Types of Journal

There are two types of the journal in financial accounting:

• General Journal: General Journal is one in which a small business entity records all the day to day business transactions
• Special Journal: In the case of big business houses, the journal is classified into different books called as special journals. Transactions are recorded in these special journals on the basis of their nature. These books are also known as subsidiary books. It includes cash book, purchase day book, sales day book, bills receivable book, bills payable book, return inward book, return outward book and journal proper.The journal proper is used for entering infrequent transactions such as opening entries, closing entries and rectification entries.

Journalizing Process

The process of recording transactions in the journal is called Journalizing. The transactions are recorded in the journal in the manner of their occurrence along with a suitable explanation, called ‘Narration‘ which supports the entry.

The steps involved in the process of Journalizing in financial accounting are as under:

1. Identification of Accounts: The first and foremost step in any given transaction is to identify the accounts which are being affected with it.
2. Recognition of Account type: Once the accounts are identified, the type of account is ascertained, i.e. whether it is a personal account, real account or nominal account.
3. Applying the golden rules of accounting: The rules of debit and credit, i.e. the golden rules of accounting are to be applied to the accounts which are affected by the transactions.

The debit and credit sides of the journal must be equal. There are some transactions in which you will find there are more than one debit for a single credit, more than one credit for a single debit or multiple debits and credits for an entry. Such entries are called as a compound journal entry. Nevertheless, the aggregate amount of debit and credit in an entry must tally.

Format of Journal

• Date: In this column, we mention the date of the transaction along with the month in which the transaction took place. The year is indicated at the top only once and not repeated with every date.
• Particulars: This column indicates the accounts which are affected, i.e. debited or credited, by the transaction. In the very first line, we write the account which is debited and then in the extreme right of the same line and column we write Dr. which indicates Debit.In the next line, after leaving some space, we write the account which is credited starting with the preposition ‘to’. A small narration for the respective transaction is given in the third line which explains the entry in the brackets, and it starts with the word ‘being’.
• Voucher Number: In this column, we enter the number written on the voucher of the concerned transaction.
• L.F. or Ledger Folio: As we know that transactions entered in the journal are then taken to the Ledger, in their respective accounts. In this column, the page number concerning the entry in the ledger is mentioned.
• Dr. Amount: The amount to be debited for a particular entry is written in the same line, where the debited account is indicated.
• Cr. Amount: The amount to be credited for a particular entry is written in the same line, where the concerned credited account is written.

All the columns are to be filled at the time of recording the transaction in the journal, except the ledger folio column which is filled when the transaction is posted to the ledger.

The journal entries may extend to multiple pages, and so both the two columns are totalled at the end of each page, with the word Total c/f, i.e. carried forward. Further, at the beginning of the next page, the amounts in debit and credit columns in the previous page is written with the words Total b/f, i.e. brought forward. Finally, on the last page of the entry, the Grand Total is written, and the columns are totaled.

Topic: Journal, ledger, and Trial balance (CONTINUE…)

Types of accounts

To understand the Golden Rules of Financial Accounting we must first understand the types of accounts.

There are three types of accounts:

• Real Account

• Personal Account

• Nominal Account

A Real Account is a general ledger account relating to Assets and Liabilities other than people accounts. These are accounts that don’t close at year-end and are carried forward.

A Personal Account is a General ledger account connected to all persons like individuals, firms, and associations.

A Nominal account is a General ledger account pertaining to all income, expenses, losses, and gains.

Golden rules of accounting

Looking at the nature of all the accounts,  the financial accounting rules have been devised. For each account, there is a set of Golden Rules and hence there are three Golden Rules of Accounting.

Illustration

An entity named Orange Ltd. has the following financial accounting transactions.

1. It deposits Rs.10,000 into Bank
2. It buys goods worth Rs.50,000 from Apple Ltd.
3. It sells goods worth Rs.35,000 to Melon  Ltd.
4. It pays Rs.12,000 as Rent for its premises
5. It earns Rs.3,000 as interest on bank account.

First of all,  let us identify the accounts involved in these transactions and classify them into the different types of accounts:

Now applying the golden rules of Financial Accounting to each of the transactions we will get the following journal entries :

• Deposit Rs.10,000 in Bank

Both Bank and Cash are real accounts and so the Golden rule is:

• Debit what comes into the business
• Credit what goes out from the business

So the entry will be:

• Purchase goods worth Rs.50,000 from Apple Ltd.

The Purchase Account is a Nominal account and the Creditors Account is a Personal account.

Applying Golden Rule for Nominal account and Personal account:

• Debit the expense or loss
• Credit the giver

The entry will be:

• Sale of goods worth Rs.35,000 to Melon Ltd.

The sale account is a Nominal account and the Debtors Account is a Personal account.

Hence the Golden Rule to be applied is:

• Debit the receiver
• Credit the income or gain

Thus the entry will be:

• Pays Rs.12,000 as rent

Rent is a Nominal account and Bank is a real account.

The Golden Rule to be applied is:

• Debit the expense or loss
• Credit what goes out of business

The entry thus will be:

• Earn Rs.3,000 as interest on Bank Account

Interest and Bank are Nominal account and Real Account.

The Golden rule to be applied is:

• Debit what comes into the business
• Credit the income or gain

Hence the entry will be:

Topic: Journal, ledger, and Trial balance – Financial Accounting (CONTINUE…)

2. LEDGER

The statement which is prepared at a particular date with the ledger account balances to test the arithmetical accuracy of the ledger accounts and also to facilitate the preparation of financial statements is called a trial balance.

It is to be noted that trial balance is not an account; it is a mere statement.

A trial balance contains the columns – serial number of ledger accounts,

If a trial balance agrees i.e. a total of debit money column and a total of credit money column are equal, it proves that the ledger accounts are arithmetically accurate.

The famous writer R.N. Carter says;

A trial balance is a schedule or a list of balances both debit and credit extracted from the accounts in the ledger and including the cash and bank balances from the cash book.

According to J.R. Batliboi,

A trial balance may be defined as a statement of debit and credit balances extracted from the ledger with a view to testing the arithmetical accuracy of the books.

Characteristics of Trial Balance

It appears from the definitions of trial balance that the trial balance contains the following features;

1. The trial balance is neither an account nor a part of it. It is a statement containing all balances of ledger accounts.
2. It is not recorded in any book of account. The trial balance is prepared in a separate sheet of paper.
3. The trial balance is prepared with the balances of accounts at the end of a particular accounting period. A trial balance is prepared before the preparation of financial statements at the end of the accounting period.
4. The statement contains all kinds of accounts, irrespective of their classifications, such as assets liabilities, income-expenses, etc. It helps to test the arithmetical accuracy of accounts.

Objects of Trial Balance

Although trial balance is not an account, it is prepared to fulfill the following objects;

• The main object of the trial balance is to prove the arithmetical accuracy of accounts.
• It is prepared to check whether the debit and credit accounts of each transaction have been recorded properly.
• For the convenient preparation of financial statements, the trial balance is prepared to bring debit and credit ledger balances together.
• To proof the accurate balancing of a ledger account.
• To detect mistakes in the process of accounts, if any.
• To provide information to the proper authority in time.
• To compare the balances of various ledger accounts of the current year with those of the previous year.

Topic: Journal, ledger, and Trial balance – Financial Accounting (CONTINUE…)

Why do both Sides of Trial Balance Agree

According to a double-entry system every transaction is recorded in a journal debiting one account and crediting the other for the same amount of money with an explanation.

At the time of posting of the transaction from journal to ledger debit account of the journal is debited in the same account and the credit account of the journal is credited in the same account in the ledger.

As a result, a total of the debit balance of ledger accounts becomes equal to the total credit balance of ledger accounts.

Therefore, According to double-entry principle;

If all correctly drawn ledger accord balance is recorded in trial balance in debit and credit money columns properly, the totals of both columns of trial balance become equal.

Preparing Trial Balance From Journal and Ledger (How To)

To prepare a trial balance, first, we need to know to make sure the transactions are journalized and have been posted to ledgers.

The final balance from the ledger needs to be properly placed on the debit and credit column while preparing the trial balance, to make sure the accounting process is correct.

How to Prepare a Trial Balance

Business transactions are first recorded in the journal and thereafter these are posted in the ledger under different heads of accounts.

It may be mentioned that transactions may directly be posted in the ledger accounts without recording them in the journal.

At the end of a particular accounting period, a trial balance is prepared in a separate sheet of prescribed form recording debit ledger balance, in the debit column and credit ledger balances in the credit money column.

Besides ledger balances, cash balance, and bank balance of cash book of that particular date are also included in the trial balance.

Thereafter the total of debit and credit money columns of a trial balance is calculated. The agreement of trial balance is the conclusive evidence of the accuracy of the ledger and trial balance.

Topic: Journal, ledger, and Trial balance – Financial Accounting (CONTINUE…)

The format for Preparing Trial Balance

A short description of the format of the trial balance is given below:

1. Titles: In the middle of the format name of the company, the trial balance and date of preparation are written.
2. Accounts serial number: In this column, the serial numbers of ledger accounts are written.
3. Account Titles: The serial number of that account of the ledger which has been written in the first column, the full title of that account is written in this column. For example, Capital account, Furniture account, Cash account etc.
4. Ledger Folio: The number of the ledger page from where ledger balances are brought is written in this column.
5. Debit balance: All debit balances of ledger accounts are written in this column.
6. Credit balance: All credit balances of ledger accounts are written in this column.

Ledger Account Balance and Trial Balance

Topic: Journal, ledger, and Trial balance – Financial Accounting (CONTINUE…)

Rules for recording debit ledger account balances and credit ledger account balances in debit money column and credit money column of trial balance in absence of ledger account:

Important to remember:

1. Opening cash and bank balance are not shown in the trial balance as these are included in closing cash and bank balances.
2. Closing stock is not shown in the trial balance because this remains included with opening stock and purchase of the accounting year. But if opening stock and purchase remain absent in trial balance and the adjusted purchase is shown in the trial balance, in that case, the closing stock is shown in the debit money column of the trial balance.