INTRODUCTION TO JOURNALS, LEDGER AND TRIAL BALANCE

 

UNIT STRUCTURE

1. Learning Objectives
2. Introduction
3. Meaning Books of Account
4. Meaning of Journal
5. Journalising
6. Meaning of Ledger
7. Ledger Posting
8. Balancing Of an Account
9. Meaning of Trial Balance
10. Preparation of Trial Balance
11. Errors Detected Through Trial Balance
12. Let Us Sum Up
13. Answers to Check Your Progress
14. Possible Questions

LEARNING OBJECTIVES

 
  After going through this unit you will be able to :
    Explain the meaning of Books of Account
Explain the meaning of ‘Journals’
Journalise the transactions
Explain the meaning of ‘Ledger’
    Prepare ledger

INTRODUCTION


In the earlier unit, we have discussed about account and the rules of debit and credit. We have discussed the double entry system of book- keeping. In this unit, we are going to discuss the steps of recording business transactions which starts with journal, then posting of transactions into ledger and preparation of Trial Balance from the ledger accounts.

 
 

Meaning of Books of Accounts


The book, which contains accounts, is known as the Books of Accounts. In other words, it means the khata or books in which the businessman keeps the records of business transactions. Recording of transactions in books of account is a process of entering the transactions in the proper books of accounts in a systematic manner. It means putting into black and white the transaction that takes place in course of business activities.

Normally transactions are recorded in two sets of books step by step. Transactions are first recorded in Journal, which is also known as ‘book of original entry’ or ‘Primary Books’.. The next step of recording of transactions is in Ledger, which is also known as ‘book of final entry’ or ‘Secondary Books’. These Books of accounts are specially printed and ruled books where the accounts of a firm can be written up.




Meaning of Journal


The word ‘Journal’ has been derived from the French word ‘JOUR’ means daily records. Journal is a book of original entry in which transactions are recorded as and when they occur in chronological order (in order of date) from source documents. Recording in journal is made showing the accounts to be debited and credited in a systematic manner. Thus, the journal provides a date-wise record of all the transactions with details of the accounts and amounts debited and credited for each transaction with a short explanation, which is known as narration.

Firms having limited number of transactions record those in journal and from there post these to the concerned ledger accounts. Firms having large number of transactions, maintain some special purpose journals such as, Purchase Book, Sales Books, Returns books, Bills Book, Cash Book, Journal proper etc.

Format of Journal:
The following is the format of Journal.
Format of Journal

Date

Particulars

L.F

Amount

Debit

Credit

Rs.

Rs.

 

(i)

(ii)

(iii)

(iv)

 

 

 

 


The format of Journal is sub-divided into five columns. These five columns are (i) Date (ii) Particulars (iii) Ledger Folio (L/F) (iv) Debit amount and Credit amount.

            Ledger Folio (L.F): Journal is the original record of the business transactions. All entries from the journal are posted in the ledger accounts. The page number or folio number of the ledger account where the posting has been made from the journal is recorded in the L.F column of the Journal. Each entry in the journal must be explained in brief. This brief explanation of the entry is called Narration.  Thus, Narration gives a brief explanation of the transaction for which the entry has been passed is given. It enables the persons going through the journal entry to have an idea about the transaction.
 

Journalising


Journalising is the process of recording the aspects of the transactions in Journal. In other words, recording of entries in the ‘journal’ is known as journalising.

Process of Journalising:   
The process of journalising means the steps to be followed for ascertaining the account heads to be debited/credited for a particular transaction. There are three steps involved in the process of journalising  a transaction.
Step 1: Identification of accounts or ‘account heads’ affected by the transaction.
Step 2: Classification of accounts or accounts heads.
Step 3: Application of Rules for Debit and Credit

Types of journal Entries:  
Entries recorded in the journal may be of two types.

  1. Simple Journal Entry and
  2. Compound Journal Entry

Simple Journal Entry:
When a transaction affects only one aspect/account in the debit and one aspect/account in the credit. It is known as Simple Journal Entry.

Compound Journal Entry
When a transaction affects more than two accounts at a time – one or more accounts being debited/ one or more accounts being credited, such entry is known as Compound Journal Entry.


CHECK YOUR PROGRESS



Explain the meaning of Journal.

 

 

Meaning of Ledger


Although Journal is chronological record of all business transactions, yet it cannot provide all information regarding a particular account at one place. The journal cannot show the net effect of various transactions affecting a particular person, assets, revenue and expense. For example, if a trader wants to know the amount due to a particular supplier or the amount due from a particular customer, he will have to go through the whole journal. It would be a tedious and time consuming process. To overcome this difficulty, another book of account, in addition to Journal/special purpose books, is maintained. This book is called ‘Ledger’.

