Balance Sheet & P&L related Concepts

Learning Outcome

Understanding of the Concept Understanding of Transactions and related documents Process leading to preparation of trial balance and financial Statements

Accounting Cycle

Journa lizing

Posting

Balancin g

Trial Balance

Income Stateme nt (P& L A/c)

Position Stateme nt (Balance Sheet)

Journalizing

It is a process of recording the transactions in Journal Journal :

Book of original entry Chronological record of events

Steps of Journalizing Transactions Understanding of Transaction Find Accounts Involved

Find Type of Account (RNP) Debit Credit Effect to the Account involved Pass the journal entry, write narration below it and close it

Journal Entries

What information do we need to record?

Date Debit account Debit amount Credit account Credit amount Supplementary information

Format of Journal
Date Particulars
Date of Transactio n Debit Ac Credit Ac Narration

L/f Debit (`)

Led. Pg. No Amount of Debit Ac

Credit(`)
Amount of Credit Ac

Total

Illustrations on Journal Entry

Accounting Cycle

Journa lizing

Postin g

Balancin g

Trial Balance

Income Stateme nt (P& L A/c)

Position Stateme nt (Balance Sheet)

Posting
Process

of transferring the amounts in the journal to the ledger

The Account

Account Title

The Account

Account Title
Left side

The Account

Account Title
Left side Right side

The Account

Account Title
Left side the debit side Right side

The Account

Account Title
Left side the debit side Right side the credit side

Performa of Ledger Account

Dr. Date Particula J. rs F.
To (Name of A/c which is credited)

Name of A/c Amou Dat nt(`) e Particular J. s F.

By (Name of A/c which is debited)

Cr. Amount (`)

Total

Total

Procedure for Posting

1. 2. 3. 4.

5.

6. 7. 8.

Read the entry passed in Journal Open the account in ledger by writing the name of account at the top suffixing the word A/c Dr is written on the left hand side, which represents debit side and Cr is written on right hand side which represents credit side. First posting will be done of the account which is debited in the journal entry. Similarly, posting will be done of the account which is credited in the journal entry. On the debit side of posting, name of credit account is recorded and on the credit side of posting, the name of debit account is recorded. Separate accounts should be opened in the ledger for posting the transactions relating to different accounts recorded in journal. Two accounts of same name should not be opened Posting will be done date wise only

Accounting Cycle

Journaliz ing

Posting

Balanc ing

Trial Balance

Income Stateme nt (P& L A/c)

Position Stateme nt (Balance Sheet)

Illustrations on Ledger Posting

Balancing of Account

See both sides of amount appearing in a/c and identify the total column which is greater.

Identify the difference in the total

This difference must be written on the smaller side in the amount column. If the debit side total is greater than credit side total, then the difference must be entered on the credit side. This is known as debit balance of that A/c. Totals of both sides should be appear against each other in same line. Draw a single line above the totals and two lines below the totals. Closing balance always comes on the short side or the lighter side. It becomes opening balance for the next period. It is brought down or brought forward on the heavier side.

Some points to remember:

If the Personal A/c has debit balance it shows the amount due from him. He is the debtor. In vice versa scenario it has credit balance and amount is due to him. He is the creditor. All the real accounts have debit balances. They cannot have credit balances. All the accounts of expenses and losses have debit balances while all the accounts of incomes and gain have credit balances. The balance of any account is decided on the basis of balance b/d and not on the basis of balance c/d.

Summary of the Debit/Credit Rules

Assets

Appear on the left (debit) side of the equation

Summary of the Debit/Credit Rules

Assets

Appear on the left (debit) side of the equation Therefore we:

Increase them with debits Decrease them with credits

Summary of Debit/Credit Rules

Liabilities

Summary of Debit/Credit Rules

Liabilities

Appear on the right (credit) side of the equation

Summary of Debit/Credit Rules

Liabilities

Appear on the right (credit) side of the equation Therefore we:

Increase them with credits Decrease them with debits

Accounting Cycle

Journaliz ing

Posting

Balanc ing

Trial Balanc e

Income Stateme nt (P& L A/c)

Position Stateme nt (Balance Sheet)

Trail Balance

It is the list of debit and credit balances of the ledger accounts. Total of the debit balances and credit balances of various accounts as on particular date must be equal, leading to tallying of the trial balance.

Trial Balance (Journal form) As on_____________

Sr. No. Name of Accounts L/F

Debit (`)

Credit (`)

Trial Balance (Ledger form) As on_____________

Particulars of debit L/F balances

Particulars of credit balances

L/ F

Trial Balance
If the trial balance is not tallied then it indicates certain error in recording, posting, balancing or casting in the whole process of accounting cycle. Even if the trial balance is tallied then also there can be error in accounting as there are certain errors which are not detected by trial balance. They are (a) Errors of omission (b) Errors of commission in original record (c) Errors of principle and (d) Compensating errors.

Illustrations on Trial Balance

Accounting Cycle

Journaliz ing

Posting

Balancin g

Trial Balance

Income Stateme nt (P& L A/c)

Position Stateme nt (Balance Sheet)