UNIT II

MECHANICS OF ACCOUNTING
ACCOUNTING STANDARDS AND IFRS:
 International Accounting Principles and

Standards
 Matching of Indian Accounting Standards

with International Accounting Standards

DOUBLE ENTRY SYSTEM OF ACCOUNTING
JOURNALIZING OF TRANSACTIONS
LEDGER POSTING AND TRIAL BALANCE
ACCOUNTING
STANDARDS
…contd.
 GAAP
 Accounting standards improve the transparency of financial reporting
in all countries. In the United States, the Generally Accepted
Accounting Principles (GAAP) form the set of accounting standards
widely accepted for preparing financial statements. International
companies follow the International Financial Reporting Standards
(IFRS), which are set by the International Accounting Standards
Board and serve as the guideline for non-U.S. GAAP companies
reporting financial statements.
 The generally accepted accounting principles are used widely among
public and private entities in the United States. The rest of the world
primarily uses IFRS. Multinational entities are required to use these
standards. The International Accounting Standards Board
(IASB) establishes and interprets the international communities'
accounting standards when preparing financial statements.
 …contd.
 Accounting standards relate to all aspects of an entity’s
finances, including assets, liabilities, revenue, expenses, and
shareholders' equity. Specific examples of accounting
standards include revenue recognition, asset classification,
allowable methods for depreciation, what is considered
depreciable, lease classifications, and outstanding share
measurement.
 The American Institute of Accountants, which is now known as
the American Institute of Certified Public Accountants, and the
New York Stock Exchange attempted to launch the first
accounting standards in the 1930s.Following this attempt
came the Securities Act of 1933 and the Securities Exchange
Act of 1934, which created the Securities and Exchange
Commission.Accounting standards have also been established
by the Governmental Accounting Standards Board for
 …contd.
 Accounting standards specify when and how economic events
are to be recognized, measured, and displayed. External entities,
such as banks, investors, and regulatory agencies, rely on
accounting standards to ensure relevant and accurate information
is provided about the entity. These technical pronouncements
have ensured transparency in reporting and set the boundaries for
financial reporting measures.

 Accounting standards ensure the financial statements from multiple

companies are comparable. Because all entities follow the same
rules, accounting standards make the financial statements credible
and allow for more economic decisions based on accurate and
consistent information.
 Financial Accounting Standards
Board (FASB)

 An independent nonprofit organization, the

Financial Accounting Standards Board (FASB)
has the authority to establish and interpret
generally accepted accounting principles
(GAAP) in the United States for public and
private companies and nonprofit
organizations. GAAP refers to a set of
standards for how companies, nonprofits, and
governments should and present their
financial statemen
 Why Are Accounting Standards
Useful?

Accounting standards improve the

transparency of financial reporting in all
countries. They specify when and how
economic events are to be recognized,
measured, and displayed. External entities,
such as banks, investors, and regulatory
agencies, rely on accounting standards to
ensure relevant and accurate information is
provided about the entity. These technical
pronouncements have ensured transparency
in reporting and set the boundaries for
 What Are Generally Accepted Accounting Principles
(GAAP)?

In the United States, the generally accepted accounting

principles (GAAP) form the set of accounting standards
widely accepted for preparing financial statements. Its aim
is to improve the clarity, consistency, and comparability of
the communication of financial information. Basically, it
is a common set of accounting principles, standards, and
procedures issued by the Financial Accounting Standards
Board (FASB). Public companies in the United States
must follow GAAP when their accountants compile their
financial statements.
 IFRS
What Are International Financial Reporting Standards
(IFRS)?
International companies follow the International Financial
Reporting Standards (IFRS), which are set by the
International Accounting Standards Board and serve as the
guideline for non-U.S. GAAP companies reporting
financial statements. They were established to bring
consistency to accounting standards and practices,
regardless of the company or the country. IFRS is thought
to be more dynamic than GAAP in that it is regularly being
revised in response to an ever-changing financial
environment.
IND AS VS AS
Difference between Accounting Standards and Ind-AS
…contd.
…contd.
…contd.
 DOUBLE ENTRY SYSTEM OF
ACCOUNTING

What Is Double Entry?

