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Finance Basics

Introduction to Accounting

Need for Accounting


Meaning of Accounting
Attributes of Accounting
Branches of Accounting
Users of Accounting Information
Accounting Cycle

Accounting Equation

Introduction and Meaning


Effects of Business Transactions on Accounting Equation
Purchase of an asset of credit
Rules of Accounting Equation

Finance Basics
Double Entry System
Types of Accounting
Rules of the Double Entry System (Debit and Credit)

Advantage of Double Entry System

Journal
Meaning of Journal
Objectives of Journal
Rules of Journalizing

Miscellaneous Journal Entries

Finance Basics
Ledger
Trial Balance
Cash Book

Finance Basics
Ledger
Meaning of Ledger
Ledger is the principal book of accounts. It
contains all the accounts of a business whether
real, personal or nominal. It is also called the
book of final entry.
A ledger may be defined as a summary statement
of all transactions relating to a person, asset,
expense or income which have taken place
during a given period of time and shows their net
effect.

Finance Basics
Ledger
Ledger posting
The following example will make the process of
posting clear:
JOURNAL
Date

Particulars

L.F.
2010
April 1

Ramys a/c
To Sales a/c
(Being goods sold on credit)

Dr.

Debit
(SAR)

Credit
(SAR)

2000
2000

Finance Basics
Ledger
Ledger posting
Ledger (Ramys Account)
Date

Particulars

2010 To Sales a/c


April 1

Amount

Date

Particulars

Amount

2000

Ledger (Sales Account)


Date

Particulars

Amount

Date
2010
April 1

Particulars
By Ramys a/c

Amount
2000

Finance Basics
Ledger
Ledger posting (More example)
Ledger (Cash Account)
Date
Jan 1
Jan 5
Jan 16
Jan 25

Particulars
To Capital a/c
To Sales a/c
To Sales a/c
To Badr & Co.

Amount
10,000
1,700
650
2,850

15,200
Feb 1

To Balance b/d

6,800

Date

Particulars

Jan 3
Jan 4
Jan 7
Jan 26
Jan 31
Jan 31

By Furniture a/c
By Purchase a/c
By tele rent a/c
By bank a/c
By Salaries a/c
By Balance a/c

Amount
900
4,000
400
2,500
600
6,800
15,200

Finance Basics
Ledger
Ledger posting (More example)
Ledger (Sales Account)
Date
Jan 31

Particulars
To Balance c/d

Amount
5,250

Date

Particulars

Amount

Jan 1 By Badr & Co.


Jan 5 By Cash a/c
Jan 16 By Cash a/c

2,900
1,700
650

5,250

5,250
Feb 1 By Balance b/d

5,250

Finance Basics
Ledger
Difference between Journal and Ledger
Journal

Ledger

1.

Nature

It is the book of first


entry

It is the book of secondary


entry.

2.

Record

This is the book of


chronological record

The ledger is an analytical


record

3.

Datewise

Entries are mad


datewise

Postings are made


accountwise

4.

Permanency

This is only the


original record and
not a permanent
record

This is a permanent
record of various accounts

Finance Basics
Ledger
Difference between Journal and Ledger
Journal

Ledger

5.

Processing

The process of
journal entries is
known as journalizing

The process is knows as


posting

6.

Narration

The narration is given


after every entry.

The narration is not given.

7.

Folio

Folio of journal is
written

Ledger folio is written

8.

Basis in final
accounts

Final accounts cannot Ledger is the basis of


be prepared directly
preparing the final
from journal
accounts

9.

Balancing

Journal is not
balanced

Every account is balanced

Finance Basics
Ledger
Advantages of Ledger
This is an important book of a business. It records the
summary of all the transactions effected in a specific period.
The following are the advantages of ledger:
1. Knowledge of assets: Leger records each and every
asset separately; hence, it can readily give the
knowledge of present value of asset.
2. Knowledge of purchases and sales: It can give a clear
picture of purchases and sales.
3. Knowledge of profit and loss: Ledgers are the basis of
profit and loss account. No business result can be
known unless we prepare the profit and loss account.

Finance Basics
Ledger
Advantages of Ledger
4. Arithmetical accuracy: Ledgers are helpful for preparing
the trial balance. If in a trial balance both debit and
credit sides are equal, then it is evident that the ledger
balances are correctly carried forward. Thus, it is a
check of arithmetical accuracy.
5. Knowledge of income and expenditure: In ledger, a
separate account of income and expenditure is kept
which can tell us how much is spent on each item.
6. Helpful in preparing balance sheet: Various ledger
balances are carried to the trial balance, which is the
basis of the balance sheet.

