Financial Accounting & Analysis

Unit- 2
 Unit- 2

2.1 Journal Entries

2.2 Compound Journal Entries
2.3 Opening Entry
2.4 Ledger posting
2.5 Trial Balance
2.6 Cash Book
2.7 Sales & Purchase book
2.8 Trading Account, Profit & loss account
2.9 Balance sheet as per schedule III of companies act 2013
Journalising Transactions
Unit 2.1-2.3
 Suggested Readings
1. Author: S. N. Maheshwari
Title of the book: Financial Accounting
Chapter name: Journalizing Transactions
Publication: Vikas Publishing House
2. Author: P. C. Tulsian
Title of the book: Financial Accounting
Chapter name: Journalizing, Posting & Balancing
Publication: Pearson Education
 Journal
•Journal is a historical record of business
transactions or events. The word journal comes
from the French word "Jour" meaning "day".
• It is a book of original or prime entry written up
from the various source documents. Journal is a
primary book for recording the day to day
transactions in a chronological order i.e. in the
order in which they occur.
•The journal is a form of diary for business
transactions. This is also called the book of first
entry since every transaction is recorded firstly in
the journal.
 Format of Journal
Date Particulars L.F. Debit Credit
(Rs.) (Rs.)
 Account
An account is a summary of the relevant
transactions at one place relating to a particular
head. It records not only the amount of
transaction but also their effect and direction.
Classification of Accounts
The classification of accounts is given as follows :
• Personal Account
• Real Account
• Nominal Account
 1. Personal Account
Accounts which are related to individuals, firms,
companies, co-operative societies, banks, financial institutions are known as
personal accounts.
The personal accounts may further be classified into three categories :
(i) Natural Personal Accounts : Accounts of individuals (natural persons)
such as Akhils' A/c, Rajesh's A/c, Sohan's A/c are natural personal accounts.

(ii) Artificial Personal Accounts : Accounts of firms, companies, banks,

financial institutions such as Reliance Industries Ltd., Lions Club, M/s Sham &
Sons, Punjab National Bank, National College are artificial personal accounts.

iii) Representative Personal Accounts : The accounts recording transactions

relating to limited expenses and incomes are classified as nominal accounts.
 2. Real Accounts
Real accounts are the accounts related to
assets/properties.
• These may be classified into tangible real account
and intangible real account.
• The accounts relating to tangible assets (which
can be touched, purchased and sold) such as
building, plant, machinery, cash, furniture etc. are
classified as tangible real accounts. Intangible real
accounts (which do not have physical shape) are
the accounts related to intangible assets such as
goodwill, trademarks, copyrights, patents etc.
 3. Nominal Accounts
• The accounts relating to income, expenses,
losses and gains are classified as nominal
accounts.
• For example Wages Account, Rent Account,
Interest Account, Salary Account, Bad Debts
Accounts, Purchases, Account etc. fall in the
category of nominal accounts.
 Rules of Debit & Credit
The Rules for Debit and Credit are given below :
Types of Accounts Rules for Debit Rules for Credit
(a) For Personal Accounts- Debit the receiver
Credit the giver
(b) For Real Accounts- Debit what comes in Credit
what goes out
(c) For Nominal Accounts- Debit all expenses &
losses
Credit all incomes and gains
 Journalize the followings transactions:
Journalise the following transactions :
1. 2005 Jan. 1 Mohan started business with cash Rs.
80,000
2. Jan. 6 Purchased goods from Ram on credit
30,000
3. Jan. 8 Sold goods on cash 6,000
4. Jan. 15 Bought Furniture from Yash for cash
8,000
5. Jan. 18 Paid Salary to manager 6,500
6. Jan. 20 Paid Rent to land lord in cash 1,000
Date Particulars
Journal L.F. Debit Credit

2005 Cash Account Dr. 80,000 80,000

To Mohan's Capital Account
(Being business started with cash)

"6 Purchases Account Dr. 30,000 30,000

To Ram's Account
(Being purchase on credit)

"8 Cash Account Dr. 6,000 6,000

To Sales Account
(Being sold goods for cash)

