Module 2

Journal
It is a book of original entry in which all the transactions are entered in sequence of their occurrence date wise.

Ledger
It is a book of final entry containing all the accounts of the business. Accounts are the classified records of all the
transactions prepared on the basis of journals.

Posting
It is a process of transferring the entries of the transactions from journals to ledger accounts.

Debiting
Recording the transaction on the debit side of an account.

Crediting
Recording the transaction on the credit side of an account.

Casting
The totaling of the amount columns of the journals/accounts.
Trading Account
It is a revenue account which contains Sales and Cost Of Goods Sold. It shows Gross
Profit/Loss made on the trading operations of the business in a given period.

Profit & Loss Account

It is a Revenue account prepared to show the Net Profit/ Loss during the financial year.
It contains all the Incomes/Gains and Expenses/Losses for that financial year.

Balance Sheet
It is the statement of Assets and Liabilities prepared to ascertain the financial position
of the business as on a specified date.
Double Entry System
It is the method of recording of two – fold aspects of a business
transaction based on assumptions.
Every transaction affects the financial position in two ways.
If one account receives the benefit, then the other account gives the benefit.
The benefit is measured in terms of money.
Account which receives the benefit is debited and the account which gives the benefit is credited.

If Goods are purchased for cash.

Purchase account receives the value of goods - debited
Cash account gives the benefit - credited
If goods are sold to Mr. X on credit

Mr. X receives the benefit – Debited

Sales account gives the benefit – Credited

When cash is withdrawn from the bank

Cash account receives the benefit – Debited

Bank account gives the benefit – Credited

When shop rent is paid

Rent account receives the benefit – Debited

Cash account gives the benefit – Credited

When commission is received

Cash account receives the benefit – Debited

Commission account gives the benefit – Credited
Advantages of Double – Entry System

Complete Record if all transactions of business

Detection, correction and prevention of errors and frauds
Reliability of accounts

Disadvantages of Double – Entry System

Costly because elaborate

Requires special knowledge and skill
All errors are not disclosed even by trial balance
 Classification of Accounts
Personal Account
Person, firm, institution with whom businessman deals.
Capital, Drawings, Debtors, Creditors, Bankers etc.

Natural Personal Accounts – Relate to living individuals

Ex: Shiva’s Account, Lata’s Account etc.

Representative Personal Accounts – Represent person or group of people

Ex: Debtors, Creditors, Capital, Drawings, EPF, Gratuity, Outstanding and Prepaid expenses Account etc. Accrued Income and
Advance Income Account. Salary Payable, Interest receivable. Salary Prepaid, Commission received in advance.

Artificial/Legal Accounts – Related to institutions or body of individuals

Ex: Companies, Cooperative societies, Govt agencies, Local authorities, Clubs and Banks etc.
Tata Company, HDMC, State Bank, KLE Tech.
Real Account
Represent rights of ownership - Properties, Assets, Possessions.
Ex: Cash, Stock of goods, Land, Building, Goodwill, Copyright account etc.

Tangible Real Account

Consists of the assets which can be seen, touch, bought and sold.
Ex: Cash, Land, Furniture, Fixtures, Machinery, Vehicle, Investments, Stock account etc.

Intangible Real Account

Relate to the Assets or rights which can’t be seen, touch or felt but have value. Bought,
sold for a value.
Ex: Goodwill, Trademark, Patent, Copyright account etc.
Nominal Account
Accounts of various expenses, losses, gains and incomes. They represent the
expenses whose benefit is expired and revenues for which benefit has been
fully rendered.
Ex: Wages, Salary, Rent, Interest, Advertising, Sample, Commission, Dividend, Carriage, Freight, Depreciation,
Repairs, Postage and Bad debts account etc.