Ledger is a book of account which contains a condensed and classified record of all transactions of the business posted from the journal. It is also called the book of final entry. In other words, the book, which contains accounts, is known as the ledger, also called the Principal Book. Ledger provides necessary information regarding various accounts. Personal accounts in ledger show how much money firm owes to the creditors and the amount it can recover from its debtors. The real accounts show the value of properties and also the value of stock. Nominal accounts reflect the sources of income and also the amount spent on various items.

In accounting all transactions are ultimately recorded in the ledger. In this book, separate accounts are opened for each ‘account head’ and all transactions relating to a particular ‘account head’ will be posted in the concerned account. An account for each person, each type of revenue, expense, assets and liability is opened in the ledger. For example, all transactions relating to a particular supplier; say Vivek will be posted to the account of Vivek. This helps in ascertaining the amount due to Vivek. 

           
Ledger is generally maintained in the form of a bound register. First few pages of the ledger has ordinary horizontal ruling for indexing. Remaining pages area ruled like an account and is consecutively numbered. The index pages are used for writing the names of accounts and the Folio No. (Page No.) where a particular account has been opened for easy location. The ledger may also be maintained in loose-leaf form instead of one bound book

 

Ledger is the ‘King of all the books of accounts’
Ledger is called the king of all the books of account, because it is the book which alone can exhibit the position of each ‘account head’ in a convenient form. It can supply all the useful information such as the net result of various transactions involving an asset, a liability, capital, revenue and an expense.

Ledger is the ultimate destination of all transactions because posting is made from the journal to the ledger. The information available in the ledger in classified and summarised form also facilitates the preparation of a Trading and Profit and Loss Account and a Balance Sheet. Thus, Ledger is called the King of all books because no other book of account can supply all the information like ledger.  

Utility/Importance/ Advantages:
The utility/importance of ‘Ledger’ can be summarised as follows:
(a) Consideration of Scattered Information: The ledger brings out the scattered information from the ‘Journal’. It shows the condensed information under each account head.

(b) Full information at a glance: As the ledger records both the debit and credit aspects in two different sides, the complete position of an account can be ascertained at a glance.

(c) Balance: At the end of a specified period, the net effect of transactions on a particular ‘account head’ can be ascertained by finding out the balance of that account. For example, how much is due from a customer or how much is payable to a creditor or what is the total amount of purchases or what has been the expenditure on different heads? All these information can be ascertained by balancing the accounts appearing in the ledger.

(d) Trial Balance: As both the aspects are recorded, the net debit effect and the net credit on the accounts must be equal on a particular date. This is verified by preparing a statement called Trial Balance. This is possible only if the ledger accounts are maintained. 

  (e) Preparation of final accounts: Ledger is the ‘store-house’ of all information relating to the transactions. It facilitates the preparation of a ‘Profit and Loss Account’ from the balances of revenue and expenses accounts. It also, facilitates the preparation of a ‘Balance Sheet’ from the balances of assets, liabilities and capital accounts.

Purpose of Ledger:
A businessman requires various information to ascertain the net results, financial position and progress of the business. Ledger can provide various information, which are given below.
(a) Information regarding Debtors: A trader can know the amount of money receivable from various customers and others who are known as debtors.
(b)  Information regarding Creditors: A trader can know the amount of money payable to various suppliers and others who are known as creditors.
(c) Information regarding Purchases and Sales: The total purchase of goods and the total sale of goods during a specific period can be known by preparing Purchase A/c and Sales A/c.
(d) Information regarding Revenue and Expenses: The amount of revenue earned from different sources and the amount of expenses incurred on different accounts heads for a particular period may be known from the ledger.
(e) Information regarding Assets and Liabilities: The amount of various types of assets such as Land, Building, Machinery, cash in hand, cash at bank, etc. and the amount of various liabilities can be obtained from ledger.
Sub-divisions of Ledger:
Ledgers may be sub-divided in the following manner:

  1. Personal Ledger

(i)         Debtors’ ledger or Sales Ledger and
(ii)        Creditors’ ledger or Bought Ledger.

  1. General or Nominal Ledger.

These are explained below:
A. Personal Ledger: The ledger which contains the accounts of persons, firms or organisations to whom goods are sold on credit or from which goods are bought on credit, is known as personal ledger. Generally personal ledgers are sub-divided into

(i) Debtors’ ledger or Sales Ledger and
(ii) Creditors’ ledger or Bought Ledger.

(i) Debtor’ ledger or Sales ledger: In this ledger, the accounts of all Debtors for goods sold are maintained. Posting is made from Sales Day Book, Purchase Returns Book, Cash Book, Bills Receivable Book and Journal Proper for the transactions affecting the accounts of Debtors.

