OMBC 103:

Management Accounting
Unit 3:
Unit Name : Mechanics of Accounting

Dr.Yogesh Kumar Jain-Professor

[email protected]
Topics in the Unit
Accounting Equation

Journal

Subsidiary books

Ledger Accounts & Trial Balance

Final Accounts

3
 • Accounting is a highly
technical subject. Many
Introduction rules, regulations and
procedures are to be followed
for correct recording of
business transactions.
• This unit deals with
accounting process, and
specific system to be followed
for recording transactions. It
takes you through four stages
of accounting cycle viz.
Journal, ledger, trial balance
and final accounts..

4
 • Accounting entries are recorded
by a system of debits and credits.
• As a rule, every accounting
transaction affects atleast two
accounts, one or more of which are
debited and the others credited in
such a way that sum of amounts
debited is equal to amounts credited.
This process of recording is called the
Definition journal entry.
• Ledger posting—is a process by
which a journal entry is
transferred to a ledger.

5
 OBJECTIVES

After studying this unit, you will be able to:

 Explain the significance of accounting equation
 Enter transactions in journal and subsidiary
books
 Prepare various ledger accounts
 Check whether transactions entered in journal
or ledger are correct by preparing trial balance
 Prepare final accounts i.e. Income statement
and Balance sheet

6
 • The modern-day accounting is based upon
the dual aspect concept, i.e.,
• Each transaction affects at least two
accounts in such a way that the basic
accounting equation,
• Assets = Capital + Liabilities
• is always true. The accounting system
based upon the dual aspect concept is
Accounting called double-entry bookkeeping system.

Equation

7
Sequence of Accounting

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‘ACCOUNTING PROCESS’

• Recording of
• Transactions >> Journal Entries

• Classification
• of Transactions >> Ledger Posting Accounts

• Summarization >> Balancing of Accounts

• Trial Balance

• Financial Statements >>

• Profit and Loss Statement
• Balance Sheet

9
‘ACCOUNTING PROCESS’

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‘Accounting Process’
• Recording: At this stage, the accounting transactions are
identified on the basis of the supporting documents
called vouchers. A voucher is an evidence of an
accounting transaction having taken place. The transaction
is analysed to decide which of the accounts are to be
affected and the amounts involved. The transaction is then
recorded by way of a journal entry. Journal entries are
recorded in a chronological order.
• Classification: The accounting entries recorded at the first
stage are then grouped under different heads called ledger
accounts. The purpose of this stage is to ensure that all
entries of similar nature are grouped together. It may be
noted that no new accounting entry is passed at this stage;
rather the journal entries recorded earlier only are classified
by way of ledger posting.

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‘Accounting Process’

• Summarization: When the enterprise wants to

ascertain the results for an accounting period, it
needs to first find the balance in each ledger
account. Once the balance in each account has
been ascertained, it is put in a statement called
trial balance to ensure that the equality of
debits and credits has been observed.
• Financial statements: At this stage, balances in
various accounts are arranged to prepare the
profit and loss account, and the balance sheet.
All accounts relating to income or gains and
losses or expenses are transferred to the
profit and loss account, whereas accounts
representing assets, capital and liabilities are12

arranged in the Balance Sheet

Recording -Journal entry

• Journal entry—all accounting

transactions are originally recorded by
way of journal entries in a chronological
order.
• Accounting entries are recorded by a
system of debits and credits. As a rule,
every accounting transaction affects
atleast two accounts, one or more of
which are debited and the others credited
in such a way that sum of amounts
debited is equal to amounts credited. This
process of recording is called the journal
13

entry.
Steps for Journal Entry

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Subsidiary Books
• Practically for every business there are large no. of transactions. It
is tedious and impractical to record all transactions in one journal.
• It is therefore essential to classify the transactions in a convenient
manner and record them in separate journals.
• This sub-division of journal is called subsidiary books

