This session discussed transaction journals.

You started by learning the various steps

through which a transaction passes before entering into records. Then you understood
journals and their formats. Next, you learnt about ledgers and the differences between
the journals and the ledgers. You also became familiar with trial balance and its format.
You then moved on to understand final accounts and their various components. Finally,
you learnt about ten adjustments that might be necessary to the final accounts.

A transaction passes through a series of steps before entering the records. These steps are
shown below.

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The format of a journal is shown below.

Here are a few points to remember while making a journal entry:

1. It is important to analyse the transaction to figure out which accounts will be affected.
2. After every journal entry, a line should be drawn, separating it from other entries.
3. At the end of all the entries, debit and credit should match.

A ledger is a book that contains accounts grouped by their logical uses, rather than in
chronological order. For example, there will be separate ledgers maintained for assets,
liabilities, equity, revenue and expense depending upon the size of the business and
management.

It contains the information that is required to prepare financial statements. It includes accounts
for assets, liabilities, owner’s equity, revenues and expenses. This complete list of accounts is
known as the Chart of Accounts.

Some points to be remembered while posting to a ledger:

1. Ledger uses the double-accounting method, wherein each journal entry is reflected in
two ledgers.
2. Ledgers break up the financial information from the journals into specific accounts, such
as cash, accounts receivable and sales on their own sheets.

Finally, you saw differences between a journal and a ledger.

Journal Ledger

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 Transactions are listed here first Used to create financial statements

Journalising is the process of making an entry Posting is the process of transferring entries
to a journal from the journal to the ledger

Transactions are in chronological order Transactions are in a logical order

The format includes the transaction date, The ledger uses the ‘T’ format where date,
particulars of the transaction, folio number, particulars and amount are recorded on each
debit amount and credit amount side

A trial balance statement prepared with debit and credit balances of the ledger accounts to test
the arithmetical accuracy of books, as presented on a particular date.

The format of a trial balance statement is shown below.

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There are a total of three components of final accounts:
1. Trading account: It helps in determining the gross profit or loss of a business concern,
made out of buying and selling. The components of a trading account are mentioned
below.

2. Profit and loss account: The profit and loss account takes into account the output of the
trading account and illustrates the net profit/loss of the business.

3. Balance sheet: The balance sheet takes as one of its inputs the net profit as calculated
from the profit and loss account. The balance sheet reflects the financial position of a
company as on a particular date, as compared with a period for the profit and loss
statement. It is prepared by tabulating the assets and liabilities.
a. The components of a balance sheet are as follows:

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 i. Assets: They are the resources owned by the company that is expected
to generate a positive economic value. They can be classified as follows:
1. Fixed assets
2. Current assets
3. Cash and cash equivalent
4. Tangible assets
5. Intangible assets
6. Accounts receivable

There are ten different types of adjustments that might be necessary to the final accounts. The
following table describes them. Remember, for each adjustment, two accounts would be
affected.

Adjustment Trading Account Profit and Loss Balance Sheet

Account

Closing Stock Yes Yes

Outstanding Yes Yes

Expenses Yes Yes

Prepaid Expenses Yes Yes

Yes Yes

Accrued Income Yes Yes

Advance Income Yes Yes

Interest on Capital Yes Yes

Interest on Drawing Yes Yes

Provision for Doubtful Yes Yes

Debts

Provision for Yes Yes

Discount on Debtors

Bad Debts Yes Yes

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