(ii) Creditors’ Ledger or Bought Ledger: In this ledger, the accounts of all Creditors for goods purchased are maintained. Posting is made from Purchases Day Book, Purchase Returns Book, Cash Book, Bill Payment Book and Journal proper for the transactions affecting the accounts of Creditors.

(B) General Ledger: This ledger contains all accounts other than the accounts of Debtors and Creditors for goods. All accounts falling in the category of Assets, Liabilities (except debtors and creditors for goods), Capital, Revenue and Expense are maintained in this proper ledger. For example, if a machine is sold to Ram on credit, his account will appear in General Ledger; again, if goods are sold to him on credit, his account will appear in the Debtors’ Ledger. General Ledger is also known as Impersonal Ledger or Nominal Ledger.

Distinction between Journal and Ledger:
Following are the distinctions between a Journal and a Ledger.  

Sl
No.

Points of Distinction

Journal

Ledger

(i)

Nature

Journal is a book of primary entry

Ledger is a book of final entry.

(ii)

Basis of Recording

In Journal, transactions are recorded on the basis of voucher

Here transaction are recorded from the journal

(iii)

Manner of Recording

Here transactions are recorded in order of happening i.e. date wise

Here transactions are recorded on the basis of ‘account heads’

(iv)

Narration

Every entry in the journal is followed by a narration

Posting in the Ledger is not followed by any narration

(v)

Forma of Information

It provides information in scattered form

It provides information in a summarised and classified form



Format of a Ledger Account:
There are two types of forms for writing up Ledger Accounts namely
(a) Horizontal form and (b) Vertical or ‘T’ form. These are discussed below.
(a) Horizontal Ledger Account is ruled out as follows:  

 

“AB & Co” Account

 

Date

 

Particulars

 

J.
F

 

Debit
Amount (Rs.)

 

Credit
Amount (Rs.)

 

Debit
Or
Credit

 

Balance
(Rs.)



In this form of ledger, balance is ascertained after every transaction. This method is generally used in bank. Where the accounts are maintained in computers through the use of accounting software like Tally, accounts are also prepared in this from.
(b) A vertical or ‘T’ shaped form is ruled as under:-

“AB & Co” Account
Dr.                                                                                           Cr.

 

Date

Particulars

J.
F.

Amount
(Rs.)

Date

Particulars

J.
F.

Amount
(Rs.)

1

2

3

4

1

2

3

4



J.F (Journal Folio): In this column, the page number of the Journal where the transaction was originally recorded is mentioned. It helps in locating the entry in the Journal. Again, in Journal the page number of the Ledger where the account appears is written in the Ledger Folio column.

Features of Ledger accounts

In ‘T’ shaped form of writing up a ledger account, balance is ascertained periodically. In this book ‘T’ shaped form of Ledger Account has been used. Such Ledger Account has the following features:

(a) Two sides: A Ledger Account has two sides, namely Left hand and Right hand side. Left hand side is called the Debit side while the right hand side is called the Credit side.

(b) Recording of two aspects: Posting is made on the debit side of the ledger account which has been debited in the journal and the account which has been credited in the journal is posted on the credit side of the ledger account

(c) Balancing: Each account in the ledger is balanced independently. This is done by ascertaining the difference between the total of the Debit side and total of the Credit side.

Closing and Opening Balance
The balances of account ascertained at the end of a particular period are known as closing balances. These balances become the opening balances in the next period.

CHECK YOUR PROGRESS



What is the function of a ledger account?


Ledger Posting


Ledger posting means making entries of the transactions in the ledger books from the journals. Posting is a process of transferring debit and credit aspects of the entries appearing in the journal and other books of original entry to the debit and credit sides of the relevant accounts in the ledger. Postings are made using the word ‘To’ and ‘By’ as a prefix. For debit side entry ‘To’ prefix is used and for credit side entry ‘By’ prefix is used. The aim of posting is to make a classified and summarised record of all business transactions under appropriate account heads.

Rules generally followed while posting the transactions in the Ledger:
The following basic rules are to be followed while posting the transactions in the ledger:
(a) Separate accounts should be opened in the ledger for posting the different transactions recorded in the journal.
(b) All the transactions pertaining to one account head should be posted to that account.
(c) Two aspects of the business transaction namely – debit and credit aspects – should be posted on the debit side and credit side of the account respectively.

Basic points regarding posting:  
Basic points to be kept in mind before posting are:
1. Opening of separate accounts: Separate accounts should be opened for different ‘account heads’ in the ledger for posting the different transactions recorded in the journal. For example: Cash A/c, salary A/c, purchases A/c etc.  

