Journal, Ledger and Trial Balance

Double-entry system

Every transaction affects at least two accounts, and the total debited always equals the total credited. This follows from the dual aspect concept.

Modern (accounting equation) rules

Traditional (golden) rules

• Personal accounts: debit the receiver, credit the giver.
• Real accounts: debit what comes in, credit what goes out.
• Nominal accounts: debit expenses and losses, credit incomes and gains.

Journal and subsidiary books

The journal is the book of original (prime) entry: transactions are first recorded there in date order with a narration. Larger firms split the journal into subsidiary books:

• Purchases book - credit purchases of goods only
• Sales book - credit sales of goods only
• Purchases returns and sales returns books
• Cash book - all cash and bank receipts and payments (it works as both journal and ledger)
• Bills receivable and bills payable books
• Journal proper - everything else: opening, closing, adjusting and rectifying entries, credit purchase of assets

Trade discount is deducted on the invoice and never entered in the books. Goods listed at Rs 50,000 less 10% trade discount are debited to purchases at Rs 45,000. Cash discount is recorded.

Ledger, posting and balancing

The ledger is the principal book, holding one account for each person, asset, liability, income and expense. Transferring entries from the journal to the ledger is posting.

To balance an account, total both sides and put the difference on the lighter side as "balance c/d". If debits are Rs 185,000 and credits Rs 142,500, the account has a debit balance of Rs 42,500. Assets, expenses and drawings normally show debit balances; liabilities, capital and incomes show credit balances.

Trial balance

A trial balance is a statement (not an account) listing the debit and credit balances of all ledger accounts on a date. It tests the arithmetical accuracy of posting and is the starting point for final accounts.

Example: a credit sale of Rs 5,400 is posted to the customer's account as Rs 4,500. Sales is credited with 5,400 and the debtor debited with 4,500, so the debit side is short by Rs 900. A difference divisible by 9 often signals such a transposition.

An error of principle changes profit. Machinery of Rs 20,000 debited to purchases overstates expenses, so profit is understated by Rs 20,000 (before depreciation).

Suspense account

When the trial balance does not agree, the difference is placed in a suspense account on the lighter side so that work can go on. As one-sided errors are found, they are corrected through suspense until it closes.

Example: the sales book is undercast by Rs 2,000 (credit short 2,000); discount allowed Rs 500 is not posted (debit short 500); a purchase of Rs 1,500 from X is posted to the debit of X (debit exceeds credit by twice the amount, 3,000). Net excess of debit = 2,000 - 500 + 3,000 = Rs 4,500, so suspense opens with a credit balance of Rs 4,500.

Exam pointers

• Journal = book of original entry; ledger = principal book.
• Purchases and sales books take only credit dealings in goods.
• An agreed trial balance is not proof of accuracy.
• Errors of omission, commission, principle, compensating errors and errors of original entry are not disclosed.
• Posting to the wrong side creates a difference of double the amount.
• Suspense account is used only for one-sided errors.