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Subsidiary Books
Name of subsidiary book Used to record
Sales Day Book Credit sales
Sales return or Returns inward Goods returned by customer
book
Purchase Day Book Credit purchases
Purchase return or Returns Goods returned to supplier
outward book
Bills Receivable (B/R) book Bills raised by co.and accepted by
customer
Bills Payable(B/P) book Bills raised by supplier and
accepted by co.
Cash book All cash receipts and cash
payments
Journal Proper Any transaction which can't be
Recorded in any of the above
books
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Advantages of subsidiary books:
• Accounting work can be divided amongst no. of clerks
• Particular person acquires efficiency and speed in handling
particular journal
• Time of accounting process is reduced
• Facilitates audit work as different auditors can check different
books

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 Meaning of cash book:

• In every company many transactions are in cash. Every day there

are large no. of cash receipts and cash payments. The book which
records all these cash transactions is called cash book
• It is a book of original entry because all cash transactions are
first recorded in this book and thereafter to various ledger
accounts
• It is also called as ledger or book of final entry as it is maintained
under double entry principle.
• It is thus a journalized ledger as it serves both as journal and
ledger.

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Types of cash book:

• Single column cash book: All cash and cheque receipts and
payments are entered in one and same column
• Double column cash book: Cash and Cheque receipts and
payments are entered in 2 different columns
• Triple column cash book: It has 3 columns on both debit and credit
side viz. discount, cash and bank

Side Column Transaction entered

Debit Discount Discount allowed to customers

Cash All cash receipts
Bank All cheque receipts
Credit Discount Discount received from suppliers
Cash All cash payments
Bank All cheque payments

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Format of cash book:

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Types of cash book:

• Petty cash book: Many small payments are to be made daily. If

all such payments are incorporated in general cash book it will be
bulky and complicated. In order to avoid this cash book is opened
which incorporates all these payments
• Petty expenses are classified into different heads of expenses and
separate column is provided for each of them.
• Periodically each column is totaled and debited to respective
expenses in ledger
• This cash book is prepared by petty cashier and hence maintained
by taking advance from chief cashier and credited by these
periodic totals.

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Recording:

• For this purpose, accounts are classified under three heads:

• 1. Real accounts: Accounts relating to assets owned by
the enterprise. For example—cash, machinery, land and
building, furniture and fixture, etc.
• 2. Personal accounts: Accounts relating to the persons—
both natural as well as legal—with whom the enterprise has
business transactions. They represent the amount
receivable or payable by the enterprise. For example,
capital account, loan from banks, receivables for goods sold
on credit, payables for goods and services bought on credit,
expenses outstanding, etc.
• 3. Nominal accounts: Accounts relating to incomes or
gains and losses or expenses. For example, sales, purchase
of goods, rent earned, interest earned, wages and salaries,
power and electricity charges, and audit fees, etc.
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23
Rules for Debits and Credits
Type of Accounts Rules

Real Account Debit what comes in

Credit what goes out

Personal Account Debit the receiver

Credit the giver

Nominal Account Debit all expenses/losses

Credit all incomes/gains

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Accounts & Statements

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Transaction Analysis
• Once an accounting transaction has taken place, the same is
analysed to pass the necessary journal entry. The following
questions need to be answered by the accountant:
• 1. Which accounts are getting affected?—two or more
accounts will need to be identified.
• 2. What is the nature of these accounts—real, personal or
nominal?
• 3. Which account or accounts are to be debited or credited
and by how much—in such a way that the total of debits is equal
to the total of credits?
• To illustrate: On 1st April 2017, an amount of ` 5,000 was paid to
the watchman in cash towards his salary.
• The transaction will be analysed and journalized as follows:
• 1. Accounts affected—Cash Account and Salary Account.
• 2. Type of accounts—Cash is an asset therefore the Cash Account
is a real account whereas Salary is an expenses and therefore the
Salary Account is a nominal account.
• 3. Debit or Credit—As cash is going out (real account) it will be
26
credited; salary is an expense (nominal account) it will get debited.
Both the accounts will be recorded at ` 5,000.
Transaction Analysis
• Date Particulars Dr.
Cr.
• 01-04-2017 Salary A/c ` 5,000
• To Cash A/c
• (Salary paid to watchman vide voucher no….) ` 5,000

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Transaction Analysis**
• Analyse the following transactions and pass the necessary journal
entries:
• 1. Paid rent to the landlord by cash: ` 60,000
• 2. Sold goods to Ramesh on credit: ` 100,000
• 3. Cash withdrawn from the bank: ` 35,000

• The transactions will be analysed as follows:

• 1. Rent Account and Cash Account are two accounts getting
affected. Rent is an expense (nominal account); Cash account
(real account) has decreased. Expenses are always debited
whereas real accounts are credited when decreased.
• The journal entry accordingly will be:
• Rent A/c Dr. ` 60,000
• To Cash A/c ` 60,000

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Transaction Analysis

• 2. Sales account (income) and Ramesh Account (personal)

will be affected. As income is increasing, Sales Account will
be credited whereas Ramesh is a receiver (he has received
goods) without paying for them so he will be debited. The
journal entry will be:
• Ramesh A/c Dr. ` 100,000
• To Sales A/c ` 100,000

• 3. Accounts affected are Cash Account (real) and Bank

Account (personal). Cash has come in, therefore will be
debited whereas bank is a giver so will be credited. The
journal entry will be:
• Cash A/c Dr. ` 35,000
• To Bank A/c ` 35,000

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• Journal entries
Journal refers to a primary book of accounts in which all transactions of
business are recorded.

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 Following are the Transaction of ABC Ltd .
Examples of 1. September 5 - Purchased Furniture for Cash Rs. 60,000.
2. September 10 - Purchased goods for Cash Rs. 75,000.
Journal Entries: 3. September 15 - Sold goods for 1,30,000 on cash.
4. September 20 - Rent paid in cash Rs. 4,000.
5. September 25 - Salary paid in cash Rs.12,000.

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

Sept 5 Furniture A/c Dr. 60,000
To, Cash A/c 60,000
(Being, Furniture purchased on Cash)

Sept 10 Purchase A/c Dr. 1,30,000

To, Cash A/c 1,30,000
(Being, Goods purchased on Cash)

Sept 15 Cash A/c Dr. 75,000

To, Sales A/c 75,000
(Being, Goods sold on Cash)

Sept 20 Rent A/c Dr. 4,000

To , Cash A/c 4,000
(Being, Rent paid on Cash)

Sept 25 Salary A/c Dr. 12,000

To, Cash A/c 12,000
(Being, Salaries paid in Cash)
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CLASSIFICATION
• Ledger posting—is a process by which a journal entry is
transferred to a ledger
• Journal entries as aforesaid are recorded in a chronological order,
i.e., as and when they occur. In an accounting period, a number of
transactions affecting the same head of account might take place.
On the basis of journal entries alone, it is not readily possible to
know all the transactions that might have affected a particular
account during an accounting period. Therefore, we need to
classify these transactions under suitable heads called ‘ledger
accounts’ or simply ‘accounts’.
• An account is a T-shaped statement in which the left-hand
side is called the debit side and the right-hand side is called the
credit side.
• For example, all the journal entries where Cash Account has been
debited will be shown on the left-hand (Debit) side of the Cash
Account and wherever cash has been credited will be shown on
the right-hand (Credit) side of Cash Account. So by looking at the
Cash Account, one can easily ascertain all the transactions
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affecting cash that have taken place in an accounting period. The
process of classification is called ‘ledger posting’. It may be noted
Ledger
• It is a principal book of accounts
• Every entry recorded in journal must be posted into respective
ledger accounts.
• An account is a T-shaped statement in which the left-hand side is
called the debit side and the right-hand side is called the credit
side
• For each asset, liability, income and expense separate A/C is
opened and book containing all such accounts is called as ledger.
• Posting:
• a. Open separate account
• b. When there is posting in Dr side of one account simultaneously
there must be entry in credit side of other account.
• c. Posting of difference account books

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 Format of Ledger

A ledger refers to book or register in which financial transactions are permanently

recorded.

Trial Balance:
Trial Balance refers to a list of closing balances of ledger accounts on a particular
date and constitutes the first step towards preparation of financial statements of an
organization.