Valuation Account
Concerned with Valuation of assets.
Ex: Provision for Bad debts, Depreciation, Revaluation account etc.
 Classify the following accounts into Personal, Real and Nominal accounts.
Sl. No. Name of the Account Type of Account Sl. No. Name of the Account Type of Account
1 Capital A/c Personal A/c 13 Patent A/c Real A/c
2 Purchases A/c Nominal A/c 14 Stationary A/c Nominal A/c
3 Cash A/c Real A/c 15 Interest A/c Nominal A/c
4 Salary A/c Nominal A/c 16 Bank Charges A/c Nominal A/c
5 Vehicle A/c Real A/c 17 Sales A/c Nominal A/c
6 Tata Motors Ltd A/c Personal A/c 18 Advertisement A/c Nominal A/c
7 Salary Payable A/c Personal A/c 19 Bad Debts A/c Nominal A/c
8 Vishwa’s A/c Personal A/c 20 Co-operative Society A/c Personal A/c
9 Commission Receivable A/c Personal A/c 21 Machinery A/c Real A/c
10 Canara Bank A/c Personal A/c 22 Rent Prepaid A/c Personal A/c
11 Building A/c Real A/c 23 Drawings A/c Personal A/c
12 Goodwill A/c Real A/c 24 Copy Right A/c Real A/c
Rules of Debit and Credit

Personal Account
Debit the receiver
Credit the giver

Real Account
Debit what comes in
Credit what goes out

Nominal Account
Debit expenses and losses
Credit incomes and gains
How to apply the rules ?

Once you understand the meaning of transaction

Find out which are the accounts affected in the transaction
Find out which class the above two accounts belong
Apply respective rules to the accounts
Write the account to be debited and credited

Ex:
Commenced business with Rs 10, 000. In book keeping owners account is termed as Capital
Account
Cash Account Capital Account
Real Account Personal Account
Cash comes in Owner is the giver
Debit cash account Credit capital account
Purchased goods from X Rs 2, 000 on Credit
Purchase Account X’s Account
Nominal Account Personal Account
Purchases are expenses X is the giver
Debit Purchase account Credit X account

Purchased goods from Y Rs 1, 000 for cash

Purchase Account Cash Account

Nominal Account Real Account
Purchases are expenses Cash goes out
Debit Purchase account Credit cash account
Personal account of Y is not affected because cash is paid to him. Y is not our creditor.
Paid cash Rs 800 to X on account
X’s Account Cash Account
Personal Account Real Account
X is the receiver Cash goes out
Debit X’s account Credit cash account

Returned goods worth Rs 100 to X

X’s Account Purchase Returns Account
Personal Account Nominal Account
X is the receiver Reduction in expenses
Debit X’s account Credit purchase return account
Purchased furniture from Z Rs 300 on credit
Furniture Account Z’s Account
Real Account Personal Account
Furniture comes in Z is the giver
Debit Furniture account Credit Z’s account

Purchased machinery for cash Rs 500

Machinery Account Cash Account
Real Account Real Account
Machinery comes in Cash goes out
Debit machinery account Credit cash account
Sold goods to A Rs 900 on credit
A’s Account Sales Account
Personal Account Nominal Account
A is the receiver Sales are income
Debit A’s account Credit sales account

Sold goods to B Rs 100 for cash

Cash Account Sales Account
Real Account Nominal Account
Cash comes in Sales are income
Debit Cash account Credit sales account

B’s account is not affected since he pays cash. He is not our debtor.
Received cash Rs 400 from A on account
Cash Account A’s Account
Real Account Personal Account
Cash comes in A is the giver
Debit Cash account Credit A’s account

“A” returned goods worth Rs 500

Sales return Account A’s Account
Nominal Account Personal Account
Reduction in income A is the giver
Debit sales return account Credit A’s account
Paid salary Rs 700 to accountant
Salary Account Cash Account
Nominal Account Real Account
Salary is an expense Cash goes out
Debit Salary account Credit cash account

Personal account of accountant is not affected because cash paid for his services. He is not our debtor.