2. One account for each kind of transactions: One account should be opened for each kind of transaction. Transactions taking place during an accounting period relating to that particular account should be posted to that account only. If more than one account is opened for one kind of transactions, the object of summarisation of transactions of similar nature will not be achieved. For example, it may be found that in the journal, Cash A/c has been debited during  a week, say on six different dates and the same account has been credited on four different dates. For recording in Cash A/c, only one Cash A/c will be opened for transactions taking place on all the days and posting of all entry relating to Cash A/c will be made in that account only. 

 

Methods of Posting:
There are three methods of posting from Journal to Ledger:

a. Entrywise posting: Posting of each journal entry in the affected ‘account heads’ may be made before proceeding to the next entry.

b. Account headwise posting: Posting may be made ‘account head’ wise i.e. posting of all Debits and Credits relating to one particular account head may be made before taking up another account head.

c. Pagewise posting: Posing may be made in all account heads appearing in one particular page of the journal before taking up the next page.

Procedure for posting into an account:
(a) Which has been debited in the journal-

Step 1: Concerned account in the ledger should be located. If no     account appears in the ledger for that account head, a new    account should be opened and the name of the new account  head along with the Folio No. should be recorded in the index   page.   
Step 2: In the ‘Date column’ on the debit side, date of the transaction should be recorded.
Step 3: In the ‘Particulars column’ on the debit side, the name of the ‘account head’ credited in the journal, should be recorded as:
“To ………… (name of the account credited)…….”

Step 4: In the ‘J.F column’ on the debit side, the Folio (page) number of the Journal where the transaction has been originally recorded should be entered. Also the Folio

(page) number of the ledger in which the concerned account appears, should be entered in the ‘Ledger folio column’ of the Journal for cross reference.
Step 5: In the ‘Amount column’ on the debit side, the amount as recorded in the journal against the account where the posting  has been made should be entered. 

(b) Which has been credited in the journal? - 
Step 1: Concerned account in the ledger should be located. If no  account appears in the ledger for that account head, a new account should be opened and the name of the new account    head along with the Folio No. should be recorded in the index page.   

Step 2: In the ‘Date column’ on the Credit side, the date of the transaction should be recorded.

Step 3: In the ‘Particular column’ on the credit side, the name of the ‘account head’ debited on the journal, should be recorded as:  
“By …………… (name of the account credited) ……”

Step 4: In the ‘J.F. column’ on the credit side, the Folio (page) number of the Journal where the transaction has been originally recorded should be entered’. Also the Folio (page) number of the ledger in which the concerned account appears, should be entered in the ‘Ledger folio column’ of the Journal for cross reference.
Step 5: In the ‘Amount column’ on the credit side, the amount as     recorded in the journal against the account where the posting  has been made should be entered.
Note: When the debit aspect of a transaction entered in the journal is posted in the ledger, only the debit side of that account is affected; when the credit aspect of a transaction entered in the journal is posted in the ledger, only credit side of that account is affected. In order to have a complete record of each transaction, both the aspects will have to be posted.
Posting of simple Journal Entry:

Illustration:
On 1st January 2008, Srinath started business with a capital Rs. 18,000

Journal of M/s Srinath

Date

Particulars

L.
F.

Dr.
Amount
(Rs.)

Cr.
Amount (Rs.)

2008
Jan1

 

Cash A/c             Dr.
To Capital A/c
(Being cash brought in as capital)

 

18,000

 

18,000

In the above entry, the accounts affected are Cash A/c and Capital A/c. Therefore, in the ledger, Cash A/c and Capital A/c will be opened. Posting in both the accounts are shown as under.  
Posting in cash account:    
M/s Srinath
Ledger
Cash Account
Dr.                                                                                                     Cr

Date

Particulars

L
F

Amount
Rs.

Date

Particulars

L
F

Amount
Rs.

2008
Jan1

 

To Capital A/c

 

18,000

 

 

 

 

As the Cash A/c has been debited in the Journal, Cash account will also be debited in the Ledger. This means that posting will be made in the debit side of the Cash A/c. On the debit side, in the ‘date column’, date will be written. In the Journal i.e. 2008, Jan. 1, the date of the transaction, will be written. In ‘particulars column’, the account which has caused an effect in the Cash A/c will be written. As per the entry in the journal, Capital A/c will be written in the ‘particulars column’ with ‘To’ as prefix. In the ‘J.F. column’, the Folio number (page number) where the entry appears in journal will be written. In the ‘amount column’ in the ledger, the figure stated against Cash account in the journal, as shown above, will be entered.   

Posting in the capital account:
M/s Srinath
Ledger
Capital Account
Dr.                                                                                                      Cr.

Date

Particulars

L
F

Amount
Rs.

Date

Particulars

L
F

Amount
Rs.

 

 

 

 

2008
Jan 1

By Cash A/c

 

18,000

As the Capital A/c has been credited in the journal, Capital A/c will also be credited in the Ledger. This means that posting will be made on the credit side of the Capital A/c. On the credit side, in the ‘date column’, date as written in the Journal i.e. 2004, Jan. 1, the date of the transaction, will be written. In the ‘particulars column’, the account which has caused an effect in the Capital A/c will be written. As per the entry in the journal, Cash A/c has caused an effect in the Capital A/c. Therefore, Cash A/c will be written in the ‘particulars column’ with a prefix ‘By’. In the ‘J.F column’, the Folio number (page number) where, the entry appears in journal will be written. In the ‘amount column’ in the ledger, the figure stated against Capital A/C in the journal, as shown above, will be entered.

Illustration: Purchase of furniture from Modern Furnishers Rs.12,000 on January 1,2008
Journal Entry:
Furniture A/C Dr.                                            12,000
To Modern Furnishers A/C Rs.                       12,000
(Being furniture purchased)
The amount of Rs. 12,000 will be debited to the Furniture A/C and credited to Modern furnishers A/C in the following way –

Ledger
Furniture Account
Dr.                                                                                                     Cr

Date

Particulars

L
F

Amount
Rs.

Date

Particulars

L
F

Amount
Rs.

2008
Jan1

 

To Modern
Furnishers

 

12,000

 

 

 

 

Ledger
Modern Furnishers Account
Dr.                                                                                                     Cr

Date

Particulars

L
F

Amount
Rs.

Date

Particulars

L
F

Amount
Rs.

 

 

 

 

2008
Jan1

By Furniture Account

 

12,000


Balancing of an Account



The ‘balance’ is a term used in accounting which means the difference between the two sides of an account, or the total of the account containing only debits and only credits. Balancing of an account is an important aspect of accounting. It implies the process of ascertaining the net difference of an account after totalling of both sides – viz. debit side and credit side.

In simple words, balancing means the insertion (writing) of the difference between the two totals, debit side total and credit side total, in the smaller (smaller total) side, so that the (grand) totals of the two sides become equal.

Balancing is done periodically, i.e. weekly, monthly, quarterly, half-yearly or yearly, depending on the requirements of the business.

A computerised system will usually print the balance of the account after each transaction, but in a manual system we must calculate the balance. The balance of an account shows the position of an account on a particular day. Such balance of an account may be ‘Debit balance’ or ‘Credit balance’.

  1. The total of both the sides of an account may be equal. In  that case, the account does not show any balance.
  2. The total of the debit side may be more than the total of the credit side. In that case, the account shows debit    balance
  3. The total of the credit side may be more than the total of the debit side. In that case the account shows credit   balance.

Nature of Ledger Account Balances:
The nature of balances of different classes of ledger accounts will be as under.

1. Assets Accounts: Assets account will always show debit balance. For example, Cash Account will always show debit balance, because all cash receipts are shown on the debit side and all cash payments are shown on the credit side. Since cash payments cannot be more than the receipts, cash account will show the debit balance. When cash receipts are equal to the cash payments then the cash account will not show any balance. Thus, it never shows credit balance.

2. Liability Account: Liability accounts will be always show credit balance. For example Creditors Account, Bills Payable Account, Outstanding expense Account, Loan from Gauri Account  etc.

3. Capital Account: Capital account will always show credit balance.

4. Revenue Accounts: Revenue accounts will always show credit balance. For example, Sales Account, Commission Received Account etc.

5. Expense Account: Expense account will always show debit balance. For example, Sales Account, Commission Allowed Account, wags Account etc.

6. Drawing Account: Drawings account will always show debit balance.

CHECK YOUR PROGRESS



What is the object of balancing an account?



Meaning of Trial Balance


After posting the accounts in the ledger and balancing the same, a statement is prepared to show separately the debit and credit balances. Such a statement is known as Trial Balance.

The Trial Balance is a statement which shows the closing balances, debit balances as well as credit balances of all ledger accounts. This statement is always prepared in ‘T’ Shape. In the left hand side, debit balances and in the right hand side, credit balances of ledger accounts are written and both sides are totalled. The totals of the both the sides, should always be equal. This equality in the totals of debit side and credit side ensures the completion of double entry system of  book-keeping. It also ensures the arithmetical accuracy of ledger accounts.

Objects of Trial Balance:
The following are the objectives of preparing the Trial Balance.

1. Ascertainment of arithmetical accuracy of the ledger accounts: The Trial Balance is a test of arithmetical accuracy of ledger accounts. If the totals of two sides of Trial Balance i.e. debit side and credit side are equal, it ensures the arithmetical accuracy of the ledger accounts. It means that there is no mistake in totalling the debit side and credit side of all the ledger accounts.