" 15 Furniture Account Dr. 8,000 8,000

To Cash Account
(Being bought furniture for cash)

" 18 Salary Account Dr. 6,500 6,500

To Cash Account
(Being salary paid to manager)

" 20 Rent Account Dr. 1,000

To Cash Account 1,000
(Being rent paid to land lord)
 Compound Journal Entries
When more than two accounts are involved in a
transaction and the transaction is recorded by means
of a single journal entry instead of passing several
journal entries, such single journal entry is termed as
'Compound Journal Entry'.
• 2005 Nov. 1 Paid to Arun Rs. 5,250 discount
allowed by him Rs.50
• Nov. 6 Received from Somesh Rs. 1,900 and from
Komesh Rs. 400
• Nov. 8 Goods purchased for cash Rs. 4000
• Furniture purchased for cash Rs. 3000
• Paid cash to Raman Rs. 2090
• Paid Salary in cash Rs.7600
• Paid Rent in cash Rs. 1400
 Journal

Date Particulars L.F. Debit(Rs.) Credit(Rs.)

2005 Arun's Account Dr. 5,300

Nov.1 To Cash Account 5,250
To Discount Received Account 50
(Being the cash paid to Arun and discount received)

Nov.6 Cash Account Dr. 2,300

To Somesh's Account 1,900
To Komesh's Account 400
(Being cash received)

Nov.8 Purchases Account Dr. 4,000

Furniture Account Dr. 3,000
Raman's Account Dr. 2,090
Salary Account Dr. 7,600
Rent Account Dr. 1,400
To Cash Account 18,090
(Being the cash paid )
 Opening Entry
A journal entry by means of which the balances of various assets,
liabilities and capital appearing in the balance sheet of previous
accounting period are brought forward in the books of the current
accounting period, is known as 'Opening Entry'. While passing an
opening entry, all assets accounts (individually) are debited and all
liabilities accounts (individually) are credited and the Net worth
(i.e. excess of assets over liabilities) is credited to Proprietor's
Capital Account (in case of a proprietary concern) or Partners'
Capital Accounts (in case of a partnership concern).
 Unit- 2
Topic- 2.4
 Suggested Readings
1. Author: S. N. Maheshwari
Title of the book: Financial Accounting
Chapter name: Ledger Posting & Trial Balance
Publication: Vikas Publishing House

2. Author: P. C. Tulsian 2. Robert N. Anthony

Title of the book: Financial Accounting
Chapter name: Journalizing, Posting &
Balancing
Publication: Pearson Education
 Ledger
•Ledger is a principal book of accounts of the enterprise. It
is rightly called as the 'King of Books'. Ledger is a set of
accounts. Ledger contains the various personal, real and
nominal accounts in which all business transactions of the
entity are recorded.
•The main function of the ledger is to classify all the items
appearing in Journal and other books of original entry under
appropriate head/set of accounts so that at the end of the
accounting period, each account contains the complete
information of all transaction relating to it.
•A ledger therefore is a collection of accounts and 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.
 Relationship between Journal and
Ledger
Journal and Ledger are the most useful books kept by a business
entity. The points of distinction between the two are given below :
1. The journal is a book of original entry where as the ledger is the main book
of account.
2. In the journal business transactions are recorded as and when they occur
i.e. date-wise. However posting from the journal is done periodically, may
be weekly, fortnightly as per the convenience of the business.
3. The journal does not disclose the complete position of an account. On the
other hand, the ledger indicates the position of each account debit wise or
credit wise, as the case may be. In this way, the net position of each account
is known immediately.
4. The record of transactions in the journal is in the form of journal entries
whereas the record in the ledger is in the form of an account.
 Utility of a Ledger

The main utilities of a ledger are summarized as

under :
(a) It provides complete information about all
accounts in one book.
(b) It enables the ascertainment of the main items
of revenues and expenses
(c) It enables the ascertainment of the value of
assets and liabilities.
(d) It facilitates the preparation of Final Accounts.
 Posting
• Posting refers to the process of transferring debit and
credit amounts from the Journal or subsidiary books to
the respective heads of accounts in the ledger.
• Journal will have at a minimum of one debit and one
credit for each transaction. The ledger will have either
a debit or a credit for each account used in the Journal.
• Posting may be done daily, weekly fort nightly or
monthly according to the convenience and
requirements of the business, but care should be taken
to complete it before the preparation of annual
financial statements.
 Rules of Posting
The following rules should be followed while posting business transactions to
respective accounts in the ledger from the journal :
i) Enter the date and year of the transaction in the date column.
ii) Open separate account in the ledger for each person, asset, revenue,
liability,
expense, income and loss appearing in the Journal.
iii) The appropriate/relevant account debited in the Journal will be debited in
the ledger, but the reference should be given of the other account which
has been credited.
iv) Similarly, the account credited in the Journal should be credited in the
ledger, but the reference has to be given of the other account which has
been debited in the Journal.
v) The debit posting should be prefixed by the word 'To' and credit posting
should be prefixed by the word 'By'.
vi) In the Journal Folio (J.F.) column the page number of the book of original
entry (Journal) is entered.
 Unit- 2
Topic-2.5
 Suggested Readings
1. Author: S. N. Maheshwari
Title of the book: Financial Accounting
Chapter name: Ledger Posting & Trial Balance
Publication: Vikas Publishing House
2. Author: P. C. Tulsian 2. Robert N. Anthony
Title of the book: Financial Accounting
Chapter name: Journalizing, Posting &
Balancing
Publication: Pearson Education
 References
Author: P. C. Tulsian 2. Robert N. Anthony
Title of the book: Financial Accounting
Chapter name: Journalizing, Posting & Balancing
Publication: Pearson Education
 Trial Balance
Various debit balances and the credit
balances of the different accounts are
taken down in a statement, the
statement so prepared is termed as a
Trial Balance.
 METHODS OF PREPARATION OF
TRIAL BALANCE
A trial balance can be prepared by the following two methods:
1. Total method: In this method, the debit and credit totals
of each account are shown in the two amount columns (one
for the debit total and the other for the credit total).
2. Balance Method: In this method, the difference of each
amount is extracted. If debit side of an account is bigger in
amount than the credit side, the difference is put in the
debit column of the Trial Balance and if the credit side is
bigger, the difference is written in the credit column of the
Trial Balance.
3. Total and Balance Method: This method combines the first two
methods explained above.
 LIMITATIONS OF TRIAL BALANCE

The followings are the main limitations of the Trial Balance:

(i) Trial Balance can be prepared only in those concerns
where double entry system of accounting is adopted.
(ii) Though trial balance gives arithmetic accuracy of the
books of accounts but there are certain errors, which are
not disclosed by the trial balance. That is why it is said that
trial balance is not a conclusive proof of the accuracy of the
books of accounts.
(iii) If trial balance is not prepared correctly then the final
accounts prepared will not reflect the true and fair view of
the state of affairs of the business. Whatever conclusions
and decisions are made by the various groups of persons
will not be correct and will mislead such persons.
 Unit- 2
Topic- 2.6
 Suggested Readings
1. Author: S. N. Maheshwari
Title of the book: Financial Accounting
Chapter name: Sub-division of Journal
Publication: Vikas Publishing House

2. Author: 1. P. C. Tulsian
Title of the book: Financial Accounting
Chapter name: Subsidiary Books I- Cash Book
Publication: Pearson Education
 Cash Book
A cash book is a special journal, which is used
for recording all cash receipts and cash
payments.
Cash book-both a journal and a ledger
• The cash book is a book of original entry (or
prime entry) since transactions are recorded
for the first time from the source documents.
• The cash book is a ledger in the sense that it is
designed in the form of a cash account and
records cash receipts on the debit side and
cash payments on the credit side. Thus, the
cash book is both a journal and a ledger.
 Types of cash book
3 Types:
• Single column cash book
• Two column cash book
• Three column cash book
 Single Column Cash Book

This cash book has one amount

column on each side. All cash receipts
are recorded on the receipt side and
all cash payments on the payment
side. In fact, this book is nothing but a
Cash Account.
 Format of Single Column Cash Book