Finance Basics
Ledger
Questions
Choose the correct answer
1. Ledger is a set of:
a)
b)
c)
d)

balances
accounts
rules
None of these

Finance Basics
Ledger
Questions
Choose the correct answer
1. Ledger is a set of:
a)
b)
c)
d)

balances
accounts
rules
None of these

Finance Basics
Ledger
Questions
Choose the correct answer
2. Assets always have .. balances:
a)
b)
c)
d)

debit
credit
Both debit and credit
None of these

Finance Basics
Ledger
Questions
Choose the correct answer
2. Assets always have .. balances:
a)
b)
c)
d)

debit
credit
Both debit and credit
None of these

Finance Basics
Ledger
Questions
Choose the correct answer
3. If the total of debit side of an account is higher than
total of credit side, it is called balance:
a)
b)
c)
d)

debit
Credit
debit or credit
None of these

Finance Basics
Ledger
Questions
Choose the correct answer
3. If the total of debit side of an account is higher than
total of credit side, it is called balance:
a)
b)
c)
d)

debit
Credit
debit or credit
None of these

Finance Basics
Ledger
Questions
Choose the correct answer
4. . Is the principal book of accounts.
a)
b)
c)
d)

Ledger
Journal
Trial balance
None of these

Finance Basics
Ledger
Questions
Choose the correct answer
4. . Is the principal book of accounts.
a)
b)
c)
d)

Ledger
Journal
Trial balance
None of these

Finance Basics
Ledger
Questions
Choose the correct answer
5. The process of transferring entries from journal to
ledger is called...
a)
b)
c)
d)

balancing
posting
recording
None of these

Finance Basics
Ledger
Questions
Choose the correct answer
5. The process of transferring entries from journal to
ledger is called...
a)
b)
c)
d)

balancing
posting
recording
None of these

Finance Basics
Trial Balance
Meaning of Trial Balance
Trial balance is a statement of debit and credit
totals or balances extracted from the various
accounts in the ledger, and is done with a view to
test the arithmetical accuracy of the books of
account.
It is an abstract of ledger accounts at a specified
date, showing the debit and credit totals for all the
accounts.
It is usually prepared periodically, either at the
end of each month or quarter.

Finance Basics
Trial Balance
Objectives of Trial Balance
1. To Check arithmetical accuracy of books of
accounts: The main objective of the trial balance is
to check the arithmetical accuracy of the books of
account. If the total of debit and credit columns of
the trial balance is equal, it is assumed that the trial
balance is correct.
2. Compliance to double entry system: Another
objective of the trial balance is to verify whether the
dual aspect of each and every transaction is
complete. Every debit must have a corresponding
credit. If the totals of both the sides of the trial
balance are equal, it is assumed that the double
entry system has been strictly adhered to.

Finance Basics
Trial Balance
Objectives of Trial Balance
3. Helpful in preparing final accounts: The trial
balance records the balance of various ledger
accounts at one place which helps in the
preparation of the profit and loss account and
the balance sheet which can be used for
knowing the financial position of a business.
4. To detect errors: If the trial balance does not
agree, then it means that there are some errors
in the recording or posting or balancing of the
accounts. Steps are taken to locate and rectify
the errors

Finance Basics
Trial Balance
Objectives of Trial Balance
5. Summary of ledger: The main aim of preparing a
trial balance is to summarize the balance of all the
accounts of a ledger at one common place in the
form of a statement.
6. Connective link: One of the main objectives of
preparing a trial balance is to use it as a connecting
link between the ledger and the final accounts.
7. Check on accounting staff: Trial balance activates
the accounting staff because of the reason that their
work can be checked through the trial balance.

Finance Basics
Trial Balance
Trial balance of XYZ as on 30th Apr, 2010
S.
No
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Name/Head of accounts
Cash a/c
Capital a/c
Office furniture a/c
Purchase a/c
Fahd a/c
Samy a/c
Sales a/c
Discount allowed a/c
Discount received a/c
Bank a/c
Salary a/c
Drawings a/c

Debit
total

Credit
Total

13,200
-1,500
3,000
3,000
2,500
--100
--1,100
400
300

5,800
10,000
----3,000
2,500
3,300
--200
300
-----

25,100

25,100

Finance Basics
Trial Balance
Advantages of Trial Balance
1. Proper record of transaction: The main advantage of preparing
the trial balance is to ensure that the transactions have similar
debit and credit amounts. It can be done only with a proper
recording of transactions in the journal as well as in the ledger.
2. Base for preparing final accounts: The preparation of the final
accounts is not possible unless the trial balance is prepared
first.
3. Arithmetical accuracy of books of accounts: An agreed trial
balance is a prima facie evidence of arithmetical accuracy of
the books of accounts.
4. Rectification of errors: The main benefit of preparing a trial
balance is that errors can be easily rectified even before the
preparation of the final accounts.
5. Summary: Trial balance provides the summary of all
accounting information which ultimately helps the
management in taking certain financial decisions.

