Financial Accounting - I (I B.Com.)

1. SAIVA BHANU KSHATRIYA COLLEGE, ARUPPUKOTTAI.
Department of Commerce,
Dr. K. SUDHAGARAN M.Com., M.Phil., Ph.D., AssociateProfessor,
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FINANCIALACCOUNTING –BOOKS OFACCOUNTS
STUDY NOTES
Books of Accounts
 The book, which contains accounts, is known as the Books of Accounts. In other
words, it means the khata or books in which the businessman keeps the records of
business transactions.
 Recording of transactions in books of account is a process of entering the transactions
in the proper books of accounts in a systematic manner. It means putting into black
and white the transaction that takes place in course of business activities.
 Normally transactions are recorded in two sets of books.
 Transactions are first recorded in Journal, which is also known as ‘book of original
entry’ or ‘Primary Books’..
 The next step of recording of transactions is in Ledger, which is also known as ‘book
of final entry’ or ‘Secondary Books’.
 These Books of accounts are specially printed and ruled books where the accounts of
a firm can be written up.
Journal & Journalising
The word ‘Journal’has been derived from the French word ‘JOUR’ means daily records.
Journal is a book of original entry in which transactions are recorded as and when they occur
in chronological order (in order of date) from source documents. Recording in journal is
made showing the accounts to be debited and credited in a systematic manner. Thus, the
journal provides a date-wise record of all the transactions with details of the accounts and
amounts debited and credited for each transaction with a short explanation, which is known
as narration.
Ledger Folio (L.F): Journal is the original record of the business transactions. All entries
from the journal are posted in the ledger accounts. The page number or folio number of the
ledger account where the posting has been made from the journal is recorded in the L.F
column of the Journal.
Narration. Each entry in the journal must be explained in brief. This brief explanation of
the entry is called Narration. Thus, Narration gives a brief explanation of the transaction for
which the entry has been passed is given. It enables the persons going through the journal
entry to have an idea about the transaction.
Journalising is the process of recording the aspects of the transactions in Journal. In other
words, recording of entries in the ‘journal’ is known as journalising.

2. ADVANTAGES OF JOURNAL
The following are the inherent advantages of using journal.
1.As all the transactions are entered in the journal chronologically, a date wise record can
easily be maintained;
2. All the necessary information and the required explanations regarding all transactions can
be obtained from the journal.
3. Errors can be easily located and prevented by the use of journal or book of prime entry.
Ledger
Ledger is a book of account which contains a condensed to overcome and classified record of
all transactions of the business posted from the journal. It is also called the book of final
entry. In other words, the book, which contains accounts, is known as the ledger, also
called the Principal Book.
Ledger provides necessary information regarding various accounts. Personal accounts in
ledger show how much money firm owes to the creditors and the amount it can recover from
its debtors. The real accounts show the value of properties and also the value of stock.
Nominal accounts reflect the sources of income and also the amount spent on various items.
In accounting all transactions are ultimately recorded in the ledger. In this book, separate
accounts are opened for each ‘account head’ and all transactions relating to a particular
‘account head’ will be posted in the concerned account. An account for each person, each
type of revenue, expense, assets and liability is opened in the ledger.
Ledger is the ‘King of all the books of accounts’
Ledger is called the king of all the books of account, because it is the book which alone can
exhibit the position of each ‘account head’ in a convenient form. It can supply all the useful
information such as the net result of various transactions involving an asset, a liability,
capital, revenue and an expense.
Ledger is the ultimate destination of all transactions because posting is made from the journal
to the ledger. The information available in the ledger in classified and summarised form also
facilitates the preparation of a Trading and Profit and Loss Account and a Balance Sheet.
Thus, Ledger is called the King of all books because no other book of account can supply all
the information like ledger.
Importance/ Advantages of Ledger
The utility/importance of ‘Ledger’ can be summarised as follows:
(a) Consideration of Scattered Information: The ledger brings out the scattered
information from the ‘Journal’. It shows the condensed information under each
account head.
(b)Full information at a glance: As the ledger records both the debit and credit
aspects in two different sides, the complete position of an account can be ascertained
at a glance.
(c) Balance: At the end of a specified period, the net effect of transactions on a

