Basics of Accounting &

Finance- M.B.A.- I Semester

UNIT- 1
Journal, Ledger and Trial Balance
 Journal
 Journal is the book of original entry or prime entry in which all the transactions are
recorded in chronological order (date-wise) as per the rules of debit and credit.
 Each entry in the journal is supported with a precise description known as the
narration. When you are passing a journal entry, you have to record from the point
of view of business not from the point of view of the businessman/ owner/
proprietor.
 The format of the journal is:-
 Double Entry
System
 Since transactions in the journal are recorded on the basis of rule of ‘double entry
system’, it is essential to study this system.
 ‘Double Entry System’ of accounting is based on dual aspect concept.
Accordingly, every business transactions has two aspects so they affect two
accounts in opposite directions i.e. debit ( dr.) and credit ( cr.) .
 Every transaction is recorded in at least two accounts in a manner so that the total
amount debited must be equal to the total amount credited.
 Rules of Double Entry System are dependent on nature of accounts i.e.
classification of accounts.
Classification of Accounts & Rules of Double
Entry System

 Financial transactions are recorded on debit and credit as per

accounting rules. As per British system of accounting, there are two
types of accounts:-
(i) Personal Accounts
(ii) Impersonal Accounts

(i) Personal Accounts :- The accounts related to an individual, firm,

company, institution etc. are called personal accounts.
Eg. – Capital A/C of the proprietor, Accounts of Debtors, Accounts of
Creditors, Ram’s A/C, Tata Motors Ltd. A/C etc. .
Personal Accounts are of three types:-
(a) Natural Personal Accounts :- It refers to accounts of human beings.
Eg. – Mohan’s A/C, Capital A/C, Drawings A/C etc. .

(b) Artificial Personal Accounts:- The accounts of firm, company, institutions, banks, airlines etc.
are personal accounts but they don’t have any physical existence like human beings so they are
known as artificial personal accounts.

(c)Representative Personal Accounts:- An account representing a particular person or group of

persons is termed as representative personal accounts. These accounts will be outstanding
expenses, prepaid expenses, accrued income and unaccrued income.

The Golden Rule for Personal Accounts is

Debit / Dr. - The Receiver
Credit/ Cr. - The Giver
(ii) Impersonal Accounts:- These accounts are categorized into two categories- (a) Real Accounts (b)
Nominal Accounts

(a) Real Accounts :- The account of all the properties of the business whether tangible or intangible are
termed as real accounts.
Eg.- Cash A/C, Patent A/C, Trademark A/C etc. .
The rules for the real accounts will be :-
Debit / Dr. – What comes in
Credit/ Cr.- What goes out
Real Accounts are of two types –
(i) Tangible Real Accounts- All the properties / assets of the business which can be seen,
touched, felt and measured in terms of money are called tangible real accounts. Eg.- Cash A/c, Plant A/c,
Furniture A/c etc.
(ii) Intangible Real Accounts :- All those assets/ properties of the business which cannot be felt,
seen and touched but can be measured in terms of money are called intangible real accounts. Eg. –
Goodwill A/c, Patents A/c, Trademark A/c etc. .
(b) Nominal Accounts:- The accounts related to expenses, losses, revenue, incomes
and gains are termed as nominal accounts.
Eg.- Rent, Commission, Electricity Bill, Salaries, Wages, Interest, Discount Bad
Debts etc..

The Golden Rule for Nominal Accounts are:-

Debit / Dr. – all the expenses and the losses
Credit / Cr. – all the incomes and the gains
Meaning of goods in accounting:-
Goods are those commodities in which the business deals with (buys and sells).
Eg.- A dealer dealing with the business of furniture. When he purchases or sells furniture it is
goods for him as he is dealing with the business of furniture but if he buys machinery it
won’t be termed as goods as he is not dealing with the business of machinery.
Goods may acquire five forms from the point of view of recording transactions in the journal.
1. Purchases A/C- At the time of purchases of goods, purchases A/c is debited
Instead of goods A/C.
Purchases can be real account or nominal account and the rule is
Real A/C- Dr.- what comes in – In case of Purchases, goods always come in the business
during the time of purchases so it will be always be debited.
Nominal A/C- Dr.- All expenses and losses- In case when you consider Purchases in nominal
a/c, Purchases will be expenses and thus it will be always debited.
So, Purchases A/C is always debited or Purchases A/C will have a Dr. Balance.
2. Sales A/C- Sales of goods is a revenue/income, so as per rule of nominal account-credit the
gains and incomes.
Also, during sales goods are coming in the business as per the real account- credit what comes
in. So, Sales A/C is always credited or Sales A/C will always have a credit balance.

