Accounting Cycle

(Accounting Process)
• Recording
• Classifying
• Summarising

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Origin & Recording of Transactions
• Source Documents
Cash Memo – Goods sold or purchased for cash
Invoice or Bill - Goods sold or purchased on credit
Receipt – Receiving cash from customers
Pay in Slip – Depositing cash or cheque in bank
Cheque – Drawing cash from bank
Debit Note (Credit Purchase)
Credit Note(Credit Sales)

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 Journal
• French word “Jour”, means “a day”.
• A daily record of business transactions.
• Book of original entry, book of primary entry or
Day Book.
• Journalising – Process of recording transactions
chronologically in journal.
• Journal Entry – Entry of transaction in a journal.
– Simple Journal Entry – Entry with one debit & one
credit aspects.
– Compound Journal Entry - Entry with more than one
debit or credit aspects.
• Narration – A brief explanation of transactions
given in brackets below journal entry
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 Journal
Date Particulars LF Dr. Amount Cr. Amount

(Name of A/c to be debited) Dr

To (Name of A/c to be credited)

(being…….(Narration)……………)

* LF – Ledger Folio
* Not compulsory to start narration with “being”
* Not compulsory to add “A/c” while writing Personal A/c

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 Objects of Journal
• To simplify ledger
• To provide an adequate explanation of each
entry through narration
• To ensure observance of double entry system
• To help in solving misunderstanding &
disputes in business

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 Points to be noted while Journalising
• Cash or Credit Transactions – If no mentioning
of transaction whether cash or credit, be
treated as credit transaction.
• Goods given as charity – Debited to Charity
A/c & Credited to Purchases A/c.
• Opening Entry – Balances of previous year are
brought forward in the beginning of the year
on the basis of accounting equation ( Debiting
all Assets & Crediting Liabilities & Capital)
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• Cash Discount – Discount allowed by creditor
to debtor when debtor pays the amount
either immediately or within a specific period.
• Trade Discount
– A deduction on gross value or list price of goods
allowed by manufacturer to wholesaler or
wholesaler to retailer to enable them to sell the
goods at list price to customers.
– It is deducted from invoice or cash memo itself
from gross value of goods.
– Not recorded in the books of account.
– Journal entry is passed with net value.
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• Purchase of Shares/ Securities – Entry is made
at market value (with brokerage on purchase),
not at face value.
• Sale of Shares/ Securities – Entry is made at
market value less brokerage on sales.
• Expenses incidental to purchase of Fixed
Assets – Added to cost of asset & debited to
Asset A/c.
• Premium on Life Insurance Policy – Debited to
Drawings A/c as it is a personal expense.
• Goods distributed as free samples – Debited
to Advertisement A/c & Credited to Purchases
A/c.
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• Withdrawals
– Goods for personal use – Debit Drawings A/c & Credit
Purchases A/c
– Cash for personal use – Debit Drawings A/c & Credit
Cash A/c
– At the end of the period – Debit Capital A/c & Credit
Drawings A/c
• Bad Debt
– Amount irrecoverable from a customer due to his
insolvency or otherwise.
– A loss for business.
– Debited to Bad Debt A/c & Credited to Debtors
(Customer) A/c.

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 Banking Transactions
• Cash deposit in Bank – Debit Bank A/c &
Credit Cash A/c
• Cash withdrawal from bank - Debit Cash A/c &
Credit Bank A/c
• Cash withdrawal for personal use - Debit Drawings
A/c & Credit Bank A/c
• Cheque received from debtors (not deposited in
bank) - Debit Cash A/c & Credit Debtors A/c
• Cheque received from debtors (deposited or directly
sent to bank) - Debit Bank A/c & Credit Debtors A/c
• Cheque of debtor dishonoured by bank - Debit
Debtors A/c & Credit Bank A/c
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• Payment by issuing cheque – Debit Personal
A/c & Credit Bank A/c
• Interest allowed on deposit - Debit Bank A/c & Credit
Interest A/c
• Commission & Interest charged by bank - Debit Bank
Charges A/c & Credit Bank A/c
• Cheque issued for expenses - Debit Expenses A/c &
Credit Bank A/c

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 Journal - Advantages
• Provides chronological (date wise) record of all
transactions.
• Provides info of debit & credit in an entry with
explanation.
• Reduces the possibility of errors.
• Legal evidence in court of law as it is the book
of original entry.

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 Sub-division of Journal or
Subsidiary Books
• Due to repetitiveness it is inconvenient to
record all transactions in journal.
• It can be easily recorded in special journals,
called Day Book, Special Journal, Subsidiary
Book or Book of Primary Entry.
• Transactions that can’t be recorded in any
special journal are recorded in another journal
– General Journal, Journal Proper or
Miscellaneous Journal.

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 Subsidiary Books
• Cash Book
• Purchases Book
• Sales Book
• Purchase Returns Book
• Sales Return Book
• Bills Receivable Book
• Bills Payable Book
• Journal Proper or Miscellaneous Journal
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 Ledger
• Dutch word “Legger”, means “to lie (kept)”.
• Books of Final Entry.
• Collection or set of accounts.
• Account – Formal record of transactions in similar
nature.
• Posting – Process of recording transactions from
journal to ledger.
• Contra Entries – Items appear on both sides of an
account.
• Balancing (Closing) of Accounts – Balance is difference
between total debits & total credits of an account or
total of an account containing only debits or credits

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 Form of Ledger

Dr Cr
Date Particulars J Amount Date Particulars J Amount
F F
To By

JF (Journal Folio) – Page numbers of journal from where entries are posted

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 Classification of Ledger
(American Approach/ Modern Approach)

Accounts

Assets Liabilities Capital Revenue Expense

A/c A/c A/c A/c A/c

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 Classification of Ledger
(British Approach/ Traditional Approach)

Accounts

Personal Impersonal
Accounts Accounts

Representati
Natural Artificial Real Nominal
ve Person’s
Person’s A/c Person’s A/c Accounts Accounts
A/c

Tangible Real Intangible

A/c Real A/c

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 Trial Balance
• A statement of balances or total of debits &
credits of all the accounts in the ledger on a
particular date, prepared to test the
arithmetical accuracy of books kept under
double entry system.
• Suspense A/c – Temporary A/c to rectify
errors.

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 Objectives or Functions of TB
• To ensure arithmetical accuracy of books of
accounts
• To provide a base for preparing final accounts
• To help in detecting certain errors
• To serve as an aid to management in decision
making
• To help in comparison

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 Methods in preparation of
Trial Balance
• Total Method
• Debit totals & credit totals of each account are entered
in trial balance in debit & credit columns respectively.
• Both sides of trial balance should be equal
• Balance Method
• Trial balance is prepared with balances extracted from
ledgers & not total
• Debit balance should be entered in debit column &
credit balance should be entered in credit column
• Total & Balance Method
• Combination of total method & balance method

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