Double entry is a bookkeeping and accounting
method, which states that every financial
transaction has equal and opposite effects in
at least two different accounts. It is used to
satisfy the accounting equation:
Assets=Liabilities+Equity​
Assets=Liabilities+Equity​With a double-entry
system, credits are offset by debits in
a general ledger or T-account
 Double Entry System

Double Entry System of accounting deals with either two or more accounts for
every business transaction. For instance, a person enters a transaction of borrowing
money from the bank. So, this will increase the assets for cash balance account and
simultaneously the liability for loan payable account will also increase.
Recording System
 Double entry system records the transactions by understanding them as a DEBIT
ITEM or CREDIT ITEM. A debit entry in one account gives the opposite effect in
another account by credit entry. This means that the sum of all Debit accounts must
be equal to the sum of Credit accounts. This method of accounting and book-
keeping results in the accurate depiction of financial statements. Thus, it also lowers
the rate of errors by detecting them on a timely basis.
 Types of Accounts

The accounting and book-keeping process

measures, records and communicates day to day
financial activities. A transaction is an
event taking place between two economic entities,
such as customers or vendors and businesses.
Accounting and book-keeping record this event.
 Under a systematic accounting process, the
activities are recorded into various accounts to
keep the data bifurcated and classified under
account heads. There are majorly seven types of
accounts wherein all the business accounting
entries and transactions are classified. These are:
 Assets
 Liabilities
 Equity
 Gains
 Losses
 Expenses
 Revenues
The accounting and book-keeping is a continuous process of tracking changes in each
account as the company continues to do its operations.
Debits and Credits are essentials to enter data in a double entry system of accounting and
book-keeping. While posting an accounting entry, an entry on the left side of the account
ledger is a debit entry and right side entry is a credit entry.
Finally, to complete an entry the total of the Debit side and the Credit side should be
equal. All debits do not always equate to increase the account nor do all credits equate to
decrease the accounts. A debit entry might increase one account and at the same time
decrease another account.
 …contd.
 Double entry refers to an accounting concept
whereby assets = liabilities + owners’ equity.
 In the double-entry system, transactions are
recorded in terms of debits and credits.
 Double-entry bookkeeping was developed in
the mercantile period of Europe to help
rationalize commercial transactions and
make trade more efficient.
 The emergence of double entry has been
linked to the birth of capitalism.
 RULES OF DEBIT AND CREDIT

Understanding Double Entry

 In accounting,a credit is an entry that increases a liability

account or decreases an asset account. A debit is the opposite. It

is an entry that increases an asset account or decreases a liability
account. In the double-entry accounting system, transactions are
recorded in terms of debits and credits. Since a debit in one
account offsets a credit in another, the sum of all debits must
equal the sum of all credits.
 The double-entry system of bookkeeping standardizes the

accounting process and improves the accuracy of prepared

financial statements, allowing for improved detection of errors.
All types of business accounts are recorded as either a debit or a
 …contd.
 Debits and credits are essential to the double-entry system. In
accounting, a debit refers to an entry on the left side of an account
ledger, and credit refers to an entry on the right side of an account
ledger. To be in balance, the total of debits and credits for a
transaction must be equal. Debits do not always equate to
increases, and credits do not always equate to decreases.
 A debit may increase one account while decreasing another. For
example, a debit increases asset accounts but decreases liability
and equity accounts, which supports the general accounting
equation of assets = liabilities + equity. On the income statement,
debits increase the balances in expense and loss accounts, while
credits decrease their balances. Debits decrease revenue account
balances, while credits increase their balances.
 The Double-Entry Accounting System

 Double-entry bookkeeping was developed in the mercantile period of Europe to

help rationalize commercial transactions and make trade more efficient. It also
helped merchants and bankers understand their costs and profits. Some thinkers
have argued that double-entry accounting was a key calculative technology
responsible for the birth of capitalism.
 The balance sheet is based on the double-entry accounting system where the total
assets of a company are equal to the total liabilities and shareholder equity.
Essentially, the representation equates all uses of capital (assets) to all sources of
capital (where debt capital leads to liabilities and equity capital leads to
shareholders’ equity). For a company to keep accurate accounts, every business
transaction will be represented in at least two of the accounts.
 For instance, if a business takes a loan from a financial entity like a bank, the
borrowed money will raise the company’s assets and the loan liability will also rise
by an equivalent amount. If a business buys raw materials by paying cash, it will
lead to an increase in the inventory (asset) while reducing cash capital (another
asset). Because there are two or more accounts affected by every transaction
carried out by a company, the accounting system is referred to as double-entry
accounting.
 This practice ensures that the accounting equation always remains balanced; that
is, the left side value of the equation will always match the right side value.
 Example of Double Entry

 A bakery purchases a fleet of refrigerated delivery trucks on

credit; the total credit purchase was $250,000. The new set
of trucks will be used in business operations and will not be
sold for at least 10 years—their estimated useful life.
 To account for the credit purchase, entries must be made in
their respective accounting ledgers. Because the business
has accumulated more assets, a debit to the asset account
for the cost of the purchase ($250,000) will be made. To
account for the credit purchase, a credit entry of $250,000
will be made to accounts payable. The debit entry increases
the asset balance and the credit entry increases the notes
payable liability balance by the same amount.
 Double entries can also occur within the same class. If the
bakery’s purchase was made with cash, a credit would be
made to cash and a debit to asset, still resulting in a balance.
 …….Contd.
 A business took out a $10,000 loan and the
loan was recorded in both the debit account
and the credit account. The cash (asset)
account would be debited by $10,000 and the
debt (liability) account is credited by $10,000.
Under the double-entry system, both the debit
and credit accounts will equal each other.
 What Is the Difference Between Single-Entry
Accounting and Double-Entry Accounting?

In single-entry accounting, when a business completes a

transaction, it records that transaction in only one account.
For example, if a business sells a good, the expenses of the
good are recorded when it is purchased, and the revenue is
recorded when the good is sold. With double-entry
accounting, when the good is purchased, it records an
increase in inventory and a decrease in assets. When the
good is sold, it records a decrease in inventory and an
increase in cash (assets). Double-entry accounting provides
a holistic view of a company’s transactions and a clearer
financial picture.
 Advantages of Double Entry System

 This system increases the Accuracy of the

accounting, through the trial balance device
 Profit and loss suffered during the Year can be
calculated with details
 By following this system the company can keep
the accounting records in detail which
eventually helps in controlling
 The recorded details can be used for comparison
purpose as well. Details of the first year can be
compared with the second year, deviations
found any during comparison can be worked on.
 What Is the Disadvantage of the Double-Entry
Accounting System?

 The primary disadvantage of the double-entry

accounting system is that it is more complex.
It requires two entries to be recorded when
one transaction takes place. It also requires
that mathematically, debits and credits
always equal each other. This complexity can
be time-consuming as well as more costly;
however, in the long run, it is more beneficial
to a company than single-entry accounting.
 Solved Example
Q: A fleet owner purchases delivery
trucks on credit. The total credit
purchase is of Rs. 50,00,000/-. All
new trucks will be used in daily
business operations and will not be
sold for the next 10 years. The
estimated life of trucks is 10 years.
Explain in respect to the Double
Entry System.
 Answer
 This is a credit purchase of trucks. For the transaction, there are
two activities, one is credit purchase of the trucks and another is
an addition in new inventory. Entries are in respective accounting
ledgers.
 As the business has accumulated the assets, a debit entry will be
made in inventory with the amount equal to the cost of trucks i.e.
Rs. 50,00,000/-. As these are credit purchases, an entry with an
equal amount has to be made on the credit side in accounts
payable.
 We see that the debit entry increases the inventory asset balance
and credit entry increases the accounts payable liability balance
with the same amount.
 Double entries can also affect the same class of accounts. If the
fleet owner would have bought the trucks in cash, then a credit
entry has to be made in cash account and a debit entry to the
inventory account. Still, the result in balance will be the same.
 Traditional Approach
Traditional Approach
 Financial accounts can be classified into two types of
approaches. Firstly, according to the Traditional approach
or the British approach. The other way is the Modern
approach or the American approach. The Key concepts
under the Traditional approach are personal and
impersonal accounts .
 Traditional Approach of Financial Accounting
 Traditional approach classifies the accounts while Modern
approach uses the Accounting equation for accounting.
Further, under the Traditional approach, all the ledger
accounts are classified as “Personal” and “Impersonal
accounts”. The rules of debit and credit under the
Traditional approach are golden rules.
 Classification of Accounts:

 Personal accounts
 Impersonal accounts

Personal Accounts
These are the accounts of human beings, natural persons
and artificial persons. Hence, Personal accounts are
further classified as:
 Natural persons

 Artificial persons and

 Representative persons
 …contd.
1] Natural Persons
Natural persons are human beings. Here, we include
accounts belonging to humans. Thus, Debtor’s A/c.,
Creditor’s A/c., Proprietor’s A/c., Proprietor’s Capital
A/c., Proprietor’s Drawings A/c. etc. fall under this
category.
2] Artificial Persons
These are those persons who are not human beings but
can act and work like humans. They possess a separate
identity in the eyes of law. So, they can enter into
agreements. They qualify to be penalized too.
These, therefore, include Hindu undivided families,
partnership firms, co-operative societies, an association
of persons, companies, municipal corporations,
hospitals, banks, government bodies, etc.
3] Representative Persons
As the name suggests, these accounts represent the
accounts of the persons. These persons may be
natural or artificial. Most importantly, when the
nominal accounts i.e. those of expenses and
incomes become outstanding, pre-paid, accrued or
unearned, they fall under this category. Hence,
Wages Outstanding A/c, Pre-paid Rent A/c,
Accrued Interest A/c, Unearned Commission A/c,
etc. fall under this category.
 Impersonal Accounts

Impersonal Accounts are the accounts other than

the Personal Accounts. Hence, these are further
classified as:
 Real accounts
 Nominal accounts
1. Real Accounts
These accounts are the accounts of all the assets
and liabilities of the business. Therefore, these
accounts are not closed at the end of the accounting
year. Thus, they continue to appear in the Balance
Sheet. The balances of these accounts are carried
forward to the next accounting year. So, these are
permanent accounts and have the following
categories:
(a) Tangible Real Account:
It comprises of those assets, properties or
possessions that one can touch, see and
measure. For example, Building A/c, Furniture
A/c, Cash A/c, etc.
(b) Intangible Real Account:
It comprises of those assets or possessions
that one cannot touch, see or measure. But
these possess a monetary value. Thus, they can
be bought and sold also. For example, Goodwill,
Patents, Copyrights, Trademark, etc.
2. Nominal Accounts
Nominal accounts are the accounts related to the
expenses, losses, incomes, and gains. These
accounts are temporary accounts. Therefore, the
balances of these are transferred to Trading and
Profit and Loss A/c at the end of the accounting
year. Hence, these accounts have no balance to
carry forward next year.
 Example
Q. Analyze the following transactions based on the
traditional approach of accounting. State which
accounts are to be debited and credited.
 Chitra commenced business with cash ₹ 1, 00,000.

 Purchased furniture for cash ₹ 10,000

 Purchased goods from Ram on credit ₹ 50,000

 Sold goods for cash ₹ 20000

 Paid salary to Jatin ₹ 15,000

 Paid to Ram ₹ 25000

 Salary to be paid to Rahul is outstanding ₹ 5000

 Commission earned but not received ₹ 2000

ANSWER
 Modern Approach to Accounting

Under the Modern Approach, the accounts are not debited

and credited. Hence, the Accounting Equation is used to
debit or credit an account. Thus, it is also known as the
Accounting Equation Approach.
 The Basic Accounting Equation is: Assets = Liabilities +

Capital (Owner’s Equity)