Date Particular L.F. Cash Date Particulars L.F. Cash

(Amount) (AMOUNT)
 Two-column cash book
This cash book has two amount columns (one
for cash and another for discount) one each
side.
• All cash receipts and discount allowed are
recorded on the receipt side and all cash
payments and discount received are recorded
on the payment side.
 Format of Double column cash book
Date Particul L. Discount Cash Date Particul L.F. Discount Cash
ars F. (Amount) (Amou ars (Amount) (Amou
nt) nt)
 Three-column cash book
• This cash book has three amount columns (one
for cash, one for bank and one for discount) on
each side.
• All cash receipts, deposits into bank and discount
allowed are recorded on receipt side and all cash
payments, withdrawals from bank and discount
received are recorded on the payment side.
• In fact, a three-column cash book serves the
purpose of Cash Account as well as Bank Account.
Hence, there is no need to open these two
accounts in the ledger.
Format of Three Column Cash Book
Date Particul L.F Disc Cash Bank Date Partic L.F. Disc Cash Bank
ars . ount ulars ount
 Unit- 2
Topic- 2.7
 Suggested Readings
1. Author: S. N. Maheshwari
Title of the book: Financial Accounting
Chapter name: Sub-Division of Journal
Publication: Vikas Publishing House

2. Author: 1. P. C. Tulsian 2. Robert N. Anthony

Title of the book: Financial Accounting
Chapter name: Subsidiary Book II- Other Books
Publication: Pearson Education
 Subsidiary Books
In case of large business organization numerous
transactions takes place with respect to purchase,
sales, cash etc. Journalisation of each of these
transactions separately is laborious and time-
consuming, so to solve this problem subsidiary
books are prepared.

45
Normally, the following subsidiary books
are used in business :-
• Cash book: To record cash, bank and discount
transactions
• Purchase book: To record transaction relating
to credit purchases of goods in trade
• Sales book: To record transaction relating to
credit sales

46
•Purchase return book: To record transaction
relating to purchase return

•Sales return book: To record transaction

relating to sales return

•Bills receivable book: To record the receipts

of the promissory notes.
47
•Bills payable book: To record the issue of the
promissory notes.

•Journal proper: To record other transactions

for which no specific book is maintained, and
for recording entries to rectify mistakes in
books of accounts.

48
 Purchase Book
• The purchase journal is meant for recording
credit purchases of goods.
• It is also known as the purchase day book.
• It records good purchase of good on credit
only.
 Format of purchase book

Purchase Journal
SI. Invoice Particulars L.F. Amount Amount
No. No.
 Sales Book
• The Journal is meant for recording all sales of
goods on credit.
• This is also known as sales day book.
 Format of sales book

Sales Journal
SI. Invoice Particulars L.F. Amount Amount
No. No.
 Unit- 2
Topic- 2.8-2.9
 Suggested Readings
1. Author: S. N. Maheshwari
Title of the book: Financial Accounting
Chapter name: Final Accounts
Publication: Vikas Publishing House

2. Author: 1. P. C. Tulsian 2. Robert N. Anthony

Title of the book: Financial Accounting
Chapter name: Financial Statements
Publication: Pearson Education
 TRADING ACCOUNT
• After the preparation of trial balance, the next step is to prepare
Trading Account.
•Trading Account is one of the financial statements which shows the
result of buying and selling of goods and/or services during an
accounting period.
•The main objective of preparing the Trading Account is to ascertain
gross profit or gross loss during the accounting period.
•Gross Profit is said to have been made when the sale proceeds
exceed the cost of goods sold. Conversely, when sale proceeds are
less than the cost of goods sold, gross loss is incurred. For the
purpose of calculating cost of goods sold, we have to take into
consideration opening stock, purchases, direct expenses on
purchasing or manufacturing the goods and closing stock.
• The balance of this account i.e. gross profit or gross loss is
transferred to the Profit and Loss Account.
 Format of Trading account
Trading Account
For the year ended 31st March…….