Finance Basics
Ledger
Advantages of Ledger
4. Arithmetical accuracy: Ledgers are helpful for preparing
the trial balance. If in a trial balance both debit and
credit sides are equal, then it is evident that the ledger
balances are correctly carried forward. Thus, it is a
check of arithmetical accuracy.
5. Knowledge of income and expenditure: In ledger, a
separate account of income and expenditure is kept
which can tell us how much is spent on each item.
6. Helpful in preparing balance sheet: Various ledger
balances are carried to the trial balance, which is the
basis of the balance sheet.

Finance Basics
Trial Balance
Questions
Choose the correct answer
1. Trial balance is :
a)
b)
c)
d)

An account
A statement
Both (a) and (b)
None of these

Finance Basics
Trial Balance
Questions
Choose the correct answer
1. Trial balance is :
a)
b)
c)
d)

An account
A statement
Both (a) and (b)
None of these

Finance Basics
Trial Balance
Questions
Choose the correct answer
2. Trial balance is prepared from which book?
a)
b)
c)
d)

Journal
cash book
ledger
None of these

Finance Basics
Trial Balance
Questions
Choose the correct answer
2. Trial balance is prepared from which book?
a)
b)
c)
d)

Journal
cash book
ledger
None of these

Finance Basics
Trial Balance
Questions
Choose the correct answer
3. Which of the following errors will not affect the trial
balance?
a)
b)
c)
d)

Wrong balancing of an account


Writing an amount in the wrong account on correct side
Wrong totaling of an account
None of these

Finance Basics
Trial Balance
Questions
Choose the correct answer
3. Which of the following errors will not affect the trial
balance?
a)

Wrong balancing of an account

b)

Writing an amount in the wrong account on correct side

c)
d)

Wrong totaling of an account


None of these

Finance Basics
Trial Balance
Questions
Choose the correct answer
4. Trial balance records balances
a)
b)
c)
d)

Of all accounts
Of personal and real accounts
Of only nominal accounts
None of these

Finance Basics
Trial Balance
Questions
Choose the correct answer
4. Trial balance records balances
a)
b)
c)
d)

Of all accounts
Of personal and real accounts
Of only nominal accounts
None of these

Finance Basics
Trial Balance
Questions
Choose the correct answer
5. If the two sides of the trial balance are equal, it is an
indication of the fact that the books of accounts are
.. Accurate.
a)
b)
c)
d)

Arithmetically
Not arithmetically
not
None of these

Finance Basics
Trial Balance
Questions
Choose the correct answer
5. If the two sides of the trial balance are equal, it is an
indication of the fact that the books of accounts are
.. Accurate.
a)
b)
c)
d)

Arithmetically
Not arithmetically
not
None of these

Finance Basics
Illustration : Journalize the following transactions in the
books of Shri K.K. Luhra, post them into ledger and
prepare a trial balance as on 30th March 2010:
March:
1
3
5
10
15
20
22
25
28
30

Commenced business with a capital of SAR 10,000


Purchased office furniture for SAR 1,500
Purchased goods from Mr. Anil for SAR 3000
Sold Goods to Mr. Azad for SAR 2,500
Received cash from Mr. Azad SAR 2,400 in full
settlement
Paid to Mr. Anil in cash SAR 2,800 and he allowed
discount SAR 200
Sold goods for cash SAR 800
Opened a bank account with SAR 1,100
Paid salary to Mr. Gokul SAR 400
Withdrew cash from bank for personal use SAR 300

Finance Basics
Solution: Books of K. K. Luthra
Journal
Date

Mar 1

Mar 3

Mar 5

Mar 10

Particulars

Debit
(SAR)

Cash a/c
Dr.
To Capital a/c
(Being business started with SAR 10,000)

10,000

Office furniture a/c


Dr.
To cash a/c
(Being purchase of office furniture for cash)

1,500

Purchases a/c
To Anil a/c
(Being goods purchased on credit)

Dr.

3,000

Azad a/c

Dr.

To Sales a/c
(Being goods sold on credit)

Credit
(SAR)
10,000

1,500

3,000

2,500
2,500

Finance Basics
Solution: Books of K. K. Luthra
Journal
Date

Mar 15

Mar 20

Particulars

Debit
(SAR)

Cash a/c
Dr.
Discount allowed a/c
Dr.
To Azad a/c
(Being cash received from Azad in full
settlement)

2,400
100

Anil a/c

3000

Dr.