 Furthermore, it can be expanded as Assets = Liabilities +

Capital + Revenues – Expenses

 Also, Profit = Revenues – Expenses
 The Accounting Equation should remain
balanced every time. Because we know
that each transaction has a Dual aspect.
Thus, each transaction will either affect
the debit side and credit side. Also, a
transaction may affect two accounts on
the debit side or two accounts on the
credit side.
 Also, the profits will increase the Capital
and losses will decrease it.
 Classification of Accounts under the Modern Approach

Under the Modern Approach the accounts can be classified as

follows:
I. Assets Accounts
 Assets are the properties, possessions or economic resources

of a business. They help in business operations and help in

earning revenues. They can be measured in terms of money.
 Assets can be tangible or intangible. Also, assets can be

classified as Fixed Assets and Current Assets. Fixed Assets

are held for the long-term.
 They help in carrying out the normal operations of the

business. For example, land, building, furniture, machinery,

vehicles, etc. Current Assets are held for short-term. They are
realizable within a year usually. For example, debtors,
bills receivable, bank balance, cash, stock, etc.
II. Liabilities Accounts
 Liabilities are the amounts that an entity owes to the

outsiders. These are the obligations or the debts

payable by the business. Liabilities can also be
classified as Long-term and Current.
 Long-term Liabilities are payable after a period of

one year. For example, debentures, bank loans, etc.

Current liabilities are payable within one year. For
example, creditors, bills payable, rent outstanding,
bank overdraft, etc.
III. Capital Accounts
 The money brought into the business by the owner

is called Capital or Owner’s Equity. The Capital can

be brought in cash or assets by the owner.
 Capital is an obligation of the business that has to

be paid back to the owner. Because business is a

separate entity from its owner.
 Therefore, the Capital is shown on the liabilities side

of the Balance Sheet. The capital account is shown

after deducting the Drawings by the owner.
Drawings are the amount of cash, goods or assets
taken by the owner for personal use from the
IV. Revenue Accounts
 Revenue is the amount earned by the business by

selling goods or rendering of services. Also, it

includes other incomes such as rent received, the
commission received, interest received, dividend
earned, etc. All items of revenue are also clubbed
together under the Modern Approach.
V. Expenses Accounts
 All costs incurred or money spent by a business in order to

earn revenues is called expenses. It is noteworthy here that

when the benefits of the money spent are exhausted within a
period of one year, it is called an Expense. While in case the
benefit lasts for more than a year it is called Expenditure.
 Therefore, the purchase of goods is expenditure while the

cost of goods sold is an expense. For example, rent paid,

salary paid, electricity charges, interest paid, etc. are
expenses. While the purchase of assets, purchase of short-
term investments, etc. fall under the category of expenditure.
 Example on Modern Approach of Classification

Q: Analyze the following transactions and also

show their effects on the assets and liabilities
using the Modern Approach to Accounting.
 Commenced business with cash ₹100000

 Paid rent ₹1000

 Received commission ₹500

 Introduced additional capital ₹10000 in cash and 5000

in goods.
 Purchased goods ₹20000 from B

 Sold goods costing ₹10000 at a profit of 25% on the

cost
 Purchased office furniture ₹15000
 ANSWER
The analysis of each transaction is given below. Their
effect on the Assets and Liabilities is also shown in the
form of Accounting Equation:
 Cash is increasing and thus, cash should be debited. Also,
Capital is increasing, hence, Capital should be credited.
 Rent is paid. Therefore cash is decreasing. Rent is an
expense. Directly deduct rent from Capital. Therefore,
capital should be debited and cash should be credited.
 Commission is an income. Thus, add it to the Capital.
Also, cash will increase.
 Cash and goods are coming in. Also, Capital is increasing.
Hence, cash and goods should be debited and Capital
should be credited.
 …contd.
 Goods are coming in. Thus, they are increasing.
Therefore, goods should be debited. B has
become a creditor.
 Goods are going out thus, credit goods. Cash is
coming in thus, cash must be debited. Also, add
the profit of ₹ 2500 to Capital.
 Cash is decreasing while the furniture is
increasing. Therefore, cash must be credited
and furniture should be debited.
 Salary paid in advance is a current asset. Cash
is decreasing so cash must be credited.
 Journal and Journalising Process