3. Purchases Returns A/C – When the purchased goods is returned to the supplier, Purchases
Returns A/C is always credited or will always have a credit balance. Purchases Returns is
also known as Return Outwards A/C.
One can treat Purchases Returns as Real Accounts or Nominal Accounts.
Rule of Real Accounts- Dr.- what comes in. and Cr. – what goes out
So in case of Purchases Returns, goods are going out from the business so it will always have a
Credit Balance.
Rule of Nominal Accounts- Dr. – all expenses and Losses and Cr.- all incomes and gains.
So, in case of Purchases Returns, it is an income/ revenue for the business as per the rule of
nominal accounts so it will have a credit balance.
4. Sales Returns- It is also known as Return Inwards A/C. When the customer
returns goods to us, Sales Returns A/C is debited or will always have a debit
balance.

5. Stock- The goods left unsold at the close of the accounting year is called as
closing stock and it becomes opening stock at the beginning of the next accounting
year.
1. Classify the following accounts into personal, real and
nominal accounts.
1.Capital 2. Rent 3. Sales 4. Debtors 5. Bank 6. Cash
7. Goodwill 8. Furniture 9. Commission Paid 10. Prepaid Salaries
11. Salary 12. Purchases 13. Depreciation 14. Discount allowed
15. Wages 16. Drawings 17. Salary Outstanding 18. Creditors
19. Patent 20. Advertisement 21. Bad Debts 22. Accrued Interest
23. Stock 24. Plant
1. JOURNALISE THE FOLLOWING TRANSACTIONS IN THE BOOKS OF RAM:-
2010

APRIL 1 :- RAM STARTED BUSINESS WITH CASH RS. 50,000.

APRIL 3 :- BOUGHT GOODS FOR CASH RS. 15,000.
APRIL 6 :- BOUGHT FURNITURE FOR CASH RS. 5,000.
APRIL 9 :- SOLD GOODS FOR CASH RS. 13,000.
APRIL 14 :- SOLD GOODS TO MOHAN RS. 9,000.
APRIL 18 :- BOUGHT GOODS FROM AMIT RS. 11,000.
APRIL 21 :- CASH RECEIVED FROM MOHAN RS. 7,000.
APRIL 23 :- PAID CASH TO AMIT RS. 9,000.
APRIL 25 :- SOLD GOODS TO SUMIT FOR CASH RS. 6,500.
APRIL 27:- BOUGHT MACHINERY FROM SOHAN RS. 15,000.
APRIL 29 :- WITHDREW CASH FROM OFFICE FOR PERSONAL USE RS. 5,000.
APRIL 30 :- PAID RENT RS. 400.
APRIL 30 :- PAID SALARY TO GOPAL RS. 2,500.
APRIL 30 :- RECEIVED COMMISSION RS. 500.
 Record the following transactions in the journal of Sumit:-
2010
Jan 1:- Started business with cash Rs. 1,00,000.
Jan 3:- Paid into bank Rs. 60,000.
Jan 8:- Bought goods from Anil Rs. 11,500.
Jan 15:- Sold goods to Ajay Rs. 15,000.
Jan 18 :- Purchased furniture from Ram and issued cheque Rs. 10,000.
Jan 22:- Drew cash from bank for office use Rs. 12,000.
Jan 30 :- Drew cash from bank for personal use Rs. 5,000.
Jan 31 :- Ajay returned goods of Rs. 2,000.
 Discount
 Discount refers to the deduction in the total amount due from debtors or amount due to creditors.
 There are two types of discount:-
 Trade Discount:- Trade Discount is allowed by the manufacturer or wholesaler to the retailer as a
deduction at a fixed percentage from the list price of the goods.
 It is allowed at the time of sale of goods.
 No separate entry is passed in the books of accounts for trade discount.
 Discount