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35
 Ledger**
• There are five different accounts to be opened—Rent Account,
Cash Account, Sales Account, Ramesh’s Account and Bank
Account. The entries will be posted a follows:
• Rent Account

• Dr.
Cr.
• Particulars (Amount in ` )
Particulars (Amount in ` )
• To Cash A/c 60,000
•
• Cash Account
• Dr.
Cr.
• Particulars (Amount in ` )
Particulars (Amount in ` )
• To Bank A/c 35,000
36
By Rent A/c 60,000
 Ledger**
• Sales Account
• Dr. Cr.
• Particulars (Amount in ` ) Particulars
(Amount in ` )
• By Ramesh
A/c 100,000
•
Ramesh’s Account
• Dr. Cr.
• Particulars (Amount in ` ) Particulars
(Amount in ` )
• To Sales A/c 100,000
•
• Bank Account
• Dr. Cr.
• Particulars (Amount in ` ) Particulars
(Amount in ` )
• By Cash
A/c 35,000 37
38
Ledger - EXAMPLE

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SUMMARIZATION

• Steps described above—recording and classification—are followed

for all accounting transactions throughout the accounting period.
• At the end of the accounting period, each of these ledger accounts
are summarized by ascertaining the balance in each account and
putting balance in a statement called the Trial Balance.
• Debit balance—excess of the total of debit side of an account
over credit side.
• Credit balance—excess of the total of credit side of an account
over debit side.

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 Format of Trial Balance

SR. NO PARTICULAR AMOUNT

Debit Credit
(RS) (RS)

TOTAL XXX XXX

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 Trial Balance-Example

• The Cash Account of Strong Bull Limited for the month of

December 2017 is given below. You are required to ascertain the
balance is cash account as on 31st December 2017.
• Cash Account
• Dr
Cr
Particulars Amt Particulars Amt
To Opening 103,000 By Stationery A/c 75,000
Balance By Salaries A/c 45,000
To Bank A/c 85,000 By Rent A/c 12,000
To Sales A/c 73,000 By Purchase A/c 63,500

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Trial Balance-Example

Particulars Amt Particulars Amt

To Opening 103,000 By Stationery A/c 75,00

Balance By Salaries A/c 45,000
To Bank A/c 85,000 By Rent A/c 12,000
To Sales A/c 73,000 By Purchase A/c 63,500

By Balance 133,000
Carried Down

261,000 261,000

The balancing figure in the Cash Account (` 133,000) is also

called the closing balance. In the next accounting period, the
same balance will appear on the debit side as the Opening
Balance or Balance brought down.
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 Trial balance

• Trial balance—T-shaped statement separately showing all the debit

and credit balances at the end of the accounting period
• The Trial Balance serves three basic purposes.
• 1. It ensures that the dual aspects concept has been properly
followed, i.e., for every debit there is an equal and corresponding
credit.
• 2. It gives an overview of balances in various ledger accounts.
• 3. It forms the basis for the next step, i.e., preparation of financial
statements.

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 Trial Balance-Format
Dr Trial Balance Cr
Amount Amount
Nominal Accounts Nominal Accounts
(Expenses) (Income Interest earned
Rent Sales
Material consumed Profit on investments
Salary Other incomes
Interest
Other expenses
Personal Accounts Personal Accounts
(Receivables) (Payables)
Loans and advances Capital account
given Loans taken
Trade Trade
Receivables/Debtors Payables/Creditors
Expenses paid in Outstanding expenses
advance Income received in
Bank Account advance

Real Accounts
(Assets) Trade
Payables
Cash
Land and building
Plant and machinery
Furniture and fittings
Other assets
Total Total
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 Trial Balance-Illustration
• _____________ started a new business on 1st April 2017. For the first quarter,
his transactions are listed below.
• 1. Started business with ` 1,000,000 capital in cash.
• 2. Opened a bank account and deposited ` 990,000 in the bank.
• 3. Paid towards rent ` 60,000 by cheque.
• 4. Bought stationary for ` 7,000 paid in cash.
• 5. Invested ` 100,000 in government bonds through bank account.
• 6. Bought machinery for ` 250,000 paid through bank account.
• 7. Bought furniture for ` 150,000 from M/s Furniture Mart on credit.
• 8. Bought goods for ` 400,000 paid by cheque.
• 9. Bought goods for ` 200,000 from X Limited on credit.
• 10. Sold goods for cash ` 550,000.
• 11. Made part payment to X in cash ` 150,000.
• 12. Sold goods to Y on credit for ` 250,000.
• 13. Received part payment from Y by cheque for ` 175,000, allowed him discount of `
5,000 for prompt payment.
• 14. Received interest on investment ` 1,000 by cheque.
• 15. Paid salary to employees by cheque ` 110,000.
• You are required to do the following:
• i) Analyze the above transactions and pass necessary journal entries.
• ii) Post the transactions in the Ledger Accounts.
• iii) Prepare a Trial Balance as on 30th June 2017.
46
 Trial Balance-Illustration

