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What is debit and credit?

There is no definition of debit and


Debit and credit will depend on the

type of account in question
3 Golden Rules
In case of Personal Account: Debit the
receiver and credit the giver

In case of Real Account: Debit what comes

in and credit what goes out

In case of Nominal Account: Debit all

expenses and losses, credit all incomes and
Analysis of transactions
 Started business with cash Rs 50,000
 Purchased furniture for Rs 1,000 on credit from
 Goods purchased for cash Rs 20,000
 Goods sold to Ram Nivas for Rs 5,000 on credit
 Paid salaries to staff Rs 1,800
 Goods worth Rs 500 returned by Ram Niwas
 Rs 1000 commission received
Questions to be asked

What are the accounts involved?

What are the types of the accounts?

Which golden rules apply?

What is a Journal?
 Business transactions are either recorded in the journal or
subsidiary books.

 Journal is derived from the French word ‘Jour’ which means a


 Journal means a daily record of business transactions.

 It is a book of original entry because transactions are first

written in the journal from where they are posted to the
ledger at any convenient time.
What does journalizing mean?
Recording a transaction in the journal

The form in which a transaction is

recorded in the journal is known as a
journal entry.
 When two or more transactions occur on
the same day and either the debit account or
credit account is common, such
transactions are entered in the Journal in
the form of a combined journal entry
instead of making a separate entry for each

 Such type of entries are known as

compound journal entry.
Ruling of Journal is as follows

Date Particulars L.F. Dr. Cr.

Amount Amount
Rs Rs
Year Name of account to be debited
Month Date To Name of Account to be credited
 Columnn 1: Date- The date of the transaction on
which it takes place. It is divided into two parts,
month and date although year is only written once.
 Column 2: Particulars-The name of the account to be
debited and credited are to be written here with ‘Dr’.
and ‘To’ alongwith an explanation of the entry which
is known as ‘narration’.
 Column 3:-L.F.-It stands for ledger folio which means
page of the ledger. Page numbers on which the
various accounts appear in the ledger is written here
 Column 4: Dr. Amount- Here amount to be
debited against the Dr. account is written.

 Column 5: Cr. Amount- Here amount to be

credited against the Cr. account is written.
Advantages of journal
 Chronological and permanent record

 Information of debit and credit with narration

 Reduces possibility of error as both sides of a

transaction are written side by side

 No need to memorise on the part of the account

 Journal will be too long and voluminous because
of so many transactions

 The journal is unable to ascertain daily cash


 Becomes difficult to post each transaction to the

What is a ledger???
 To have a combined view of similar transactions
different accounts are prepared in the ledger.

 A ledger account is a summary statement of all the

transactions relating to a person, asset, expense or
income which have taken place during a given
period of time and shows their net effect.

 A group of accounts is known as ledger.

What is posting???
Every transaction is first recorded in the
journal in the form of a journal entry and
from there it is transferred to the respective
account in the ledger.

This process of transferring the transactions

from the journal to the ledger is known as
Ruling of account in the ledger
Date Particulars F. Amount Date Particulars F. Amount

1.1.12 To name of credit account 3 5,000 3.1.12 By name of debit account 2 4500
Balancing of Accounts
 Various accounts in the ledger are balanced for
the preparation of the final accounts.

 An account is said to have a debit balance if the

total of its debit side is more than the total of its
credit side.

 An account is considered to have a credit balance

if the total of its credit side is more than the total
of its debit side.
Difference between journal and
 Journal is a book of original entry(first) entry, whereas ledger
is the book of second entry.
 In the journal transactions are recorded in a chronological
order as and when they occur. But in a ledger transactions
relating to a particular account appear at one place.
 In case of disputes, journal has greater weight as legal
evidence. For accounting purposes, ledger is the main source
of information.
 Journal is a subsidiary book which helps in the preparation of
the principal book of account i.e. ledger.
 Recording transactions in the journal is called journalising
whereas recording transactions in the ledger is known as
Subsidiary Books
 A considerable saving of clerical labour can be brought
about if transactions of similar nature are recorded in
separate journals so as to permit the sub-divisions of the
 This would facilitate not only the division of the journal
but it would also make posting easier.
 These sub-divisions of the Journal into various books
recording transactions of the similar nature are called
subsidiary books.
 These subsidiary books are also known as books of
original entry because transactions are 1st recorded here
and then taken to their respective ledgers.
Classification of Subsidiary Books
 Cash Book: Only cash and bank transactions are

 Purchases Book/Purchase Day Book: only credit

purchases of goods are recorded.

 Sales Book: only credit sales of goods are recorded.

 Purchases Return(Return Outwards)Book: Only

returns of goods purchased are recorded
 Sales Return (Return Inwards) Book: Only returns of
goods made by the customers are recorded.