3. particular ‘account head’ can be ascertained by finding out the balance of that
account. For example, how much is due from a customer or how much is payable to a
creditor or what is the total amount of purchases or what has been the expenditure on
different heads? All these information can be ascertained by balancing the accounts
appearing in the ledger.
(d)Trial Balance: As both the aspects are recorded, the net debit effect and the net
credit on the accounts must be equal on a particular date. This is verified by preparing
a statement called Trial Balance. This is possible only if the ledger accounts are
maintained.
(e)Preparation of final accounts: Ledger is the ‘store-house’of all information
relating to the transactions. It facilitates the preparation of a ‘Profit and Loss Account’
from the balances of revenue and expenses accounts. It also, facilitates the preparation
of a ‘Balance Sheet’ from the balances of assets, liabilities and capital accounts.
Purpose of Ledger:
A businessman requires various information to ascertain the net results, financial position and
progress of the business.
Ledger can provide various information, which are given below.
(a)Information regarding Debtors: A trader can know the amount of money receivable
from various customers and others who are known as debtors.
(b)Information regarding Creditors: A trader can know the amount of money payable to
various suppliers and others who are known as creditors.
(c) Information regarding Purchases and Sales: The total purchase of goods and the total
sale of goods during a specific period can be known by preparing Purchase A/c and Sales
A/c.
(d)Information regarding Revenue and Expenses: The amount of revenue earned from
different sources and the amount of expenses incurred on different accounts heads for a
particular period may be known from the ledger.
(e) Information regarding Assets and Liabilities: The amount of various types of assets
such as Land, Building, Machinery, cash in hand, cash at bank, etc. and the amount of various
liabilities can be obtained from ledger.

4. Distinction between Journal and Ledger:
Following are the distinctions between a Journal and a Ledger.
S.No. Points of Distinction Journal Ledger
(i) Nature
Journal is a book of
primary entry
Ledger is a book of final
entry.
(ii) Basis of Recording
In Journal, transactions are
recorded on the basis of
voucher
Here transaction are recorded
from the journal
(iii) Manner of Recording
Here transactions are
recorded in order of
happening i.e. date wise
Here transactions are
recorded on the basisof
‘account heads’
(iv) Narration
Every entry in the journal
is followed by a narration
Posting in the Ledger is not
followed by any narration.
(v) Forms of Information
It provides information in
scattered form
It provides information in a
summarised and classified
form
Subsidiary books
When innumerable number of transactions takes place, the journal, as the sole book of the
original entry becomes inadequate. Subsidiary books or books of prime entry or original entry
are those where business transactions are recorded in the books of instance and then posted to
the ledger from these books.
There are eight types of subsidiary books which are commonly used. They are:
1. Sales Day Book- to record all credit sales.
2. Purchases Day Book- to record all credit purchases.
3. Cash Book- to record all cash transactions of receipts as well as payments.
4. Sales Returns Day Book- to record the return of goods sold to customers on credit.
5.Purchases Returns Day Book-to record the return of goods purchased from suppliers on
credit.
6. Bills Receivable Book- to record the details of all the bills received.
7. Bills Payable Book- to record the details of all the bills accepted.
8. Journal Proper-to record all residual transactions which do not find place in any of the
above books of original entry.

5. 1. Purchases Book
This book is used to record all credit purchases made by the business concern from its
suppliers. This book is also known as ‘Purchases Books’, ‘Purchases Journal’or ‘Invoice
Book’
Purchases Book
Date Particulars L.F.
Inward Invoice
Number
Details Amount
Rs.
2. Sales book
This book is used to record all credit sales effected by the business to its customers. This
book is also called as ‘Sales Book’, ‘sales Journal’or ‘Sold Book’.
Sales book
Date Particulars L.F.
Outward Invoice
Number
Details Amount
Rs.
3.Purchases Returns Book
This book is used to record all transactions relating to the goods returned to suppliers. This
book is also known as ‘Purchases Returns journal’ or ‘Returns Outward Book’.
Purchases Returns Book
Date Name of supplier L.F. Debit Note Details Amount Rs.
4.Sales Returns Book
This book is used to record all transactions relating to goods returned by customers. This
book is also known as ‘Sales Return Journal’ or ‘Returns Inwards Book’.
Sales Returns Book
Date Name of customer L.F. Credit Note Details Amount Rs.
5.Bills Receivable Book
This book is used to record all the bills received by the business from its customers. It
contains details regarding the name of the acceptor, date of the bill, place of payment, term of
the bill, due date and the amount of the bill.
Bills Receivable Book
Sl. No. Date of
Receipt
L.F. Drawer Acceptor Term Due date Rs. Remarks
While posting, the individual customers’accounts will be credited and the total of the Bills
receivable book for a specified period will be debited to the Bills receivable account in the
Ledger.