Paid landlord office rent Rs 1500

Rent Account Cash Account
Nominal Account Real Account
Rent is an expense Cash goes out
Debit Rent account Credit cash account
Paid wages Rs 800
Wages Account Cash Account
Nominal Account Real Account
Wages are expenses Cash goes out
Debit Wages account Credit Cash account

Paid for stationary purchased Rs 200 (Stationary is not goods. It is purchased for office not for sale)
Stationary Account Cash Account
Nominal Account Real Account
Stationary is an expense Cash goes out
Debit Stationary account Credit cash account
Paid advertisement charges Rs 1200
Advertisement Account Cash Account
Nominal Account Real Account
Advertisement is an expense Cash goes out
Debit Advertisement account Credit Cash account

Received interest on bank deposit Rs 250

Cash Account Interest Account
Real Account Nominal Account
Cash comes in Interest is a gain
Debit Cash account Credit interest account
Received dividend on shares Rs 300
Cash Account Dividend Account
Real Account Nominal Account
Cash comes in Dividend is a gain
Debit Cash account Credit Dividend account

Received Commission Rs 200

Cash Account Commission Account
Real Account Nominal Account
Cash comes in Commission is a gain
Debit Cash account Credit Commission account
Withdrawn cash Rs 1000 for personal expenses
Drawings Account Cash Account
Personal Account Real Account
Owner is the receiver Cash goes out
Debit Drawings Account Credit Cash Account

It is a transaction between the owner and business.

The owner is receiving cash from business for his private expenses.
Cash goes out of the business and owner is the receiver.
In book keeping for such withdrawals, owner’s account is named as Drawings Account.
Journal
Book of original entry.
Simple meaning of the journal is a daily record.
Transactions are recorded in the journal chronologically in order of
dates/ order of occurrences – Journal Entry.
Both Debit and Credit aspects of each transaction is found in Journal.
Later transferred to respective accounts in Ledger – Posting.
Proforma of Journal
Date Particulars L.F. Dr. Cr.

(1) (2) (3) (4) (5)

Ledger
The entries of the transactions are spread over different dates.
All the entries pertaining to different accounts are summarized and classified under the respective
accounts.
It is possible to know the position of each and every account maintained in Ledger on any given
date.

It is a bound book containing various accounts concerned with the business. It contains all the
personal accounts of Debtors and Creditors with whom the business deals with.
The accounts of all Assets of business. The accounts of expenses incurred and incomes earned by
the business.
Book of Final Entry - Transactions are finally posted to ledger
Format of Ledger Account
Dr. Name of the Account Cr.
Date Particulars Journal Amount Date Particulars Journal Amount
Folio Folio
(1) (2) (3) (4) (1) (2) (3) (4)
To ………….. XXXXX By …………. XXXXX
To ………….. XXXXX By …………. XXXXX
To ………….. XXXXX By …………. XXXXX
To ………….. XXXXX By …………. XXXXX
To ………….. XXXXX By …………. XXXXX
Final Accounts
Refers to financial statements and accounts prepared at the end of the
accounting year for working results (Profit/Loss) of the business
operations and present the financial position (Assets, Liabilities and
Capital) of the business as on date.

The final accounts of the business include

Trading account and Profit/Loss account (Revenue accounts)
Balance Sheet (Position Statement)
The Need and Significance
Ascertaining of trading results
The trading account is prepared to find out the Profit/Loss made by the main business activities which include buying,
manufacturing and selling of Goods/Services. This profit is called as Trading Profit or Gross Profit.

Determination of Net Profit

The Profit Loss account prepared to find out the final Profit/Loss made by the business, that is the final results of the
business. This is called as Net Income or Net Profit. Such profit / income is the excess of sales revenues over all the related
expenses.

Presentation of financial position

The balance sheet is prepared to show the financial status of the business as on a particular date (Closing date of
accounting year). It gives an idea of the financial strength of a business in terms of the value of its assets and properties.
Also share of outsiders equity and the owners investments. This will present the solvency position of the business.
Facilitates financial analysis and interpretation
Final accounts provides opportunity to understand and explain the changes in
the profitability and financial health of the business. The financial statements
are useful for investors, creditors and public in taking decision in their areas.

Legal requirements
The corporate entities are required to submit the copies of their financial
statements to shareholders, stock exchanges and to respective Govt
departments. The income tax liability is also computed on the basis of audited
financial statement of accounts.
The final accounts are prepared by classifying all the ledger accounts
into
Revenue accounts (Nominal Accounts)
Capital Accounts ( Real and Personal)
Basic Principles of Preparation of Final Accounts
Sl No Revenue Accounts
1 Revenue accounts are considered with the
regular operating functions, namely
purchasing, production and selling of goods
and services.
2 Revenue accounts are recurring. These arise
regularly and repetitively in course of business
operations.
3 These accounts are of short period. Not more
than one accounting year
4 Revenue accounts are essentially Nominal
Accounts. Incomes, gains, expenses and losses.
5 Revenue accounts are transferred to Trading
and Profit & Loss account by passing the
closing entries.
Capital Accounts
Capital accounts are concerned with raising finance
and investing in the assets of the business.
Capital accounts are non-recurring. They arise
occasionally. Purchasing Land, Building, Machinery.
These accounts are of long period. More than one
accounting year.
Capital accounts are Real and Personal Accounts.
Land, Building, Debtors, Creditors.
The balances of capital accounts are presented in the
Balance Sheet.
Trading Account
Summarised revenue account which shows the profit / loss on buying and selling of the
goods. The account covers the expenses and incomes relating to purchases, production of
goods and sale of goods of the business. The Profit/ loss shown is Gross Profit or Gross Loss.

Objectives
To ascertain the Gross profit / loss which results of purchasing, manufacturing and selling
goods dealt in the line of business.
To find out profitability of the line of business
To plan for future profits, sales, cost of goods sold. (Gross Profit / Sales)
To fix the selling price of the goods by adding the percentage of Gross Profit to its cost of
acquisition or production.
Trading account Preparation

Gross Profit/Loss = Net Sales – Cost of Goods Sold

Cost of Goods Sold = Opening Stock + Net Purchases + Purchase & Manufacturing Expenses – Closing Stock
Net Sales = Gross Sales – Returns Inwards
Net Purchases = Gross Purchases – Return Outwards
Sales = COGS + Gross Profit

Opening Stock, Direct expenses on purchases, manufacturing and factory expenses are debited.
Sales, Closing Stock are credited to Trading Account.
 Format of Trading Account
Dr. For the Year ending FY – 2020-21 Cr.
To opening stock XXXXX By Sales XXXXXX
To Purchases XXXXX Less: Sales Returns XXX XXXXX
Less: Returns XXXXX XXXXX By Closing Stock XXXXX
To carriage inwards XXXXX By Gross Loss c/d (if any) XXXXX
To Freight & Octroi XXXXX
To wages XXXX
To Fuel and Power XXXX
To Gas and Electricity XXX
To Stores consumes XX
To other Direct expenses XXXXX
To Gross Profit c/d XXXXX
Total Rs XXXXXX Total Rs XXXXXX
Prepare Trading Account from the following and Pass the closing entries.

Particulars Amount in Rs
Opening Stock 10,000
Purchases 81,000
Purchase Returns 1,000
Sales 1,22,000
Sales Returns 2,000
Carriage Inwards 6,000
Duty and Clearing Charges 4,000
Closing Stock 16,000
Prepare Trading Account for the year ending 31.03.2022 for the following ledger balances and show
the closing entries for the same.
Particulars Amount in Rs

Stock on 01.04.2021 5,000

Purchases 72,000
Sales 91,000
Return Inwards 1,000
Returns Outwards 2,000
Advertisement 500
Carriage Inwards 1,200
Selling Expenses 700
Wages 2,800
Office Salaries 3,000
Office Rent 400
Cash Discount 300
 Format of P/L Account
Dr. For the Year ending FY – 2020-21 Cr.
To administrative expn XXXXX By Gross profit b/d XXXXXX
To selling expn XXXX By other income XXXXX
To distribution expn XXXXX By Net Loss (if any) XXXXX
To Financial expn XXXXX (transferred to capital XXXXX
account)
To Provisions XXXXX
To Repairs & Maintenance XXXX
To depreciation XXXX
To Net Profit XX
(transferred to capital XXXXX
account)
Rs XXXXXX Rs XXXXXX