 Analysis • Particulars • Dr • Cr
 The accounts affected are Cash A/c Cash A/c • 1,000,000
(Real) and Owner A/c (personal). Cash To Capital A/c
has come in so will be debited
whereas owner is a giver and will be
credited. Owner’s account is called
Capital
 The accounts affected are Bank A/c Bank A/c To Cash A/c • 990,000
(personal) and Cash A/c (real). Bank is
a receiver and will be debited
whereas cash has gone out so will be
credited Rent A/c To Bank A/c
 Rent A/c (nominal) and Bank A/c • 60,000
(personal) are affected. Expenses are
always debited. Bank is a giver so will
be credited. Stationary A/c
 Stationary A/c (nominal) and Cash A/c To Cash A/c • 7,000
(Real) are involved. Expenses are
debited. Cash is going out so will be
credited. Investment A/c
 The accounts involved are Investment To Bank A/c • 100,000
A/c (real) and Bank A/c (personal).
Investment are coming in (increasing)
so will be debited. Bank is giver so
will be credited. Machinery A/c To Bank A/c
 Machinery A/c (real) and Bank A/c are
affected. Machinery is coming in so • 250,000
will be debited whereas bank is the
giver and will be credited.
 Furniture A/c (real) bought on credit Furniture A/c
from M/s Furniture Mart (personal). To M/s Furniture Mart
Furniture coming in will be debited, • 150,000
M/s Furniture Mart as giver will be
credited
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 Trial Balance-Illustration

 Analysis  Particulars  Dr  Cr
 Goods bought for resale are treated as Purchases A/c To Bank A/c 400,000
expenses (nominal) and are called
Purchases A/c. Bank A/c is the giver and
will be credited
 Purchases (nominal) will be debited Purchases A/c To X A/c 200,000
whereas X is a giver and will be credited.
 Goods sold are treated as an income Cash A/c To Sales A/c 550,000
(nominal) and will be credited to Sales A/c.
Cash (real) is coming in so it will be
debited.
 X (personal) is now a receiver and will be X A/c To Cash A/c 150,000
debited whereas Cash A/c (real) is going
out and will be credited.
 Y (personal) is a receiver and will be Y A/c To Sales A/c 250,000
debited whereas Sales (nominal) is an
income and will be credited
 Three accounts are involved here,
 Y (personal) is a giver and will be credited, Bank A/c 175,000
Bank (personal) is a receiver and will be Discount Allowed A/c 5,000
debited; Discount Allowed is an expense To Y A/c
(nominal) and will be Debited
 Interest on Investment is an income
(nominal) and will be credited whereas
Bank (personal) is a receiver and will be Bank A/c To Interest Earned A/c 1,000
debited
 Salary paid is an expense (nominal) and
will be debited whereas Bank (personal) is Salaries A/c To Bank A/c 110,000
a giver and will be credited.

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 Errors, which are disclosed
by a trial balance:

a) Posting on the wrong side of an account and posting of

a wrong amount to a ledger account also creates
disagreement of the trial balance.
b) Omission of posting of an entry from the subsidiary
book.
c) Errors in casting or totaling of subsidiary books or
accounts or if there is any error in the balancing the
ledger account –also came disagreement of trial
balance.
d) if any item is posted twice in a ledger account from
subsidiary book or put a ledger balance on the wrong
column, the trial balance will not agree.