2. Help in the preparation of Final Accounts: Trial Balance facilitates the preparation of Trading Account, Profit and loss Account and the Balance Sheet. Preparation of these financial statements is very clumsy. If the ledger accounts balances are collected and grouped under the two headings of Debit and Credit in the Trial Balance, it becomes easier to prepare the final accounts.

3. Providing summary information of Financial result and position: A close and intelligent observation of the Trial Balance gives us some information of the profit or loss and the financial position of the firm.    

4. Help in locating errors: Some of the errors in the books of accounts can be located with the help of the Trial Balance. If the Trial Balance does not agree, an intelligent scrutiny to the items and their amounts may reveal the cause of disagreement of the Trial Balance. Thus Trial Balance discloses some of the errors in the books of accounts.

5. Completion of Double Entry: Trial Balance, if it agrees, i.e. the two sides are equal, proves the completion of double entry.


 

Preparation of Trial Balance



There are two method of constructing a Trial Balance:
(a) Balance Method and (b) Total of Accounts Method:
(a) Balance Method: All the closing balances of all the ledgers- personal ledgers, General Ledgers and Cash Book, Bank Book, Petty Cash Book are taken into account to prepare the Trial Balance by Balance Method. There are two types of formats to prepare Trial Balance by Balance Method.

  1. Horizontal Format
  2. ‘T’ shape Format

Step of construction:

  1. Close the account in ledgers and cash books.
  2. Balance all the accounts.
  3. Write all the Debit balances on a sheet of  paper.
  4. Write all the Credit balances on a separate sheet of paper.
  5. Now under Horizontal Format, the following format is used to prepare Trial Balance.

 

Trial Balance
As on 31-03-1995

Heads of Accounts

L.F.

Debit Balance (Rs.)

Credit Balance (Rs.)

 

 

 

 

 

Total:

 

 

 



6. Write (a) names of all accounts having a closing balance in the Heads of Account column.  (b) Ledger Folio number of the ledger where the particular account is balanced, in the L.F column. (c) the amount of debit balance in Debit Balance column and (d) the amount of credit balance in credit Balance column.

7. Add the debit Balance column and credit Balance column and write these two totals at the bottom of the two columns.

8. See that totals of both debit balance and credit balance column agree or not.
If we want to prepare the Trial Balance under ‘T’ shape format, then the following format should be used but, the procedure of prepare it (i.e. steps of preparation) is the same.

‘T’ shape Trial Balance:
Trial Balance as on 31-03-2007

Heads of Accounts

L.F.

Debit Balance

Heads of Accounts

L.F.

Credit Balance

 Rs.

 Rs

 

 

 

 

 

 

 

 



            You should remember the following Debit balances and Credit balances: 

    • All real accounts show debit balance
    • All liabilities show credit balance
    • Capital generally shows credit balance
    • Drawings show debit balance
    • Expenses show debit balance
    • Incomes show  credit balance
    • Purchases A/c shows debit balance
    • Purchases return (Returns outward) shows credit balance
    • Sales A/c shows credit balance
    • Sales Return (Return Inward) shows debit balance
    • Cash book without bank column never shows a credit balance
    • Bills Receivable A/c shows a debit balance
    • Bills payable A/c shows a credit balance
    • Debtors A/c shows debit balance
    • creditors A/c shows credit balance
    • All losses show debit balances.

    Illustration:
    From the following balances prepare a Tri al Balance as on 31-03-2008

    Items                                                        Rs.

    1. Capital                                                 50,000            
    2. Cash                                                    46,700
    3. Furniture                                              11,000
    4. Computer                                            42,000
    5. Insurance                                              1,800
    6. Purchases                                           36,000
    7. Debtors                                               12,000
    8. Creditors                                             16,000
    9. Drawings                                               2,000
    10. Sales                                                   86,000
    11. Salary                                                    1,500
    12. Interest received                                   1,000

     Solution:

     

    Trial Balance as on 31-12-94

    Heads of Accounts

    L.F.

    Debit Balance
    Rs.

     

    Heads of Accounts

    L.F.

    Credit
    Balance
    Rs.

    Cash

    Furniture 

    Computer

    Insurance

    Purchases

    Debtors

    Drawings

    Salary

     

    46,700

    11,000

    42,000

    1,800

    36,000

    12,000

    2,000

    1,500

    Creditors

    Sales

    Capital

    Interest
    received

     

     

    16,000

    86,000

    50,000

    1,000

     

     

    Total:

     

    153,000

     

     

    153,000


Errors detected through Trial Balance


If a Trial Balance does not agree it means there is something wrong. When a Trial Balance does not agree, it indicates that there are some errors in the process of book-keeping work, i.e. Journalising and ledger posting. The errors, due to which he Trial Balance does not agree, may be of following types.