6. 6. Bills Payable Book:
This book is used to record all the bills accepted by the business drawn by its creditors. It
contains details regarding the name of the drawer, payee and date of acceptance, due date,
place of payment, term and amount of the bill.
Bills Payable Book
Sl.
No.
Date of
Acceptance
Drawer Payee LF Where
Payable
Date
of
bill
Term Due
date
Rs. Remarks
While posting the individual drawer or payee account is debited and the Bills
payable Account is credited with the total in the Bills Payable Book.
7. Journal Proper
This book is used to record the transactions which cannot be entered in any of the subsidiary
books. While recording, the entries are made in the journal covering both the aspects of the
transaction. The following are some of the examples of transactions which are entered in this
book.
1. Opening entries and closing entries.
2. Adjusting entries
3. Transfer entries from one account to another account.
4. Rectification entries.
5. Bills of Exchange Entries
6. Credit Purchase/sale of an asset other than goods.
8. Cash Book
Cash Book is a sub-division of Journal recording transactions pertaining to cash receipts and
payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are
posted subsequently to the respective ledger accounts. All cash receipts are recorded on the
debit side and all cash payments are recorded on the credit side. All cash transactions are
recorded chronologically in the Cash Book. The cash Book will always show a debit balance
since payments cannot exceed the receipts at any time.
Kinds of Cash Book:
Depending upon the nature of business and the type of cash transactions, various types of
Cash books are used. They are:
a) Single Column Cash Book
b) Two Column Cash Book or Cash Book with cash and discount columns.
c) Three Columnar Cash Book or Cash Book with cash, bank and discount columns.
d) ‘Bank’ Cash Book or Cash Book with bank and discount columns.
e) Petty Cash Book.
a) Single or Simple Column Cash Book :
This is the simplest form of Cash Book and is used when payments and receipts are mostly in
the form of cash and where usually no cash discount is allowed or received. But, when
transactions involving discounts are effected, it is recorded in a separate ledger account.
b)Tow Column Cash Book or Cash Book with Cash and Discount Columns: This
type of Cash Book is used when cash transactions involving discount allowed or received are

7. effected. Usually, discount is allowed when payments are promptly made by the customers
and discount is enjoyed when payments are promptly made by the business. In this two
column Cash Book, instead of only one column for cash as in a Single Column Cash Book,
one additional column is introduced, viz., ‘Discount Column’. The discounts allowed by the
business are entered on the debit side and discounts received are entered on the credit side of
the Cash Book. The discount columns as such cannot be balanced since they are purely
memorandum columns and will not serve the purpose of a ledger account as cash columns do.
To know the balance of discount columns, separate ledger accounts, viz., Discount Allowed
Account and discount Received Account can be opened.
c)Three Columnar Cash Book or Cash Book with Cash, Bank and Discount Columns:
Nowadays, every businessman invariably has a bank account to reap the advantages of safety,
convenience, credit facilities and less clerical work.
Thus, when a business is maintaining a bank account, the transactions can be made
through cheques. Instead of maintaining the bank account in the ledger, it is found more
convenient if it is included in the Cash Book as Cash Column. Thus, the three column Cash
Book is the resultant effect where in addition to cash and discount columns, bank column is
also included
d) ‘Bank’Cash Book or Cash Book with Bank and Discount Columns:
In case of a business where all transactions are effected through bank, i.e., all receipts are
banked (deposited into the bank) on the same day and all payments are made by cheques
only, the cash column in the cash book is of no use. Hence, the Cash Book with bank and
discount columns alone is maintained.
e) Petty Cash Book:
The word ‘petty’ has its origin from the French word ‘petit’ which means small. The petty
cash book is used to record items like carriage, cartage, entertainment expenses, office
expenses, postage and telegrams, stationery, etc. The person who maintains this book is
called the ‘petty cashier’.
The petty cash book is used by many business concerns to save the much valuable time of the
senior official, who usually writes up the main cash book, to prevent over burdening of the
main cash book with so many petty items and to find out readily and easily information about
the more important transactions.
The amount required to meet out various petty items is estimated and given to the petty
cashier at the beginning of the stipulated period say a fortnight or a month. When the petty
cashier finds shortage of money, he has to submit the petty cash book, after making all the
entries, to the chief cashier for necessary verifications. The chief cashier in turn, verifies all
the entries with supporting vouchers and disburses cash or issues cheque for the exact amount
spent.