2,500

To cash a/c
To discount received a/c
(Being cash paid to Anil and received
discount)
Mar 22

Cash a/c
To Sales a/c
(Being goods sold for cash)

Dr.

Credit
(SAR)

2,800
200

800
800

Finance Basics
Solution: Books of K. K. Luthra
Journal
Date
Mar 25

Particulars
Bank a/c

Debit
(SAR)
Dr.

1,100

To Cash a/c
(Being account opened in bank with cash
SAR 1100)
Mar 28

Mar30

Salary a/c
To cash a/c
(Being salary paid in cash)

Credit
(SAR)

1,100

Dr.

Drawings a/c
Dr.
To Bank a/c
(Being amount withdrawn from bank for
personal use)

400

400
300
300

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Cash a/c
Date
Mar 1
Mar 10
Mar 22

Particulars
To Capital a/c
To Azad a/c
To Sales a/c

Amount

10,000 Mar 3
2,400 Mar 20
800 Mar 25
Mar 28
Mar 30
13,200

Apr 1

To Balance b/d

Date

7,400

Particulars
By Office Furniture
By Anil a/c
By Bank a/c
By Salary a/c
By Balance a/c

Amount
1,500
2,800
1,100
400
7,400
13,200

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Capital a/c
Date
Mar 30

Particulars

Amount

To Balance c/d

10,000

Date

Particulars

Mar 1 By Cash a/c

10,000

Amount
10,000

10,000
Apr 1 To Balance b/d

10,000

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Office Furniture a/c
Date
Mar 3

Apr 1

Particulars
To Cash a/c

To Balance b/d

Amount

Particulars

Amount

1,500 Mar 30 By Balance c/d

1,500

1,500

1,500

1,500

Date

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Purchases a/c
Date
Mar 5

Apr 1

Particulars
To Anil a/c

To Balance b/d

Amount

Particulars

Amount

3,000 Mar 30 By Balance c/d

3,000

3,000

3,000

3,000

Date

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Anil a/c
Date
Mar 20
Mar 20

Particulars
To Cash a/c
To Discount
received

Amount
2,800
200

3,000

Date

Particulars

Mar 5 By Purchases

Amount
3,000

3,000

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Azad a/c
Date
Mar 10

Particulars
To Sales a/c

Amount

Date

Particulars

Amount

2,500 Mar 15 By Cash a/c


Mar 15 By Discount
allowed

2,400
100

2,500

2,500

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Sales a/c
Date
Mar 30

Particulars
To Balance c/d

Amount

Date

Particulars

Amount

3,300 Mar 10 By Azad a/c


By Cash a/c

2,500
800

3,300

3,300

3,000

Apr 1 To Balance b/d

3,300

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Discount Allowed a/c
Date
Mar 15

Apr 1

Particulars
To Azad a/c

To Balance b/d

Amount

Particulars

Amount

100 Mar 30 By Balance c/d

100

100

100

100

Date

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Discount Received a/c
Date
Mar 30

Particulars
To Balance c/d

Amount

Date

Particulars

Amount

200 Mar 20 By Anil a/c

200

200

200

200

Apr 1 By Balance b/d

200

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Bank a/c
Date
Mar 25

Particulars
To Cash a/c

Amount

To Balance b/d

Particulars

1,100 Mar 30 By Drawings a/c


Mar 30 By Balance c/d

1,100
Apr 1

Date

800

Amount
300
800

1,100

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Salary a/c
Date
Mar 28

Apr 1

Particulars
To Cash a/c

To Balance b/d

Amount

Particulars

Amount

400 Mar 30 By Balance c/d

400

400

400

400

Date

Finance Basics
Solution: Books of K. K. Luthra
Ledger
Drawings a/c
Date
Mar 30

Apr 1

Particulars
To Bank a/c

To Balance b/d

Amount

Particulars

Amount

300 Mar 30 By Balance c/d

300

300

300

300

Date

Finance Basics
Trial Balance
S.
No
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Trial balance of K.K.Luthra as on 30th Mar,


2010Name/Head of accounts
Debit
Credit
total
Cash a/c
Capital a/c
Office furniture a/c
Purchase a/c
Anil a/c
Azad a/c
Sales a/c
Discount allowed a/c
Discount received a/c
Bank a/c
Salary a/c
Drawings a/c

Total

13,200
-1,500
3,000
3,000
2,500
--100
--1,100
400
300

5,800
10,000
----3,000
2,500
3,300
--200
300
-----

25,100

25,100