  • Omission to post an amount into ledger from the journal
  • Debit entry (entries) is (are) not posted at all in the ledger.
  • Credit entry (entries) is (are) not posted at all in ledger.
  • Either Debit or Credit entries are posted twice while the corresponding credit or debit entries are not posted at all.
  • Wrong amount of debit is posted while the credit is posted correctly or vice versa.
  • An amount is posted on the wrong side of a ledger account.
  • Wrong totalling of subsidiary books.
  • Wrong totalling of ledger accounts.
  • Wrong balancing in the ledger accounts
  • The balance is wrongly written in the Trial Balance
  • Wrong totalling in the Trial Balance
  • Wrong totalling in the cash book
  • Wrong balancing in the cash book
  • Wrong totalling in the petty cash book
  • Wrong posting from cash book and petty cash book to the ledger accounts
  • Difference in the amount of a transaction in the Day Books and corresponding personal ledger accounts.

Why does the Trial Balance agree?
In the double entry system of book-keeping, every debit has its corresponding credit of equal value. Therefore, total of debits always equals to the total of credits. In the process of journalising and ledger posting, this principle is constantly followed. So, the total of debit side is equal to the total of credit side of a Trial Balance.   

 

Location of Errors in Trial Balance
When the Trial Balance does not agree, it means that there is a mistake. There may be more than one mistake also. So, the next step is to locate the errors or errors. To locate the errors, the following steps should be followed-

  1. Check the additions of debit and credit sides of the Trial Balance. 

2. Check if there is any ‘transportation error’ or ‘slide error’. A transportation error is an error where the digits of an amount are misplaced. For example, an amount of Rs. 3.273 is written as Rs. 3,237. A ‘slide error’ is an error where the decimal is misplaced. For example, Rs. 125.50 is written as Rs. 12.55. To locate errors, the difference is to be divided by 9. If the difference in the Trial Balance is fully divisible by 9, it may be a case of transportation or slide error.
3. Compare the closing balance of each ledger account with the amount in Trial Balance.
4. Check the opening balance of each ledger account with the amount in the previous year’s balance Sheet.
5. Check the balance brought down or balance carried forward to the next page of each ledger account.
6. Check the totalling and balance carried down in each ledger account.
7. Divide the difference in Trial Balance by 2 and if this new figure is found in the Trial Balance, it may be a case that the amount is written in the wrong side.
8. Check the totalling in Day Books, Purchase Day Book and Sales Day Book.
9. Check the posting from the subsidiary books including the Day Books, to the ledger accounts.     

 

Measure for undetected error:
After observing the above procedures to detect the reason for disagreement in the Trial Balance, if the error is not located, then the difference in the Trial Balance is transferred temporarily to an account known as ‘Suspense Account’.

Suspense Account: Suspense account is a temporary device to make the Trial Balance agree when its two sides shows two different figures due to some undetected error. The amount by which the Trial Balance does not agree is the amount of suspense account. This is the amount of suspense in the deficit side of the Trial Balance. If debit side is heavier than credit side, the amount of difference is written on the credit side, under the heading ‘suspense account’. On the other hand, if credit side is heavier than the debit side, the amount of difference is written on the debit side under the heading ‘suspense account’.

Suspense account is purely a temporary device to make equal the debit and credit sides of Trial Balance. It is neither a real account, nor a personal account, nor a nominal account. It only represents the amount of error. So, effort should be made to wipe out or cancel the suspense account as early as possible.

Generally, during the course of preparation of financial statements, viz. Trading account, Profit and Loss Account and Balance Sheet, errors are located and they are then corrected through suspense account. Errors may also be corrected in the process of audit work of accounts throng suspense account. When all the errors have been located and detected, the suspense accounts will automatically stand balanced or closed by means of rectifying entries in the General Purpose Journal. If there remains any error undetected and unrectified, then there remains some balance in suspense account. This balance is shown in the Balance Sheet. Debit balance is shown on the asset side and the credit balance is shown on the liability side of the Balance Sheet. On the subsequent detection and rectification of errors, suspense account is closed.  
Errors which do not affect Trial Balance or, Errors not disclosed by Trial Balance. 

           
If a Trial Balance does not agree, i.e. debit side does not tally with the credit side, we know that there are some errors committed either in journalising or in ledger posting or in transferring the ledger balances to Trial Balance, or in balancing or totalling the accounts. But there are some errors which do not affect the Trial Balance. Broadly these errors can be classified in two categories. – (a) Errors of Omission and (b) Errors of Commission.