8. Basic documents and features for Subsidiary books.
Inward Invoice:
This is the document sent by the suppliers of goods giving details of goods sent, price, value,
discount etc. It is the basis for entries in purchases book.
Outward Invoice:
This is a document sent by the firm to the customers, showing the details of goods supplied,
their price and value, discounts etc., it is the basis for writing sales book.
Debit Note:
It is a simple statement sent by a person to another person showing the amount
debited to the account of the latter along with a brief explanation. The debit notes are
issued by a trader relating to purchase returns in order to put up his claim for abatement of his
dues to the other party. Debit notes are serially numbered and are similar to invoices although
they are usually printed in red ink.
Credit Note:
It is nothing but a statement sent by one person to another person showing the amount
credited to the account of the latter along with a brief explanation. The credit notes are used
for sales return in order to intimate related abatement and are similar to invoice although they
are usually printed in red ink.
Cash Receipts and Vouchers:
These are the vouchers and receipts for cash received and paid. Entries in cash book are made
on the strength of the vouchers and receipts. They are also useful for auditing purpose.
Contra Entries
For any single transaction the same account cannot be debited and credited.
But since cash and bank accounts are maintained in the cash book, the debit and credit
may be found in the two different accounts in the Cash Book. They are transactions
which affect both the sides of the Cash Book.
For instance, when cash is deposited into the bank, bank account should be debited and
cash account should be credited.
Hence, on the debit side of the Cash Book.’ To Cash’is written in the particulars column
and the amount is entered in the bank column. Similarly, on the credit side of the Cash
Book, ‘By Bank’is written in the particulars column and the amount is entered in the cash
column.
Therefore, those entries which appear on both the sides of the Cash Book are called
Contra Entries and they are identified and denoted in the Cash Book itself by writing
the letter ‘C’ in the Ledger Folio Columns on either side for these transactions.
Trade Discount
Trade discount was referred to as a discount given by the seller to the buyer at the time of
purchase of goods as a deduction in the list price of the quantity sold. Generally the trade
discount is used by the sellers to attract more customers and increasing sale in big quantities.
There is no record kept in the books of buyer and seller for such a discount.
Cash Discount
Cash Discount is referred to as a discount allowed to customers by the seller at the time of
making payment of purchases made by them as a deduction in the invoice price of the
commodity. Generally, cash discount is used by the sellers to increase the rate of timely
payment and avoiding the credit risk. There is proper record keeping of such discount in the
books of buyers and sellers.

9. Differences between Trade Discount and Cash Discount
Trade Discount Cash Discount
Trade Discount is a discount allowed by the
seller to the buyer in case of bulk purchases
made by him.
Cash Discount is a reduction in the net
amount payable by the buyer when prompt
payment is made by the buyer.
Trade discount is usually allowed when bulk
purchases are made.
Cash discount is usually allowed if payment
in cash is made within a short period of time.
Trade discount's object is to attract bigger
orders by giving incentive to the buyer to buy
more.
Cash discount's purpose is to encourage the
buyer to make prompt payment.
Trade discount is allowed at the time of
purchase.
Cash discount is allowed at the time when
payment is done.
Trade discount rate varies according to the
type and quantity of goods purchased.
Cash discount varies according to the period
of payment.
Trade discount does not appear in the books
of accounts.
Cash discount is recorded in the books of
accounts.
It is usually given at the same rate which is
applicable to all customers.
It varies from customer to customer
depending on the time and period of
payment.
Trade discount is calculated as a percentage
of the catalogue price.
Cash discount is calculated as a percentage of
net amount payable by the buyer.
Advantage of Subsidiary books.
The advantages of maintaining special journals can be summarized as under:
Division of work:
The division of journal resulting in division of work ensures more clerks working
independently in recording original entries in day books.
Facilitate posting:
Because the transactions of one nature are recorded at one place, the posting of real account
is highly facilitated.
Time Saving:
Due to division of work, it is possible to perform various accounting processes
simultaneously. Thus, lesser time is required to complete accounting records.
Minimum frauds and errors:
Systematic recording of business transactions in special journals reduces the possibility of
frauds and errors. It also helps in location of errors, if any.

