.
Adjustment to be made Particulars S.No
Adjustments
Deduct from income in
the P & L A/c (credit less)
Show as a liability in the
Balance Sheet
Income received in
advance
5.
Add to income in the
P & L a/c (credit)
Show as an asset in the
Balance Sheet
Income earned but
not received
4.
Adjustment to be made Particulars S.No
Accrued Income A/C Dr.
To Income A/c
Adjustments
Debit P & L A/c
Reduce depreciation
from individual assets
in the Balance Sheet
Depreciation on
Assets
6.
Adjustment to be
made
Particulars S.No
Adjustments
Debit P & L A/c as loss
Show as deduction
(less)from the Debtors in
the Balance Sheet
Provision for
doubtful debts
( Some debtors may
not fully pay up their
debts, hence a
provision is created)
7.
Adjustment to be made Particulars S.No
Adjustments
Debit P & L A/c as loss
Show as deduction from
the Debtors in the Balance
Sheet
Additional Bad
debts
8.
Adjustment to be made Particulars S.No
Particulars Dr Cr
( Rs.) (Rs.)
Capital 250,000
Stock (as on April 1st 2003) 60,000
Debtors 100,000
Creditors 70,000
Sales 600,000
Purchases 370,000
Sales Returns 20,000
Purchase Returns 10,000
Discount Received 10,000
Bills Payable 40,000
Rent received 10,000
Insurance 10,000
Drawings 20,000
Land and Buildings 150,000
Freehold Property 50,000
Plant and Machinery 50,000
Petty Expenses 6,000
Cash at Bank 20,000
Furniture 30,000
Freight 20,000
Wages 15,000
Salaries 15,000
Advertising 10,000
Postage and Telephone 10,000
General Expenses 34,000
Total 990,000 990,000
From the following Trial Balance of Sovera Medicos
prepare a Profit and Loss Account for the year ended 31st
March2004
Adjustments
1. Closing Stock was valued at Rs. 95,000
2. Depreciate Plant and Machinery by 15% and Furniture by 10%
3. Provide for the following outstanding expenses
Wages Rs. 10,000
Salaries Rs. 7,000
General Expenses Rs. 5,000
4. Insurance was prepaid to the extent of Rs. 3,000
5.A sum of Rs. 2000 was earned by way of rent; but not yet received and
hence not included in the accounts
6. A provision of 2% is required on Debtors towards bad and
doubtful debts
Prepare Trading, Profit and Loss Account and Balance Sheet for the
year ended 31
st
March 2004.
Adjustments
1.Closing Stock was valued at Rs. 95,000
2. Depreciate Plant and Machinery by 15% and
Furniture by 10%
Credit Trading a/c
Show as an asset in the
Balance Sheet
Closing Stock
Depreciation on
Assets
Debit P & L A/c
Reduce depreciation from
the assets in the Balance
Sheet
Adjustments
3. Provide for the following outstanding expenses
Wages Rs. 10,000
Salaries Rs. 7,000
General Expenses Rs. 5,000
Outstanding
Expenses
( Expenses incurred
but not paid)
Add to expenses in the
P & L A/c
Show as a liability in the
Balance Sheet
Adjustments
4. Insurance was prepaid to the extent of Rs. 3,000
Prepaid expenses
( Expenses already
paid but not fully
utilized)
Reduce from expenses in
the P &L a/c
Show as an Asset in the
Balance Sheet
Adjustments
5. A sum of Rs. 2000 was earned by way of rent; but
not yet received and hence not included in the
accounts
Income earned but
not received
Add to income in the
P & L a/c
Show as an asset in the
Balance Sheet
Adjustments
6. A provision of 2% is required on Debtors towards
bad and doubtful debts
Provision for
doubtful debts
( Some debtors may
not fully pay up their
debts, hence a
provision is created)
Debit P & L A/c as
expenditure
Show as deduction from
the Debtors in the Balance
Sheet
Adjustments Effect
Trading A/c 0r P & L A/c Balance Sheet
1. Closing Stock Trading A/c (Credit ) (+) Current Assets
2. Outstanding Expenses
( Expenses incurred but not paid)
P & L A/c (debit)
i.e. Add to expenses
(+) Current Liability
3. Prepaid expenses
( Expenses already paid but not
fully utilized)
P &L A/c (from debit less)
i.e. Reduce from expenses
(+) Current Assets
4. Accrued Income
(Income earned but not received)
P & L a/c (credit)
i.e. Add to income
(+) Current Assets
5. Income received in advance P & L A/c (credit less)
i.e. Reduce from income
(+) Current Liability
6. Depreciation on Assets P & L A/c (Debit) (-)From Fixed Assets
i.e. Reduce from
individual asset
7. Provision for doubtful debts
Or Reserve for Doubtful Debts
i.e. RDD ( Some debtors may not
fully pay up their debts, hence a
provision is created)
P & L A/c (Debit) (-)From Debtors
8. Additional Bad debts Debit P & L A/c
as loss
(-)From Debtors
SUMMARY OF ADJUSTMENTS