 Cash Discount :- Cash Discount is allowed by the seller to its customers inducing
the later to make prompt payment or within a fixed period of time.
 It is allowed at the time of making payment.
 A separate entry is passed in the books of accounts.
 Discount
 Record the following transactions in the journal of Ram:-
2010
June 4:- Bought goods from Dinesh of the list price Rs. 50,000/- less trade discount
10%.
June 7 :- Goods returned to Dinesh at the list price Rs. 5,000/-.
June 10:- Paid cash to Dinesh under a cash discount of 2%.
June 11 :- Sold goods to Kamal of the list price Rs. 70,000/- less trade discount 20%.
June 15:- Kamal returned goods of the list price Rs. 5,000/-.
June 20:- Kamal paid us Rs. 51,000/- in full settlement of his account.
 Enter the following transactions in the journal of Gopi:-
2023:-
Jan 1:- Commenced business with cash Rs. 5,00,000/-
Jan 4:- Withdrew cash for personal use Rs. 8,000/-
Jan 9:- Withdrew goods for personal use Rs. 6,000/-
Jan 10:- Received commission Rs. 800/-
Jan 12:- Paid rent to landlord Amit Rs. 6,000/-.
Jan 15:- Bought furniture from Ram and issued cheque Rs. 10,000/-
Jan 18:- Withdrew cash from bank for office use Rs. 8,000/-
Jan 19:- Cash received from Rajan Rs. 5,000/-.
Jan 20:- Paid cash to Sunil Rs. 2,000/-.
Jan 21:- Bought goods from Anita at Rs. 4,000/-
Jan 22:- Returned goods to Anita of Rs. 500/-
Jan 25:- Sold goods to Ramesh for cash Rs. 6000/-
Jan 26:- Sold goods to Amar of the list price Rs. 50,000/- less trade
discount 10%.
Jan 27:- Amar returned goods of the list price 6,000 being
defective.
Jan 28:- Amar paid the amount due under a cash discount of 2%.
Jan 29:- Bought goods from Kapil Rs. 30,000/- less trade discount
10%.
Jan 30:- Returned goods of the list price Rs. 5,000/-
Jan 31:- Paid cash to Kapil under 2% cash discount for paying
within fixed period.
 Bad Debts
 If the amount of credit sales is either not realized or partially realized from the debtor, the amount
not realized is a loss and is termed as bad debt.
 The journal entry passed are:-
1. If the amount is irrecoverable.
Bad Debts A/C Dr.
To Debtor’s Name A/C
2. If amount is partially irrecoverable.
Cash A/C Dr.
Bad Debts A/C Dr.
To Debtor’s Name A/C
 Bad Debts Recovered :- Sometimes, the amount written off as bad debts from a customer/debtor is
realized, the amount so realized is a gain now and so the entry passed will be:-
Cash A/C Dr.
To Bad Debts Recovered A/C
 Bad Debts
 Journalise the following transactions in the books of Y Ltd.
1. Kamal is declared insolvent and the amount due from him is Rs. 40,000/-.
Bad Debts A/C Dr. 40,000
To Kamal’s A/C 40,000
2. Ram who owed us Rs. 1,00,000/- was declared insolvent and the business received 50% of the amount from him.
Bad Debts A/C Dr. 50,000
Cash A/C Dr. 50,000
To Kamal’s A/C 1,00,000
3. Received cash from Mohan Rs. 5,000/- whose account was written off as a bad debt last year.
Cash A/C Dr. 5,000
To Bad Debts Recovered A/C 5,000

SPECIAL NOTE:- Assets will always have a debit balance and liabilities will always have a credit balance.
If the balance of assets increase, it will have a debit balance whereas if the balance of assets decrease they will have a credit balance.
If the balance of liabilities increase, it will have a credit balance whereas if the balance of liabilities decrease they will have a debit
balance.
 Opening Entry
 In case of existing business, the balance of assets and liabilities as depicted by the balance sheet
at the end of the accounting year are brought forward in the beginning of the next year. This is
done by passing a journal entry.