49
 Errors, which are not disclosed by a trial
balance
• Errors of Omission: when the transition is not at all recorded in the
books of account i.e., neither in the debit side nor in the credit side of
the account -Trial balance will agree.
• Error of Commission: when there is any variation in figure/amount
e.g. Instead of Rs.800 either Rs.80 or Rs.8000 is recorded in both
sides of ledger account –Trial balance will agree.
• Error of Mis posting : When wrong posting is made to a wrong
account instead of a correct one although amount is correctly
recorded. e.g. Sold goods to B but wrongly debited to D’s account-
Trial balance will agree.
• Compensating Error: When one error is compensated by another
error then this is known as compensating error. e.g. Discount allowed
Rs.100 not debited to discount allowed account where as interest
received Rs.100 but not credited to interest account-trail balance will
agree.

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 If the agreement of trail

SUSPENSE balance is disturbed due to

the existence of some error
or errors in the books of
ACCOUNT account, the difference is
transferred to the suspense
(Difference in
account. When the error or
books account): errors are found out and
rectified the suspense
account is to be closed.

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Example
2023
• 1 January :Mr. Y started business with cash Rs. 50000, machinery Rs.
50000 and furniture Rs.10000

• 5 January : Deposited cash into the bank Rs.1000

• 7 January: Purchased goods from Hari Rs. 10000

• 10 January: Purchased goods on cash Rs. 5000

• 15 January: Purchased the furniture on cash Rs. 5000

• 18 January: Sales goods on cash Rs. 15000

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• 21 January: Sales of goods to Mr. X Rs. 10000

• 25 January: Paid to Mr. Hari Rs.10000

• 28 January: Received from Mr. X Rs.10000

• 29 January: Paid electricity bill Rs. 500

• 31 January: Paid salaries Rs. 2000.

• 31 January : Depreciation on machinery 1%

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Hints for Preparation of Trail Balance:

Debit Assets Expenses debtors

Side

Credi Liabiliti
Income
Credito
t Side es rs

54
Prepare a Trial Balance for Shining Brothers Pvt. Ltd. at March
31st, 2017?

55
56
ABC Company ( Alex)
• 1st April,2023 Started a business with cash of Rs.5,00,000
• 2 April,2023 Cash deposited into bank 40,000
• 4 May,2023 Purchased 20,000 pen @4 per pen in cash
• 7 June,2023 Wages paid 6,000 in cash
• 6 July,2023 Salary paid 3000 in cash & 5,000 via cheque
• 9 July,2023 Bank loan taken 30,000
• 10 July,2023 Purchased vehicle of 15,000 in cash
• 10 September,2023 Sales expenses incurred 6000 in cash
• 14 January,2023 Sold 15,000 pen@10 per pen on credit to Mr.Max

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ABC Company ( Alex)
Debit Credit
Cash Account-A to Alex Capital-C 5,00,000 5,00,000

Bank Account-A to Cash Account-A 40,000 40,000

Purchase Account-E to Cash Account-A 80,000 80,000

Wages Account-E to Cash Account-A 6,000 6,000

Salary Account-E 8000

To Cash-A 3000
To Bank-A 5000
Bank Account-A to Bank Loan Account-L 30,000 30,000

Vehicle account-A to Cash Account-A 15000

15000
Sales Expenses-E Account to Cash Account-A 6000
6000
Max Account-A to Sales Account-I 150000 (15000x10) 150000 (15000x10)

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 Cash Account
To Alex 500000
Capital
By Bank 40000
By Purchase 80000
By Wages 6000
By Salary 3000
By Vehicle 15000
By Sales 6000
Exp
By Balance 3,50,000
C/D on
31.03.24

59
 Wages Account
To Cash 6000
By 6000
Balance
C/D
Purchase Account
To Cash 80000 By 80000
Balance
C/D
Sales Account
To 150000 My Max 150000
Balance
C/D
Alex Capital Account
To 500000 By cash 500000
balance
60
C/D
 Salary Account
To Cash 3000
To Bank 5000 By 8000
Balance
C/D
Bank Account
To Cash 40000 By Salary 5000
To Bank 30000 Bal C/D 65000
Loan
Bank Loan Account
To Bal C/D 30000 By Bank 30000
Vehicle Account
To Cash 15000 By Bal 15000
C/D

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 Sales Expenses Account
To Cash 6000
By 6000
Balance
C/D
Max Account
To Sales 150000 By 150000
Account Balance
C/D