Particulars Amount Particulars Amount

To Opening Stock By Sales
To Purchases Less Sales Returns
Less Purchases Returns By Closing Stock
To Direct Expenses: By Gross Loss transferred
Carriage Inward to P & L A/c
Freight and Insurance
Wages
Fuel, Power and
Lighting
expenses
 PROFIT AND LOSS ACCOUNT
• Trading Account results in the gross profit/loss made by a
businessman on purchasing and selling of goods. It does not take
into consideration the other operating expenses incurred by him
during the course of running the business.
• Besides this, a businessman may have other sources of income. In
order to ascertain the true profit or loss which the business has
made during a particular period, it is necessary that all such
expenses and incomes should be considered. Profit and Loss
Account considers all such expenses and incomes and gives the net
profit made or net loss suffered by a business during a particular
period.
• All the indirect revenue expenses and losses are shown on the debit
side of the Profit and Loss Account, where as all indirect revenue
incomes are shown on the credit side of the Profit and Loss
Account.
 Format of Profit & Loss Account
Particulars
To Gross Loss b/d
To Management Expenses:
Rent, Rates and Taxes
Heating and Lighting
Office Salaries
Printing & Stationary
Postage & Telegrams
Telephone Charges
Legal Charges
Audit Fees
Insurance
General Expenses
To Selling and Distribution
Expenses :
Advertisement
Travellers' Salaries
Expenses & Commission
Amount Particulars Amount
By Gross Profit b/d
By Other Income :
Discount received
Commission received
By Non-trading Interest :
Bank Interest
Rent of property let-out
Dividend from shares
By Abnormal Gains :
Profit on sale of machinery
Profit on sale of investment
By Net Loss transferred to
Capital Account
 BALANCE SHEET
• A Balance Sheet is a statement of financial position of a
business concern at a given date. It is called a Balance
Sheet because it is a sheet of balances of those ledger
accounts which have not been closed till the
preparation of Trading and Profit and Loss Account.
• After the preparation of Trading and Profit and Loss
Account the balances left in the trial balance represent
either personal or real accounts.
• In other words, they either represent assets or
liabilities existing on a particular date. Excess of assets
liabilities represent the capital and is indicative of the
financial soundness of a company.
 Balance Sheet as per scheduled III of
new companies act 2013
BALANCE SHEET
Name of the Company…………………….
Balance Sheet as at ………………………
(Rupees in…………)
Particulars Note No. Figures at figures
the end of the end of
current reporting previous
period reporting period

I. EQUITY AND LIABILITIES

(1) Shareholders’ funds
(a) Share capital
(b) Reserves and surplus
(c) Money received against share
warrants
(2) Share application money pending
allotment
 GENERAL INSTRUCTIONS FOR
PREPARATION OF BALANCE SHEET
1. An asset shall be classified as current when it satisfies
any of the following criteria:—
(a) it is expected to be realized in, or is intended for sale
or consumption in, the company’s normal operating
cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is expected to be realized within twelve months
after the reporting date; or
(d) it is cash or cash equivalent unless it is restricted from
being exchanged or used to settle a liability for at least
twelve months after the reporting date. All other
assets shall be classified as non-current.
2. An operating cycle is the time between the
acquisition of assets for processing and their
realisation in cash or cash equivalents. Where
the normal operating cycle cannot be
identified, it is assumed to have a duration of
twelve months.
3. A liability shall be classified as current when it satisfies any
of the following criteria:—
(a) it is expected to be settled in the company’s normal
operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the
reporting date; or
(d) the company does not have an unconditional right to defer
settlement of the liability for at least twelve months after
the reporting date. Terms of a liability that could, at the
option of the counterparty, result in its settlement by the
issue of equity instruments do not affect its classification.
All other liabilities shall be classified as non-current.
4. A receivable shall be classified as a “trade
receivable” if it is in respect of the amount due
on account of goods sold or services rendered in
the normal course of business.
5. A payable shall be classified as a “trade payable”
if it is in respect of the amount due on account of
goods purchased or services received in the
normal course of business.
6. A company shall disclose the following in the
notes to accounts.