 In this entry, all the assets will be debited and all the liabilities and capital will be credited.
 But if the amount of capital is not given, the excess of assets over liabilities will represent capital.
Capital = Assets - Liabilities
 If the sum of liabilities and capital is greater than total assets, the difference will be goodwill and it
will be debited in the opening entry.
Goodwill = (Liabilities + Capital ) – Total Assets
 If total assets is greater than sum of the liabilities and capital, it is called capital reserve and it will be
credited in the opening entry.
Capital Reserve = Total Assets- (Liabilities + Capital)
 Following balances appeared in the books of R Ltd. As on 31 st January 2023. Pass the journal entry.
Assets :-Cash Rs. 6,000/- , Bank Rs. 10,000/- , Debtors Rs. 40,000
(Raman Rs. 8,000/-, Amit Rs. 7,000/-, Gopal Rs. 10,000/-, Mohan Rs. 15,000/-) , Stock Rs.
44,000/- and Furniture Rs. 20,000/-
Liabilities :- Capital Rs. 1,10,000/- and Creditors Rs. 30,000/- (X- Rs. 9,000/- , Y-Rs.
11,000/- and Z- Rs. 1,10,000/-)
 Journalize the following transactions in the books of W Ltd.as on March 31, 2024:-
March 1 :- Assets :- Cash Rs.30,000; Cash at Bank Rs. 13,000; Debtors;14,000(Ashok;5,000, Kewal;6,000, Mohan;3,000), Stock Rs. 24,500; Furniture; Rs.
14,000
Liabilities :- Creditors; Rs.12,000 (Ram; Rs. 4,000, Amit; Rs. 5,000 and Sunil; Rs. 3,000), Bank Loan;Rs. Rs. 18,000
March 3:- Bought goods from Raj for Rs. 30,000/- on cash.
March 4:- Sold goods to Ajay on credit for Rs. 40,000/-
March 5:- Received cheque from Dinesh Rs. 4,900/- allowing him a discount of Rs. 100.
March 6:- Withdrew cash from bank Rs. 10,000/- for office use.
March 7:- Withdrew goods from business Rs. 6,000/- for personal use.
March 8:- Ramesh became insolvent and he paid only 60% of the amount. The amount due from him was Rs. 1,00,000/-.
March 9:- Paid salary to Mohan by cheque Rs. 4,000/-.
March 10:- Paid rent to Hari Rs. 4,500/-
March 11:- Bought goods from Gopi of the list price Rs. 40,000/- less trade discount 10%.
March 12:- Goods returned to Gopi of the list price Rs. 5,000/-.
March 14:- Received interest of Rs. 600/-.
March 16:- Paid electricity bill Rs. 600 and stationary Rs. 400.
March 19:- Settled the account of Gopi under a cash discount of 2%.
March 20:- Sold goods to M of list price Rs. 70,000/- at 10% trade discount.
March 22:- M returned goods of the list price Rs. 6,000/- .
March 23:- Received cash from M under a cash discount of 10%.
Some more entries at the end of the year:-

1. Outstanding Expenses :- All those expenses which have been due at the end of the year but have not been paid are
termed as outstanding expenses.
For eg.- Wages, Salary, Rent for the last month of the financial year(say March) will be paid in the next financial
year(April), so they remain unpaid at the end of the previous financial year. As per principle of matching concept, these
expenses are related to current accounting year even though they have not been paid. Expense is a nominal account and
expense outstanding is a liability so the entry passed will be
Expenses A/C Dr.
To Outstanding Expenses A/C

2. Prepaid Expenses :- Some expenses have been paid in the current year but a portion of it relate to the next
accounting year. The portion related to the next accounting year is called prepaid expenses or the expenses paid in
advance. Prepaid expense is an asset and it will have a debit balance always.
So the entry passed will be
Prepaid Expenses A/C Dr.
To Expenses A/C
3. Depreciation:- It refers to the decrease in the value of fixed assets due to wear and tear with the passage of time.
Depreciation is a nominal account as it is an expense of the business and is charged on the fixed asset. The entry passed
for depreciation is:
Depreciation A/C Dr.
To Fixed Assets A/C

4. Interest on Capital :- Since the owner is separate from the business so it is the responsibility of the business to pay
interest on the capital to the owner as he has invested capital in the business. Interest on Capital is a nominal account and
it is an expense of the business thus it will always have a debit balance.
The entry passed for interest on capital is
Interest on Capital A/C Dr.
To Capital A/C