62
Trial Balance
Dr
Cr
R Cash Account 350000
P Alex Capital 500000

P Bank 65000
N Purchase 80000
N Wages 6000
N Salary 8000
P Bank Loan 30000

R Vehicle 15000
N Sales Expenses 6000
P Max 150000
N Sales 150000 63
680000 680000
 Trading Account
To Purchase 80000 By Sales 150000
Account
To Wages 6000 By Closing 20000(5000
Stock x4)
Gross Profit 84000
C/D
Profit & Loss Account
To Salary 8000 By Transfer 84000
Gross Profit
To Sales 6000
Expenses
To Net Profit 70000
to Capital
Account

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Balance Sheet
Balance Sheet
Alex Capital 500000 Cash 350000
To Profit 70000 570000 Bank 65000
Bank Loan 30000 Vehicle 15000
Max 150000
Closing Stock 20000

600000 600000

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Transaction Analysis**
• Analyse the following transactions and pass the necessary journal
entries:
• 1. Paid rent to the landlord by cash: ` 60,000
• 2. Sold goods to Ramesh on credit: ` 100,000
• 3. Cash withdrawn from the bank: ` 35,000

• The transactions will be analysed as follows:

• 1. Rent Account and Cash Account are two accounts getting
affected. Rent is an expense (nominal account); Cash account
(real account) has decreased. Expenses are always debited
whereas real accounts are credited when decreased.
• The journal entry accordingly will be:
• Rent A/c Dr. ` 60,000
• To Cash A/c ` 60,000

66
Transaction Analysis

• 2. Sales account (income) and Ramesh Account (personal)

will be affected. As income is increasing, Sales Account will
be credited whereas Ramesh is a receiver (he has received
goods) without paying for them so he will be debited. The
journal entry will be:
• Ramesh A/c Dr. ` 100,000
• To Sales A/c ` 100,000

• 3. Accounts affected are Cash Account (real) and Bank

Account (personal). Cash has come in, therefore will be
debited whereas bank is a giver so will be credited. The
journal entry will be:
• Cash A/c Dr. ` 35,000
• To Bank A/c ` 35,000

67
 Ledger**
• There are five different accounts to be opened—Rent Account,
Cash Account, Sales Account, Ramesh’s Account and Bank
Account. The entries will be posted a follows:
• Rent Account

• Dr.
Cr.
• Particulars (Amount in ` )
Particulars (Amount in ` )
• To Cash A/c 60,000
•
• Cash Account
• Dr.
Cr.
• Particulars (Amount in ` )
Particulars (Amount in ` )
• To Bank A/c 35,000
68
By Rent A/c 60,000
 Ledger**
• Sales Account
• Dr. Cr.
• Particulars (Amount in ` ) Particulars
(Amount in ` )
• By Ramesh
A/c 100,000
•
Ramesh’s Account
• Dr. Cr.
• Particulars (Amount in ` ) Particulars
(Amount in ` )
• To Sales A/c 100,000
•
• Bank Account
• Dr. Cr.
• Particulars (Amount in ` ) Particulars
(Amount in ` )
• By Cash
A/c 35,000 69
 Trial balance

• Trial balance—T-shaped statement separately showing all the debit

and credit balances at the end of the accounting period
• The Trial Balance serves three basic purposes.
• 1. It ensures that the dual aspects concept has been properly
followed, i.e., for every debit there is an equal and corresponding
credit.
• 2. It gives an overview of balances in various ledger accounts.
• 3. It forms the basis for the next step, i.e., preparation of financial
statements.

70
 Trial Balance-Format
Dr Trial Balance Cr
Amount Amount
Nominal Accounts Nominal Accounts
(Expenses) (Income Interest earned
Rent Sales
Material consumed Profit on investments
Salary Other incomes
Interest
Other expenses
Personal Accounts Personal Accounts
(Receivables) (Payables)
Loans and advances Capital account
given Loans taken
Trade Trade
Receivables/Debtors Payables/Creditors
Expenses paid in Outstanding expenses
advance Income received in
Bank Account advance

