Books of Accounts and Financial Preparation

Books of Accounts and Financial Preparation

Introduction

·       Books of Accounts are systematic records of all financial transactions of a business.

·       They ensure accuracy, help in preparing financial statements, and provide legal evidence of business activities.

·       Examples: Purchases Book, Sales Book, Cash Book, Journal, Ledger, etc.

Journal

The Journal is the book of original entry where all transactions are recorded in chronological order.

• Each entry is made following the double-entry system (one debit and one credit).
• Contains: Date, Particulars, Debit amount, Credit amount.

Example:
Purchased goods for ₹20,000 in cash.

Date                Particulars                   Debit (₹)         Credit (₹)

01-09-2025   Purchases A/c     Dr.        20,000

                        To Cash A/c                                        20,000

(Being goods purchased in cash)

Ledger

The Ledger is the book of final entry where transactions from the Journal are posted into individual accounts.

• Each account has two sides: Debit and Credit.
• Helps in finding out the net effect of transactions.

Example:
From the above journal entry:

Purchases A/c

• Debit: ₹20,000

Cash A/c

• Credit: ₹20,000

Trial Balance

The Trial Balance is a statement of all debit and credit balances extracted from the ledger.

• Prepared at a given date to check arithmetical accuracy.
• The total of Debit = Total of Credit.

Example:

Particulars	Debit (₹)	Credit (₹)
Purchases A/c	20,000
Cash A/c		20,000
Total	20,000	20,000

Types of Accounts

1. Personal Accounts – Relating to persons or entities.
• Rule: Debit the Receiver, Credit the Giver.
• Ex: Ram’s A/c, Capital A/c.
2. Real Accounts – Relating to assets (tangible or intangible).
• Rule: Debit what comes in, Credit what goes out.
• Ex: Machinery, Building, Cash.
3. Nominal Accounts – Relating to expenses, losses, incomes, and gains.
• Rule: Debit all expenses and losses, Credit all incomes and gains.
• Ex: Rent, Salary, Commission.

Example: Paid rent of ₹5,000 by cash →

• Rent A/c Dr. 5,000 (Nominal – expense)
• To Cash A/c 5,000 (Real – asset goes out)

Voucher System

A voucher is a documentary evidence of a business transaction.

• Types:
• Cash Voucher – for cash payments/receipts.
• Bank Voucher – for bank transactions.
• Journal Voucher – for adjustments (e.g., depreciation).

Example: If salary paid ₹10,000 → Salary Voucher signed by authorized person + cash receipt.

Rules of Posting

1. Locate the accounts affected.
2. Enter debit side in one account and credit side in the other.
3. Use folio reference to link journal and ledger.

Example:
Journal → "Purchases A/c Dr. To Cash A/c"
Ledger → Debit Purchases A/c; Credit Cash A/c.

Closing and Balancing of Accounts

• At the end of the accounting period, accounts are balanced:
• If debit > credit → Debit Balance.
• If credit > debit → Credit Balance.
• Nominal accounts are closed by transferring them to the Trading or Profit & Loss Account.
• Real & Personal accounts are carried forward to the Balance Sheet.

Example: Rent A/c balance ₹60,000 → transferred to Profit & Loss A/c.

Preparation of Trial Balance

Steps:

1. Extract all ledger balances.
2. List debit balances on one side, credit balances on the other.
3. Check if totals tally.

Purpose: Detect errors, serve as a base for financial statement preparation.

Trading Account

Prepared to ascertain Gross Profit or Gross Loss from buying and selling of goods.

Format (simplified):

Debit Side (Dr.)	Credit Side (Cr.)
Opening Stock	Sales
Purchases (– Returns)	Closing Stock
Direct Expenses (e.g., wages, carriage inwards)

Gross Profit = Credit side – Debit side

Example:
Sales = ₹1,00,000; Purchases = ₹70,000; Direct Expenses = ₹10,000; Opening Stock = ₹5,000; Closing Stock = ₹15,000.

Gross Profit = (1,00,000 + 15,000) – (70,000 + 10,000 + 5,000) = ₹30,000.

Profit and Loss Account

Prepared to find Net Profit or Net Loss after charging indirect expenses.

Debit Side: Indirect expenses (rent, salary, depreciation, etc.)
Credit Side: Indirect incomes (commission, interest, etc.)

Example:
Gross Profit (b/d) = ₹30,000
Less: Rent ₹5,000, Salary ₹10,000 → Total Exp. = ₹15,000
Net Profit = ₹15,000

Balance Sheet

A Balance Sheet is a statement showing Assets, Liabilities, and Capital of a business on a given date.

• Assets: Fixed, Current, Intangible.
• Liabilities: Long-term, Current.
• Capital: Owner’s equity.

Example Format:

Liabilities	Assets
Capital: 1,00,000	Fixed Assets: Machinery 50,000
Creditors: 20,000	Current Assets: Cash 30,000; Stock 40,000
Total: 1,20,000	Total: 1,20,000

Accounting Concepts in Relation to Balance Sheet

1. Going Concern Concept – Assets valued as if the business continues indefinitely.
2. Cost Concept – Assets recorded at purchase cost, not market value.
3. Dual Aspect Concept – Every transaction affects both sides (Assets = Liabilities + Capital).
4. Accrual Concept – Income/Expenses recognized when incurred, not when cash is received/paid.
5. Conservatism Concept – Anticipate losses, not profits; e.g., provision for doubtful debts.
6. Consistency Concept – Same methods of accounting should be applied every year.
7. Matching Concept – Expenses of a period must match revenues of that period.

In short

• Journal → Ledger → Trial Balance → Final Accounts (Trading A/c, P&L A/c, Balance Sheet).
• Each step ensures accuracy and compliance with accounting principles.

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