5. Interest on Drawings :- If the business allows interest on capital on owner’s capital/ businessman’s capital , it should
also charge interest on drawings made by the owner from his capital. Thus, interest on drawings is an income to the
business. It is a nominal account so it is credited and the drawings account will be debited as owner will pay it to the
business out of his capital. The entry passed will be:
Drawings A/C Dr.
To Interest on Capital A/C
1. Pass the following entries in the books of X Ltd. As on Jan.
31, 2023
2023
Jan 1:- Commenced business with cash Rs. 5,00,000/-.
Jan 3:- Provide 10% interest on capital amounting Rs. 80,000/-.
Jan 4 :- Bought goods from Krishna of list price Rs. 25,000/- less trade discount
25%.
Jan 5:- Paid salary Rs. 4,000 and stationary of Rs. 400 by cheque.
Jan 6:- Withdrew goods of Rs. 5000 from business for personal use.
Jan 7:- Withdrew cash of Rs. 600 from bank for office use.
Jan 8:- Bought goods from Ram for Rs. 30,000/-.
Jan 9:- Raman who owed the business Rs. 40,000/- became insolvent and business
received 40% of the amount from him.
Jan 10:- Bought machinery from Gopi in cash Rs. 40,000/-.
Jan 12:- Sold goods to Y for Rs. 20,000 at 10% trade discount.
Jan 15:- Y returned the goods to business of Rs. 3,000/-.
Jan 17:- Received cash from Mr. Y under cash discount of 2%.
Jan 18:- Insurance Premium of Rs. 400 relates to next year.
Jan 19:- Rent due but not paid Rs. 2,000/-.
Jan 21:- Provide 10% depreciation on machinery coting Rs. 1,00,000.
Jan 22:- Bought goods from Arun of the list price Rs. 50,000/- at a trade discount of
20%.
Jan 23:- Returned goods to Arun of the list price Rs. 2000/-.
Jan 24:- Settled the account of Arun by paying cash under a cash
discount of 4%.
Jan 25:- Paid salaries to H of Rs. 5,000/-.
Jan 27:- Received Commission Rs. 600.
 Ledger
 A ledger is a ‘book of final entry’ or ‘Principal Book’ which contains record of all
the transactions in a summarized and classified form.
 It is called the ‘Principal Book’ as it contains the complete record of each account
of business transactions so
(i) personal accounts will reveal how much amount is due from each customer or
how much amount is payable to each supplier.
(ii) the nominal accounts tells how much amount is spent on each expense of the
business and how much amount is earned from each income of the business.
(iii) real accounts tell how much amount has been spent on each type of asset of
the business.
 Ledger

 Format of Ledger Account

Dr.
DateCr. Particula J.F. Amou Dat Particula J.F. Amou
rs nt Rs. e rs ntRs.
To (name By (Name
of a/c) of a/c)

(Debit side of the ledger (Credit side of the

ledger
with credit balances.) with debit
balances.)
 Ledger
 Details of the ledger columns:-
1. Date- Date of the transaction will be recorded.
2. Particulars – Each transaction will involve equal debit and credit side. While
recording on the debit side, name of the credit account is written as ‘To………..’ ,
similarly, while recording on the credit side, name of debit account is written as ‘By
………..’ .
3. J.F. – It refers to Journal Folio (Page) from where the transaction is taken while
posting.
4. Amount – The amount involved in the transaction is recorded here.
 Ledger
 Rules for posting of Journal Entries to Ledger:-

1. Separate accounts should be opened in the ledger for different accounts recorded in the
journal eg.- Sales A/C, Cash A/C, Machinery A/C etc. .
2. All the transactions pertaining to a particular account should be posted at one place in
chronological order.
3. In the column of Particulars, the word ‘To’ is written to record credit balances on the
debit side while the word ‘By’ is written for recording debit balances transaction on
the credit side of the ledger.
 Ledger
 Example 1 :- Record the transactions in the journal and post them in the ledger :-
2010
Jan 1:- Commenced business with cash Rs. 80,000/- .
Journal/ In the books of XYZ Ltd. As on Jan 2010
Particulars Dr. Cr. Amount
Date L.F. Amount (Rs.) (Rs.)
2010
Jan 1 Cash A/C 80,000
Dr.
To Capital 80,000
A/C
(Being
commenced to be continued…..
business with
cash.)
 Ledger

Ledger
Cash A/C
Dr.
Particula J.F. Amou Dat Particula J.F. Amou
Dat rs
Cr.
nt Rs. e rs nt Rs.
e
201 201
0 0
Jan To Capital 80,000 Jan By 80,000
Date
1 A/C 31 Balance
Particulars
c/d
J.F.
Amount R 80,000
80,000
201
0
 Ledger
Ledger
Capital A/C
Dr. Cr.