(a) Errors of Omission – Such errors can be committed while recording the transactions in the Journal or posting to the ledger. An omission can be a complete or partial one.
(i) Complete omission: If a transaction is completely forgotten to record in any of the books, it is a case of complete omission. Complete omission, thus, means that the transaction has not been entered in any of books, neither in Journal, nor in any ledger accounts. As there is no entry at all, so there is no question of affecting either debit or credit. Thus, the Trial Balance is not affected and the error can not be disclosed by it.

(ii) Partial Omission: If a transaction has been recorded in Journal but not posted in the ledger accounts at all, it is a partial omission. This error, too, does not affect the Trial Balance, as there has been no entry in the ledger accounts.

Examples: (i) Complete omission – Credit purchase of goods from Sarma for Rs. 5,000 has not been entered in purchase Day Book as well as in the ledgers. Purchase A/c and Sarma A/c.

(ii) Partial omission – Credit sales of goods of Rs. 2,000 to Amar has been recorded in the sales Day Book but, forgotten to post in the ledger accounts -  Sales A/c and Amar A/c.

(b) Errors of Commission: Such errors can again be divided in to three types.

(i) Errors of Principle:  Errors of principle are committed when there is wrong application of accounting principles, e.g. improper distinction between capital and revenue items. If an item of nominal account is treated as real account, it is an error of principle.  

Example: 1) Purchase of goods (merchandise) of Rs. 3,000 is entered in the ledger account of furniture, it is an error of principle.

2. Repairs of building is charged to Building account instead of Repairs account.(ii) Comparative Errors:  When two or more errors are committed in such a manner that the debit is fully compensated by the credit effect, resulting the net effect of these errors to nil. So one error neutralises the other. As the net effect on debit

and credit is nil, so such errors can not affect the Trial Balance and are not disclosed by it.

Illustration:
Transaction 1: Salary paid Rs. 450 is posted in salary account as Rs. 540, thus account is over debit by Rs. 90.
Transaction 2: Interest received Rs. 230 is posted in interest Received A/c as Rs. 320, thereby an over credit of Rs. 90. 
The combine effects of these two errors are compensated by one another. So, it can not affect the agreement of Trial Balance.
(iii) Errors of posting: These are committed when ledger postings from journals are made in the wrong head of accounts.

Illustration:
1. Payment of Rent of Rs. 1,000 is posted in the debit side of interest paid account.
2. Cash received from Ram Rs. 5,000 is posted in Raman’s account.

 (iv) Duplicating errors: It is an error which arises when a transaction is recorded twice in journal or posted twice in ledger.

 



CHECK YOUR PROGRESS



What are the various types errors not detected through a Trial Balance?







LET US SUM UP


In this unit we have discussed the following points –

  • Journal is the primary book to record business transactions
  • Steps involved in the process of journalising
  • Ledger contains all the accounts and known as principal book
  • Various advantages and sub- division of ledger
  • Differences between journal and ledger
  • Transferring of journal into ledger, known as ledger posting
  • Basic points regarding ledger posting and balancing of accounts
  • Trial Balance is prepared on a particular date showing all ledger balances
  • Errors detected by Trial Balance
  • Errors not detected by Trial Balance

 

ANSWERS TO CHECK YOUR PROGRESS


Answers To Check Your Progress 1
Journal is a book of original entry in which transactions are recorded as and when they occur in chronological order (in order of date) from source documents.

Answers To Check Your Progress 2
Functions of ledger account are to provide:
(a) Information regarding Debtors: (b) Information regarding Creditors: (c) Information regarding Purchases and Sales: (d) Information regarding Revenue and Expenses: (e) Information regarding Assets and Liabilities.

Answers To Check Your Progress  3
The object of Balancing of account is to know periodical balance of an account.

 Answers To Check Your Progress 4
(a) Errors of Omission (i) Complete omission: (ii) Partial Omission:
(b) Errors of Commission:      (i) Errors of Principle (ii). Comparative Errors (iii) Errors of posting (iv) Duplicating errors:


POSSIBLE QUESTIONS


1.Describe different types of Books of Account.

2. What do you mean by Ledger? What are the main purposes of ledger?

3. What is Journalising? How is it done?

4. Journalise the following transactions and prepare relevant accounts in the ledger.

(i) Balances in the beginning
Cash – Rs. 5,000
Machinery – Rs. 50,000
Bank Loan – Rs. 1, 00,000
Creditors – Rs. 10,000
(ii) Purchase goods on credit from X Co. Rs. 15,000
(iii)Sale of goods for cash – Rs. 1,00,000
(iv) Salaries paid in Cash – Rs. 10,000
(v) Amount paid to X Co. – Rs. 10,000

5. Explain the objects of preparing Trial Balance.
6. What are the various types of Errors not disclosed by Trial Balance?