Journal entry, Ledger

Posting and Trial

Balance
Balance sheet equation and
accounts

• The equation can be written as

• The quantities on the LHS are normally referred as “debit”(Dr.); and

• The quantities on the RHS are normally referred as “credit”(Cr.)
• Assets, expenses and drawings will have debit balance (
• Liabilities, Capital, and Revenue will have credit balance (
Transaction and Information
• The process of accumulating information:
• In all accounts representing the LHS terms, all increases of those items are
debited in those respective account, and all decreases are credited in the
same account
• In case of accounts representing the RHS, an increase with respect to an item
is credited in that particular account, and decreases in relation to those
accounts are debited to that account
Transactions
Date Transaction Amount
January 1 Starts business with 1,00,000
January 8 Buys merchandise and stores them 80,000
January 10 Receive order for half the merchandise from A
January 15 Delivered merchandise, customer invoiced 50,000
January 17 Received order for the other half of merchandise
January 31 Customer A pays 50,000
Impact of transactions
• Starts business with
• Cash increase
• Capital increase
• Buys merchandise and stores them
• Goods increase
• Cash decrease
• Receive order for half the merchandise from A
• No transaction
• Delivered the merchandise, customer invoiced
• Inventory decreases
• Cost of goods sold increases
• Revenue increases
• Receivables increase
• Customer A Pays
• Cash increases
• Receivables decrease
 Cash Account

Dr. CASH Cr.

ACCOUNT
Date Explanation Amount Date Explanation Amount
Jan 1 Capital account 1,00,000 Jan 8 Merchandise inventory 80,000
Jan 31 Accounts receivable 50,000 Jan 31 Balance 70,000
Classification of account
• Personal accounts – that are related to persons, usually trade
customers and creditors
• Real accounts/ Tangible accounts – that can be physically possessed,
such as land, buildings, vehicles, manufacturing equipment, cash etc.
• Nominal accounts/intangible accounts: that are not visible and
cannot be touched. The transactions that make up a profit and loss
account are all nominal accounts, viz, revenues and expenses
Rules of debit and credit
• Personal account – Debit the receiver and credit the giver
Debit denotes that the person has received some benefits
Credit denotes that the entity has derived some benefits, for which the
person is entitled to a claim
• Tangible account – Debit what comes in and credit what goes out
Debit denotes that there has been an increase in the value
Credit denotes that there has been a decrease in the value
Intangible account – Debit all the expenses and losses and credit the gains and profits
Debit denotes that entity has incurred some expenses or losses
Credit denotes that entity has generated profits
T account

If we assume the above T account as Cash account,

LHS will represent all cash receipts or increases, and
RHS will represent all cash payments or decreases
Rules for debit and credit
Rules for debit and credit
• Increases in assets are debits
• Decreases in assets are credits to the respective accounts

• Increases in liabilities are credits

• Decreases in liabilities are debits to the respective accounts

• Increases in owner’s equity capital are credits

• Decreases are debits to the owner equity capital account
Journal and Ledger
• The accounts are maintained by way of the journal, which is the
primary record of transaction
• A journal is a chronological record of all transactions, showing the
debit and credit of the accounts as affected by the transactions
• It will also record the source documents of the transaction
• The Ledger is a book of final entry in which a record of the debits and
credits to the various accounts are kept
• The ledger will contain at least as many separate accounts as there
are items on the balance sheet and income statement
Illustration – Journal entry
Jan 1 Sales for cash Rs.3,00,000
Jan 1 Purchases for cash 1,00,000
Jan 3 Rent paid in cash 50,000

Journal entry

Date Explanation Ref Debit amount Credit amount

Jan 1 Cash (Debit) 3,00,000
Sales (credit) 3,00,000
Jan 1 Purchases (Debit) 1,00,000
Cash (credit) 1,00,000
Jan 3 Rent (debit) 50,000
Cash (credit) 50,000
Ledger postings
Sales Account
Dr. Cr
Date Explanation Ref Amount Date Explanation Ref Amount
Jan1 Cash 3,00,000
Cash Account
Dr. Cr
Date Explanation Ref Amount Date Explanation Ref Amount
Jan 1 Sales 3,00,000 Jan 1 Purchases 1,00,000
Jan 2 Rent Expenses 50,000
Purchases Account
Dr. Cr
Date Explanation Ref Amount Date Explanation Ref Amount
Jan 1 Cash 1,00,000
Rent Account
Dr. Cr
Date Explanation Ref Amount Date Explanation Ref Amount
Jan 1 Cash 50,000
Trial Balance
• At the end of the an accounting period. The balances of both debit
and credit balances of both debit and credit accounts of all the ledger
accounts are transferred to a worksheet, which is referred as Original
Trial Balance
• Adjustments are then worked out, giving rise to an Adjusted Trial
Balance
• Finally based on the type of the account, the balances of the
individual accounts are taken to either of the two financial statement
Trial balance work sheet
Various Original Trial Adjustments Adjusted trial Income summary Balance sheet
ledger Balance balance
items
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
RSL transactions
Transactions Accounts impacted
Ram and others invest Rs. 50,000 in cash in RSL Cash (Dr) and Capital (Cr)
Ram took a loan of Rs.20,000
RSL purchased for cash two computers, each costing Rs. 29,000
RSL purchased supplies worth Rs.6,000 on credit Supplies(Dr) Supplies (Cr)
RSL makes a sale and get Rs.12,000 cash from customer Cash (Dr.) Sales (Cr.)
RSL pays Rs.2000 to its creditors for suppliers
Pays salaries Rs.4000 and Rent Rs.1200
Delivers a software package to their customers worth Rs.8000.
Customer agrees to pay later
Ram withdraws Rs.3500 for his personal use Withdrawal (Dr) Cash (Cr.)
Journal entry
Journal Debit Credit
Cash 50,000
Capital 50,000
Cash
Loan
Computers
Cash
Supplies
Sundry creditors
Cash
Sale of software
Sundry Creditors
Cash
Salaries and Rent expense
Cash
Ledger Posting
Cash Account
Dr. Cr
Capital 50,000 Computers 58,000
Loan 20,000 Sundry creditors 2,000
Sale of software 12,000 Salaries expense 4,000
Office rent expense 1,200
Dividend 3,500
Balance 13,300
Total 82,000 82,000

Sundry creditors
Dr. Cr
Cash 2,000 Supplies 6000
Balance 4,000
Total 6,000 6,000
Sales
Dr. Cr
Cash 12,000
Balance 20,000 Accounts receivable 8,000
Total 20,000 20,000
Various Original Trial Adjustments Adjusted trial Income summary Balance sheet
ledger Balance balance
items
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 13,300
Accounts 8,000
receivabl
e
…
Sundry 4,000
creditors
Loans 20,000
Capital 50,000