10. Better information:
A lot of useful data like credit sales, credit purchases, returns etc., is made available which is
not possible in journal system.
Management decisions facilitated:
Since transactions of a similar nature are recorded at one place, the management can have the
benefit of the trend and distributional pattern in planning and making decisions.
Specialisation and efficiency:
When the same work is allotted to a particular person over a period of time, he acquires full
knowledge of it and becomes efficient in handling it. Thus, the accounting work will be done
efficiently
TRIAL BALANCE
Meaning
Trial balance is a statement prepared with the balances or total of debits and credits of all the
accounts in the ledger to test the arithmetical accuracy of the ledger accounts.
It is prepared to check the ledger balances. If the total of the debit and credit amount
columns of the trail balance are equal, it is assumed that the posting to the ledger is accurate.
The agreement of a trail balance ensure arithmetical accuracy only. A concern can prepare
trail balance at any time, but its preparation as on the closing date of an accounting year is
compulsory.
Definition
According to M.S. Gosav “Trail balance is a statement containing the balances of all ledger
accounts, as at any given date, arranged in the form of debit and credit columns placed side
by side and prepared with the object of checking the arithmetical accuracy of ledger
postings”.
Objectives
(i) To check arithmetical accuracy
Arithmetical accuracy in ledger posting means writing correct amount, in the correct account
and on its correct side while posting transactions from various original books of accounts,
(ii) To help in preparing Financial Statements
The ultimate objective of the accounting is to prepare financial statements i.e. Trading and
Profit and Loss Account, and Balance sheet of a business enterprise at the end of an
accounting year.
(iii) Helps in locating errors
If the totals of the two columns do not agree it indicates that there is some mistake in the
ledger accounts. This prompts the accountant to find out the errors.
(iv) Helps in comparison
Comparison of ledger account balances of one year with the corresponding balances with the
previous year helps the management taking some important decisions.
(v) Helps in making adjustments
While making financial statements adjustments regarding closing stock, prepaid expenses,
outstanding expenses etc are to be made.

11. Features
The following are the important features of a trail balances:
(i) A trail balance is prepared as on a specified date.
(ii) It contains a list of all ledger account including cash account.
(iii) It may be prepared with the balances or totals of Ledger accounts.
(iv) Total of the debit and credit amount columns of the trail balance must tally.
(v)It the debit and credit amounts are equal, we assume that ledger accounts are
arithmetically accurate.
(vi)Difference in the debit and credit columns points out that some mistakes have been
committed.
(vii) Tallying of trail balance is not a conclusive profit of accuracy of accounts.
Limitations
The following are the important limitations of trail balances:
(i)The trail balance can be prepared only in those concerns where double entry system of
book- keeping is adopted. This system is too costly.
(ii) A trail balance is not a conclusive proof of the arithmetical accuracy of the booksof
account. It the trail balance agrees, it does not mean that now there are absolutely no errors in
books. On the other hand, some errors are not disclosed by the trail balance.
(iii)It the trail balance is wrong, the subsequent preparation of Trading, P&LAccount and
Balance Sheet will not reflect the true picture of the concern.
Methods
A trail balance refers to a list of the ledger balances as on a particular date. It can be prepared
in the following manner:
1. Total Method
According to this method, debit total and credit total of each account of ledger are recorded in
the trail balance.
2. Balance Method
According to this method, only balance of each account of ledger is recorded in trail balance.
Some accounts may have debit balance and the other may have credit balance. All these debit
and credit balances are recorded in it. This method is widely used.
Trial Balance
Heads of Accounts L.F. Debit Balance
(Rs.)
Credit Balance
(Rs.)

12. ‘T’ shape Trial Balance:
Names of Accounts L.F. Debit
Balance
Rs
Names of Accounts L.F. Credit
Balance
Rs
Rules of Debit balances and Credit balances:
Names of Accounts L.
F.
Debit
Balance
Rs
Names of Accounts L
.
F
.
Credit
Balance
Rs
Drawings
Purchases
Sales Return
Debtors
Bills Receivable
Assets
Land and Buildings
Plant and Machinery
Furniture and Fixtures
Cash in Hand
Cash at Bank
Opening Stocks
Expenses & Losses
Discount allowed
Carriage
Rent
Bad debts
Capital
Sales
Purchases Return
Creditors
Bills Payable
Liabilities
Loans
Advances from Customers
Reserves & Provisions
Bank overdraft
Incomes & Gains
Discount received
Commission Received
Interest received
Total ****** Total ******
Suspense A/c
If the Trial Balance does not agree i.e. there is a difference of some amount in the totals of
the two columns of the Trial Balance a different account i.e Suspense Account is opened with
the difference in amount put in this account. This will result in agreement of Trial Balance.
The suspense account with the amount of difference will be put on the lesser side of the Trial
Balance. The suspense A/c is however a temporary arrangement to make the Trial Balance
agree. This account will disappear as soon as the error or errors are rectified.