Every business organization carries various transactions

throughout the day. Some transactions are similar, many
are different. Hence, it is not possible to keep all the
journalising process in mind without recording it. All
these transactions are important and therefore can’t be
avoided or omitted. So, to avoid any mistake or omission,
all these transactions are recorded in books. Journalising
is the traditional form of keeping track of happenings in
the organization.
 Meaning of Journal

 Journal is the book of prime entry also called the book of

original entry. That is, transactions are first entered here
and is the most important book of accounts. The
transactions are recorded systemically and in
chronological order.
 They are entered to show which accounts should be
debited or credited. Recording of transactions in “Journal”
is called as “Journalising the entries” “Journal” is
derived from the Latin word ‘Jour’, which means ‘a
day’. The transactions are first entered here and it is
then subsequently posted to another account book
 ….contd.
 Information recorded in the journal which certainly serves as a
proof or evidence in the court of law.
 It provides the base for ledger posting and also for cross-checking
of entries posted.
 It maintains the detailed record of transactions in the form of
narration, written immediately after passing the entry hence is
provides a highlight of the transaction done.
 Because the transactions are recorded in chronological order it is
useful for easy reference in the future.
 Journalising refers to recording business transactions
systematically and in a summarised form in the journal. It means a
process of entering the twofold effects of transactions in the form
 …contd.
 Date Column: In the first column the date of the
transaction is entered, the year is most probably written on
the top of the column than to repeat it every day.
 Particulars Column: Here the accounting entry is written
in a summarised form of debit and credit. The names of the
accounts involved in the transaction are written in the
journal entry.
On the first line, the account is debited, the word “Dr.” is
written at the right end of the same line of account debited.
On the second line, the account credited is written with a
prefix “To” after leaving a little space towards the start.
Immediately below the entry, a small explanation of the
transaction called ‘narration’ is written. The narration
begins with the word “Being”.
 …contd.
 Ledger Folio No. Column (L.F.): In this
column, the page number of the Ledger
in which the journal entry is posted, is
recorded. This also helps is easy cross
verification and reference in the future.
 Debit Amount Column: The amounts
to be debited to the accounts concerned
or involved are written.
 Credit Amount Column: The amounts
to be credited to the accounts concerned
or involved are written.
Rules for Journalising Transactions: (Golden rules of Accountancy)

Personal Account: It relates to persons(natural or

legal) with whom a business keeps dealings.
 Rule: Debit the receiver and Credit the giver.
 E.g. Goods worth Rs. 5000/- sold to Komal. Here,
because Komal is the receiver of goods so it is to
be debited.
 …contd.
Real Account: It relates to property or goods which may
come or go from the business.
 Rule: Debit what comes in and Credit what goes out.

 E.g. Goods worth Rs. 7000/- sold on cash. Here, cash a/c is

to be debited because cash flows out.

Nominal Account: It relates to business expenses, losses,
incomes, and gains.
 Rule: Debit all the expenses or losses and Credit all the

incomes, gains or profits.

 E.g. Paid Rs. 2000/- as commission to the agent. Here,

commission a/c is debited because it is a business expense.