 Bills Receivable Book: this book is maintained to record

all bills received from the customers.

 Bills Payable: This book records all acceptances made by

the firm or the bills to be paid by the firm

 Journal Proper: all those transactions which could not be

recorded in any of the above subsidiary books will be
recorded in this book.
Cash Book
 The number of transactions relating to cash are
usually large.

 If every cash transaction was recorded in the journal,

a tremendous amount of work will be involved in
debiting or crediting Cash Account everytime cash is
received or paid.

 Thus a cash book removes the botheration of posting

every time cash receipt and payment individually to
cash account in the ledger.
Is Cash book a Journal or

Types of Cash Book
 Simple Cash Book

 Double column cash book

 Triple column cash book

Receipts Payments
Date Particulars R.N. L.F. Amount(Rs) Date Particulars V.N. L.F. Amount(Rs)
Double Column Cash Book
Receipts Payments
Date Particulars R.N L.F. Discount Amount Date Particulars V.N L.F. Discount Amount
. .
(Rs) (Rs)
Receipts Triple Column Cash book Payments
Date Particulars R.N. L.F. Discount Cash Bank Date Particulars V.N L.F. Discount Cash Bank
2007 Particulars
1 Cash in hand Rs 5,374; Balance at Bank Rs 15,490
3 Cash Sales Rs 6,400
5 Paid Rs 7,000 into bank
6 Received a cheque for Rs 700 from Sneh
8 Paid into bank Sneh’s cheque for Rs 700
10 Paid to Anurag by cheque Rs 980 and discount allowed by
him Rs 20
12 Cash Purchases Rs 2500
14 Withdrew from bank for personal use Rs 5000
15 Received cheque for Rs 950 from Lucky & Co. allowed him
discount Rs 50
18 Cash Sales Rs 7,500
19 Paid into bank Lucky & Co’s cheque for Rs 950 and cash Rs
2007 Particulars
21Cash paid for stationery Rs 120
23Paid commission to Rakesh by cheque Rs 500
25Received cheque for Rs 1000 from Chander
Mohan and paid the same into bank
27 Lucky and Co’s cheque dishonoured
29 Drew a cheque for Rs 800 for personal use
31 Paid salaries by cheque Rs 1500 and by cash Rs
31 Bank charges Rs 20 and insurance premium Rs
520 are shown in Pass book
What is a trial balance???
 Fundamental principle of Double Entry System of
Accounting: For every debit there is a credit.

 Thus the sum total of debit amount should be equal

to the credit amounts of the ledger at any date.

 At the end of the financial year, the balances of all the

ledger accounts are extracted and are written up in a
statement known as trial balance and finally totaled
up to see if the debit balances is equal to the total of
the credit balances in order to test the arithmetical
accuracy of the books.
 The agreement of the trial balance shows that
both the aspects of each transaction have been
recorded and that the books are arithmetically

 Thus trial balance forms a connecting link

between the ledger accounts and the final
Specimen of trial balance
as on 30 thune,2011
Dr. Cr.
Serial Name of the Account Balance Balance
Rs. Rs.

Objectives of Trial Balance
 To have balances of all the accounts of the ledger in
order to avoid the necessity of going through the pages
of the ledger to find it out.

 To have a proof that the double entry of each

transaction has been recorded because of its

 To have arithmetical accuracy of the books of accounts

because of the agreement of the trial balance.
To have material for preparing the P&L account and
Balance Sheet of the business
 Trial balance can only be prepared where double
entry system of accounting is adopted.

 There are certain errors which are not disclosed by

the trial balance although it gives arithmetical
accuracy of the books of accounts.

 If trial balance is not prepared correctly then the final

accounts prepared will not reflect the true and fair
view of the state of affairs of the business.
Preparation of Trial Balance

 Total Method: Debit and credit total of each

account are shown in the two amount

 Balance Method: Difference between debit

and credit sides of each account is shown in
the amount columns.
The following trial balance has been
prepared wrongly. You are required to
correct the mistakes and draw a new
Trial Balance.
Name of the account Debit Balance(Rs) Credit Balance(Rs)
Cash in hand 2,000
Purchases Return 4,000
Wages 8,000
Establishment Expenses 12,000
Sales Return 8,000
Capital 22,000
Carriage Outward 2,000
Discount Received 1,200
Commission Earned 800
Machinery 20,000
Stock 10,000
Debtors 8,000
Creditors 12,000
Sales 44,000
Purchases 28,000
Bank Overdraft 14,000
Manufacturing Expenses 14,000
Loan from Ashok 14,000
Carriage Inward 1,000
Interest on Investments 1000
1,13,000 1,13,000
 Error of omission

 Error of commission

 Compensating errors

 Errors of principle