Particul J.F. Amou Date Particul J.F. Amou

Dat ars nt Rs. ars nt
e Rs.
2010 2010
Jan To 80,000 Jan 1 By Cash 80,000
31 Balance A/C
c/d
80,000 80,000
2010
Feb 1 By 80,000
Balance
b/d
 Ledger

Journalise the following transactions and post them into the ledger.
2023
May 1:- Started business with cash Rs. 6,00,000/-.
May 3:- Bought goods for cash Rs. 40,000/-.
May 4:- Bought furniture from Ram Rs. 50,000 at 10% trade discount.
May 5:- Sold machinery to Mohan Rs. 60,000/- .
May 8:- Paid Salaries to Mr. X Rs. 30,000/- .
May 9 :- Returned furniture to Ram of list price Rs. 5,000.
May 11:- Paid cash to Ram under a cash discount of 2%.
 Trial Balance

A trial balance is a statement prepared at the end of the accounting

year or even earlier from the balances of ledger accounts to ensure that
the transactions recorded in the journal have been correctly ledgerized
and balanced.

Format of Trial Balance

Particulars L.F Dr. Balances Cr. Balances
. (Rs.) (Rs.)
Trial Balance as on ………..

Total
 Trial Balance

Contents of Ledger:-
1. Particulars- It contains the name of various accounts.
2. Ledger Folio – L.F. is written against each account to ensure from where the
balance of ledger account has been taken.
3. Debit Balances- All accounts having debit balances are recorded in this column.
4. Credit Balances- All accounts having credit balances are recorded in this
column.
 Trial Balance
Prepare a Trial Balance of XYZ Enterprises from the following balances as on 31st March 2023.

Opening Stock - Rs. 10,500/- Bills Receivables - Rs. 4,500/-

Purchases - Rs. 50,600/- Creditors - Rs. 12,000/-
Sales - Rs. 80,500/- Bills Payables - Rs. 5,000/-
Purchases Return - Rs. 600/- Cash in hand - Rs. 5,000/-
Sales Return - Rs. 1500/- Capital - Rs. 60,000/-
Commission Paid - Rs. 3000/- Furniture - Rs. 14,000/-
Discount Allowed - Rs 2000/- Drawings - Rs. 6000/-
Salaries - Rs. 10,000/- Wages - Rs. 7,000/-
Rent - Rs. 7,500/- Bank Overdraft - Rs. 5,000/-
Advertisement - Rs. 1,500/-
Plant - Rs. 22,000/-
Debtors - Rs. 18,000/-
 Trial Balance as at 2023
Particulars Dr. Balances (Rs.) Cr. Balances (Rs.)
L.F
.
Opening Stock 10500

Purchases 50600

Sales 80500

Purchases Returns 600

Sales Returns 1500

Commission Paid 3000

Discount Allowed 2000

Salaries 10,000

Rent 7500

Advertisement 1500

Plant 22000

Debtors 18000
 ParticularsParticulars L. Dr. Balances Cr. Balances
 L.F F. (Rs.) (Rs.)
Bills Receivables 4500
Creditors 12000
Bills Payables 5000
Cash in Hand 5000
Capital 60,000
Furniture 14000
Drawings 6000
Wages 7000
Bank Overdraft 5000
Total 1,63,100 1,63,100
Kindly note, Accounts having

Debit Balances – Assets, Purchases, Sales Returns/ Returns Inwards, Expenses, Losses,
Drawings, Debtors, Bills Receivables, Bank
Credit Balances- Liabilities, Sales, Purchases Returns/ Returns Outwards, Incomes, Gains,
Capital, Creditors, Bills Payables, Bank Overdraft