 Steps in Journalising Transactions

The following steps are to be considered while

journalizing entries for business transactions:
 First of all, read and understand the transaction because
it may be either in a cash transaction or credit
transaction.
 Journal entries can be single entry i.e. one debit and one
credit or can be a compound entry (one or more debits
and one or more credits)
 A transaction not including any person’s name is
considered as a cash transaction. So, if a person’s name
is given along with certain words like ‘Cash’, ‘Bank’,
‘Received’, ‘Earned’, ‘Paid’, ‘Spent’, ‘Deposited’,
‘Withdrawn’, ‘Borrowed’, etc. then the transaction is
 …contd.
 In a credit transaction, out of the two accounts
in the transaction, certainly, one account is
Personal Account and the second account is
Real Account.
 As per the nature and types of accounts, apply
the rules of journalisation to give debit or credit
effects.
 Record the date of the transaction in the first
column which is the date column.
 In the particulars column, account to be debited
on the first line with the abbreviation ‘Dr.’ on
 …contd.
 While the account to be credited on the second line, with
‘To’ preceding the name of account credited. Also, draft a
narration starting with ‘Being’ in simple words.
 Finally, enter the amount of business transaction debit
column and credit column with regards to the deals done.
 If the journal entries are recorded on several pages then
both the amount column of each page should be totaled.
The balance should be written at the end of that page.
 Also, the same total is to be carried forward at the
beginning of the next page.
 At the bottom of one page, the totals are written as
“Carried Forward” and the totals of respective columns
on the next page is started with words “Brought
Furthermore, there are few transactions
which are similar in nature and occur on
the same date, hence such transactions
can be combined while journalising. It is
called composite journal entry.
 Solved Example

Question: Journalise the following transactions in the

Journal of Mr. Kiran for the year 2018
 January 1 – Paid rent Rs. 4000/-
 January 2 – Sold goods to Harsh for Rs. 10,000/-
Answer
…contd.
Here, Rent A/c is a nominal a/c and is
debited because rent is an expense.
Cash A/c is the real a/c and is credited
because there is an outflow of
cash. Here, Harsh A/c is a personal a/c
and is debited because he is the receiver
of goods. Goods A/c is the real a/c and is
credited because there is an outflow of
goods.
 LEDGER

 A ledger is a book which contains various

accounts. In other words, a ledger is a set of
accounts. It contains all accounts of the
business enterprise whether Real, Nominal or
Personal. It may be kept in any of the following
two forms: (i) Bound Ledger, and (ii) Loose
Leaf Ledger. It is common to keep the Ledger
in the form of loose-leaf cards these days. This
helps in posting transactions particularly when
a mechanised system of accounting is used.
 POSTING

The term ‘Posting’ means transferring the debit and

credit items from the Journal to their respective
accounts in the Ledger. It should be noted that the
exact names of accounts used in the Journal should
be carried to the Ledger. For example, if in the
Journal, Expenses Account has been debited, it
would not be correct to debit the Office Expenses
Account in the Ledger. Though, in the Journal, it
might have been indicated clearly in the narration
that it is an item of office expenses.
 …contd.
The correct Ledger Posting and Trial Balance
course would have been to record the amount to the
Office Expenses Account in the Journal as well as
in the Ledger. Posting may be done at any time.
However, it should be completed before the
financial statements are prepared. It is advisable to
keep the more active accounts posted to date. The
examples of such accounts are the cash account,
personal accounts of various parties etc.
 …contd.
The posting may be done by the bookkeeper from the Journal to the Ledger by any of the
following methods:
(i) He may take a particular side first. For example, he may take the debits first and make
the complete postings of all debits from the Journal to the Ledger.
(ii) He may take a particular account and post all debits and credits relating to that
account appearing on one particular page of the Journal. He may then take some other
accounts and follow the same procedure.
(iii) He may complete postings of each journal entry before proceeding to the next journal
entry.
It is advisable to follow the last method. One should post each debit and credit item as
it appears in the Journal. The Ledger Folio (L.F.) column in the Journal is used at the
time when debits and credits are posted to the Ledger. The page number of the Ledger
on which the posting has been done is mentioned in the L.F. column of the Journal.
Similarly, a folio column in the Ledger can also be kept where the page from which
posting has been done from the Journal may be mentioned. Thus, there are cross
references in both the Journal and the Ledger. A proper index should be maintained in
the Ledger giving the names of the accounts and the page numbers.
 The following rules should be observed while
posting transactions in the Ledger from the Journal:
(i) Separate accounts should be opened in the Ledger
for posting transactions relating to different
accounts recorded in the Journal. For example,
separate accounts may be opened for sales,
purchases, sales returns, purchases returns, salaries,
rent, cash, etc.
(ii) The concerned account which has been debited
in the Journal should also be debited in the Ledger.
However, a reference should be made of the other
account which has been credited in the Journal. For
example, for salaries paid, the salaries account
should be debited in the Ledger, but reference
should be given of the Cash Account which was
been credited in the Journal.
(iii)The concerned account, which has been
credited in the Journal should also be credited in
the Ledger, but reference should be given of the
account, which has been debited in the Journal. For
example, for salaries paid, Cash Account has been
credited in the Journal. It will be credited in the
Ledger also, but reference will be given of the
Salaries Account in the Ledger.
Thus, it may be concluded that while making a
posting in the Ledger, the concerned account which
has been debited or credited in the Journal should
also be debited or credited in the Ledger, but
reference has to be given of the other account
which has been credited or debited in the Journal,
as the case may be. This will be clear with the
following example.
Suppose salaries of Rs 10,000 have been paid in cash, the following entry will
be passed in the Journal:

In the Ledger two accounts will be opened (i) Salaries Account, and (ii) Cash
Account. Since Salaries Accounts has been debited in the Journal, it will also
be debited in the Ledger. Similarly Cash Account has been credited in the
Journal and, therefore, it will also be credited in the Ledger, but reference will
be given of the other account involved. Thus the accounts will appear as
follows in the Ledger:
Use of the words ‘To’ and ‘By’ It is customary to use
words ‘To’ and ‘By’ while making a posting in the Ledger.
The word ‘To’ is used with the accounts which appear on
the debit side of a Ledger Account.
For example, in the Salaries Account, instead of writing
only ‘Cash’ as shown above, the words ‘To Cash’ will
appear on the debit side of the account. Similarly, the
word ‘By’ is used with accounts which appear on the
credit side of a Ledger Account. For example, in the
above case, the words ‘By Salaries A/c’ will appear on
the credit side of the Cash Account instead of only
‘Salaries A/c’. The words ‘To’ and ‘By’ do not have any
specific meanings. Modern accountants are, therefore,
ignoring the use of these words.
 The procedure of posting from the Journal to the
Ledger will be clear with the help of the
illustrations given in the following pages:
Illustration : Journalise the following transactions
and post them into the Ledger:
 1. Ram started business with a capital of Rs
10,000.
 2. He purchased furniture for cash Rs 4,000.
 3. He purchased goods from Mohan on credit Rs
2,000.
 4. He paid cash to Mohan Rs 1,000.
 TRIAL BALANCE

In case, the various debit balances and the

credit balances of the different accounts
are taken down in a statement, the
statement so prepared is termed as a Trial
Balance.
In other words, Trial Balance is a statement
containing the various ledger balances
on a particular date. For example, with the
balances of the ledger accounts prepared,
the Trial Balance can be prepared as follows:
1. Checking of the arithmetical accuracy of the accounting
entries :
As indicated above, the Trial Balance helps in knowing the
arithmetical accuracy of the accounting entries. This is because
according to the dual aspect concept for every debit, there must
be an equivalent credit. Trial Balance represents a summary of
all ledger balances and, therefore, if the two sides of the Trial
Balance tally, it is an indication of this fact that the books of
account are arithmetically accurate. Of course, there may be
certain errors in the books of account in spite of an agreed Trial
Balance. For example, if a transaction has been completely
omitted from the books of account, the two sides of the Trial
Balance will tally, in spite of the books of account being wrong.
2. Basis for financial statements:
Trial Balance forms the basis for preparing financial
statements such as the Income Statement and the
Balance Sheet. The Trial Balance represents all
transactions relating to different accounts in a
summarised form for a particular period. In case,
theTrial Balance is not prepared, it will be almost
impossible to prepare the financial statements as stated
above to know the profit or loss made by the business
during a particular period or its financial position on a
particular date.
3. Summarised ledger.
It has already been stated that a Trial Balance
contains the ledger balances on a particular date.
Thus, the entire ledger is summarised in the form
of a Trial Balance. The position of a particular
account can be judged simply by looking at the
Trial Balance. The Ledger may be seen only when
details regarding the accounts are required.