Real Accounts
(Assets) Trade
Payables
Cash
Land and building
Plant and machinery
Furniture and fittings
Other assets
Total Total
71
 Trial Balance-Illustration
• _____________ started a new business on 1st April 2017. For the first quarter,
his transactions are listed below.
• 1. Started business with ` 1,000,000 capital in cash.
• 2. Opened a bank account and deposited ` 990,000 in the bank.
• 3. Paid towards rent ` 60,000 by cheque.
• 4. Bought stationary for ` 7,000 paid in cash.
• 5. Invested ` 100,000 in government bonds through bank account.
• 6. Bought machinery for ` 250,000 paid through bank account.
• 7. Bought furniture for ` 150,000 from M/s Furniture Mart on credit.
• 8. Bought goods for ` 400,000 paid by cheque.
• 9. Bought goods for ` 200,000 from X Limited on credit.
• 10. Sold goods for cash ` 550,000.
• 11. Made part payment to X in cash ` 150,000.
• 12. Sold goods to Y on credit for ` 250,000.
• 13. Received part payment from Y by cheque for ` 175,000, allowed him discount of `
5,000 for prompt payment.
• 14. Received interest on investment ` 1,000 by cheque.
• 15. Paid salary to employees by cheque ` 110,000.
• You are required to do the following:
• i) Analyze the above transactions and pass necessary journal entries.
• ii) Post the transactions in the Ledger Accounts.
• iii) Prepare a Trial Balance as on 30th June 2017.
72
 Trial Balance-Illustration

 Analysis • Particulars • Dr • Cr
 The accounts affected are Cash A/c Cash A/c • 1,000,000
(Real) and Owner A/c (personal). Cash To Capital A/c
has come in so will be debited
whereas owner is a giver and will be
credited. Owner’s account is called
Capital
 The accounts affected are Bank A/c Bank A/c To Cash A/c • 990,000
(personal) and Cash A/c (real). Bank is
a receiver and will be debited
whereas cash has gone out so will be
credited Rent A/c To Bank A/c
 Rent A/c (nominal) and Bank A/c • 60,000
(personal) are affected. Expenses are
always debited. Bank is a giver so will
be credited. Stationary A/c
 Stationary A/c (nominal) and Cash A/c To Cash A/c • 7,000
(Real) are involved. Expenses are
debited. Cash is going out so will be
credited. Investment A/c
 The accounts involved are Investment To Bank A/c • 100,000
A/c (real) and Bank A/c (personal).
Investment are coming in (increasing)
so will be debited. Bank is giver so
will be credited. Machinery A/c To Bank A/c
 Machinery A/c (real) and Bank A/c are
affected. Machinery is coming in so • 250,000
will be debited whereas bank is the
giver and will be credited.
 Furniture A/c (real) bought on credit Furniture A/c
from M/s Furniture Mart (personal). To M/s Furniture Mart
Furniture coming in will be debited, • 150,000
M/s Furniture Mart as giver will be
credited
73
 Trial Balance-Illustration

 Analysis  Particulars  Dr  Cr
 Goods bought for resale are treated as Purchases A/c To Bank A/c 400,000
expenses (nominal) and are called
Purchases A/c. Bank A/c is the giver and
will be credited
 Purchases (nominal) will be debited Purchases A/c To X A/c 200,000
whereas X is a giver and will be credited.
 Goods sold are treated as an income Cash A/c To Sales A/c 550,000
(nominal) and will be credited to Sales A/c.
Cash (real) is coming in so it will be
debited.
 X (personal) is now a receiver and will be X A/c To Cash A/c 150,000
debited whereas Cash A/c (real) is going
out and will be credited.
 Y (personal) is a receiver and will be Y A/c To Sales A/c 250,000
debited whereas Sales (nominal) is an
income and will be credited
 Three accounts are involved here,
 Y (personal) is a giver and will be credited, Bank A/c 175,000
Bank (personal) is a receiver and will be Discount Allowed A/c 5,000
debited; Discount Allowed is an expense To Y A/c
(nominal) and will be Debited
 Interest on Investment is an income
(nominal) and will be credited whereas
Bank (personal) is a receiver and will be Bank A/c To Interest Earned A/c 1,000
debited
 Salary paid is an expense (nominal) and
will be debited whereas Bank (personal) is Salaries A/c To Bank A/c 110,000
a giver and will be credited.

74
THANK YOU