flow of transactions, books of accounts, General Ledger balance

<< Rules of Debit and Credit for Assets, Liabilities, Income and Expenses

Cash book and bank book, Accounting Period, Trial Balance and its limitations >>

Financial Accounting (Mgt-101)

Lesson-6

Learning Objective

This lecture will cover following areas:

o An overview of the flow of transactions.

o An introduction to the basic books of accounts.

o The General Ledger, and

o The ledger balance

The Flow of Transactions

Occurrence of an Event

The Voucher

General Journal

Cash/Bank Book

General Ledger

Trial Balance

Profit & Loss Account

Balance Sheet

Event

Event is the happening of any thing but in accounting we discuss monetary events

Monetary Events

If the financial position of a business is change due to the happening of event that Event is called

Monetary Event

The Voucher

Voucher is a document in a specific format that records the details of a transaction.

It is accompanied by the evidence of transaction.

Financial Accounting (Mgt-101)

A Sample Voucher

Name Of Company

Type Of Voucher

Date: 1-1-20--

No:

Description

Code

Debit

Credit

Amount

Cash

100,000

Capital

100,000

Total:

100,000

Narration:

Capital Introduced in Cash by Owner

Prepared By:

Checked by:

The General Journal

The Journal used to be a chronological (day-to-day) record of business transactions. All vouchers

were first recorded in books.

It was also called the Book of Original Entry or Day Book.

But in present day accounting and especially with the introduction of computers for accounting, this

book is not in use any more.

We will, therefore, not study the use of Journal in detail but we should know that it is a book that

keeps day-to-day record of transactions.

General Ledger The `T' Account

Ledger is a book that keeps separate record for each account (Book of Accounts).

We know that Account or Head of Account is systematic record of transactions of one type.

An account in its simplest form is a T-shape and looks like this:

Title of Account

Left hand side.

Right hand side.

The Debit side.

The Credit side.

Financial Accounting (Mgt-101)

A Standard General Ledger

Since the ledger keeps record of transactions that affect one head of account, therefore, it should

provide all the information that a user may need.

Usually the ledger is required to provide following information:

o Title of account

o Ledger page number, called Ledger Folio / Account Code

o Date of transaction

o Voucher number

o Narration / particulars of transition

o Amount of transaction

A Standard General Ledger

Capital Account (Title of Account)

Account Code 02

Date

Voucher

Particulars /

Debit

Credit

Number

Narration

Amount Amount

20--

Jan 01

Capital Introduced in cash by Owner

100,000

Recording From Voucher To General Ledger

Voucher

Date: 1-1-20--

No:

Description

Code

Debit

Credit

Amount

Cash

100,000

Capital

100,000

Narration:

Capital Introduced in Cash by Owner

Capital Account (Title of Account)

Account code 02

Date

Voucher

Particulars /

Debit

Credit

Number

Narration

Amount

20--

Jan 01

Capital Introduced in cash by

100,000

Owner

Financial Accounting (Mgt-101)

Completing The Recording Both Effects

Description

Code Debit

Credit

Amount

Cash

100,000

Capital

100,000

Narration:

Capital Introduced in Cash by Owner

Capital Account Account Code 02

Date

Voucher Particulars / Narration

Debit

Credit

Number

Amount Amount

20--

Jan 01 01

Capital Introduced in cash by

100,000

Owner

Cash Account

Account Code 01

Date

Voucher Particulars / Narration

Debit

Credit

Number

Amount Amount

20--

Jan 01 01

Capital Introduced in cash by

100,000

Owner

A Simple Presentation of a Recorded Transaction is as under:

Cash Account

Code 01

Capital

Capital Account

Code 02

Cash 100,000

Financial Accounting (Mgt-101)

The Ledger Balance

In the earlier lecture, we discussed that in order to have the total figure in respect of each head of

expense/income, asset/liability we need to maintain different accounts.

We had also said that each account may have figures on the debit as well as the credit side.

Therefore, the difference between the debit and the credit sides, known as the BALANCE, would

represent the required total of the particular account.

The total of all balances on the Debit side is ALWAYS equal to the total of all balances on the

Credit side. This is called the balancing of books of accounts. We will study about this concept at a

later stage.

The balance may be written out after every transaction in a third column or calculated at the end of

a specific time period (an accounting period).

A Debit balance is shown without brackets and a Credit balance is shown in brackets (XYZ).

Cash Account

Account Code 01

Date

Voucher

Narration /

Debit

Credit

Balance

Number

Particulars

Amount

Amount Dr/(Cr)

20--

Jan 01

Capital Introduced in cash by Owner 100,000

100,000

Jan 01

Cash Paid for Purchase of Building

50,000

Jan 02

Cash Paid for Purchase of Furniture

10,000

40,000

Capital Account

Account Code 02

Date

Voucher

Narration /

Debit

Credit

Balance

Number

Particulars

Amount

Amount Dr/(Cr)

20--

Jan 01

Capital Introduced in cash by Owner

100,000

(100,000)

Table of Contents: