Journal, Ledger & Trial Balance (Financial Accounting)

In this article, we will discuss the basic concepts of financial accounting i.e. journal, ledger, and trial balance as per financial accounting rules. In this topic, we also cover how to prepare journal, ledger, and trial balance with practical problems and solutions.

There are two types of the journal in financial accounting:

The process of recording transactions in the journal is called Journalizing. The transactions are recorded in the journal in the manner of their occurrence along with a suitable explanation, called ‘Narration‘ which supports the entry.

The steps involved in the process of Journalizing in financial accounting are as under:

The debit and credit sides of the journal must be equal. There are some transactions in which you will find there are more than one debit for a single credit, more than one credit for a single debit or multiple debits and credits for an entry. Such entries are called as a compound journal entry. Nevertheless, the aggregate amount of debit and credit in an entry must tally.

All the columns are to be filled at the time of recording the transaction in the journal, except the ledger folio column which is filled when the transaction is posted to the ledger.

The journal entries may extend to multiple pages, and so both the two columns are totalled at the end of each page, with the word Total c/f, i.e. carried forward. Further, at the beginning of the next page, the amounts in debit and credit columns in the previous page is written with the words Total b/f, i.e. brought forward. Finally, on the last page of the entry, the Grand Total is written, and the columns are totaled.

Topic: Journal, ledger, and Trial balance (CONTINUE…)

To understand the Golden Rules of Financial Accounting we must first understand the types of accounts.

There are three types of accounts:

A Real Account is a general ledger account relating to Assets and Liabilities other than people accounts. These are accounts that don’t close at year-end and are carried forward.

A Personal Account is a General ledger account connected to all persons like individuals, firms, and associations.

A Nominal account is a General ledger account pertaining to all income, expenses, losses, and gains.

Looking at the nature of all the accounts,  the financial accounting rules have been devised. For each account, there is a set of Golden Rules and hence there are three Golden Rules of Accounting.

Illustration

An entity named Orange Ltd. has the following financial accounting transactions.

First of all,  let us identify the accounts involved in these transactions and classify them into the different types of accounts:

Now applying the golden rules of Financial Accounting to each of the transactions we will get the following journal entries :

Both Bank and Cash are real accounts and so the Golden rule is:

So the entry will be:

The Purchase Account is a Nominal account and the Creditors Account is a Personal account.

Applying Golden Rule for Nominal account and Personal account:

The entry will be:

The sale account is a Nominal account and the Debtors Account is a Personal account.

Hence the Golden Rule to be applied is:

Thus the entry will be:

Rent is a Nominal account and Bank is a real account.

The Golden Rule to be applied is:

The entry thus will be:

Interest and Bank are Nominal account and Real Account.

The Golden rule to be applied is:

Hence the entry will be:

Topic: Journal, ledger, and Trial balance – Financial Accounting (CONTINUE…)

A ledger account is T-shaped, having two sides, wherein the left part of the account represents the debit side, whereas the right part of the account, is the credit one. Both the sides consist of four columns, as you can see in the specimen below:

When the debit and credit items are transferred from a journal to the specific ledger accounts, the process is called as Posting. The rules with respect to the ledger posting are discussed as under:

The ledger in financial accounting is subdivided into two major categories:

Topic: Journal, ledger, and Trial balance – Financial Accounting (CONTINUE…)

The statement which is prepared at a particular date with the ledger account balances to test the arithmetical accuracy of the ledger accounts and also to facilitate the preparation of financial statements is called a trial balance.

It is to be noted that trial balance is not an account; it is a mere statement.

A trial balance contains the columns – serial number of ledger accounts,

If a trial balance agrees i.e. a total of debit money column and a total of credit money column are equal, it proves that the ledger accounts are arithmetically accurate.

The famous writer R.N. Carter says;

A trial balance is a schedule or a list of balances both debit and credit extracted from the accounts in the ledger and including the cash and bank balances from the cash book.

According to J.R. Batliboi,

A trial balance may be defined as a statement of debit and credit balances extracted from the ledger with a view to testing the arithmetical accuracy of the books.

It appears from the definitions of trial balance that the trial balance contains the following features;

Although trial balance is not an account, it is prepared to fulfill the following objects;

Topic: Journal, ledger, and Trial balance – Financial Accounting (CONTINUE…)

According to a double-entry system every transaction is recorded in a journal debiting one account and crediting the other for the same amount of money with an explanation.

At the time of posting of the transaction from journal to ledger debit account of the journal is debited in the same account and the credit account of the journal is credited in the same account in the ledger.

As a result, a total of the debit balance of ledger accounts becomes equal to the total credit balance of ledger accounts.

Therefore, According to double-entry principle;

If all correctly drawn ledger accord balance is recorded in trial balance in debit and credit money columns properly, the totals of both columns of trial balance become equal.

To prepare a trial balance, first, we need to know to make sure the transactions are journalized and have been posted to ledgers.

The final balance from the ledger needs to be properly placed on the debit and credit column while preparing the trial balance, to make sure the accounting process is correct.

Business transactions are first recorded in the journal and thereafter these are posted in the ledger under different heads of accounts.

It may be mentioned that transactions may directly be posted in the ledger accounts without recording them in the journal.

At the end of a particular accounting period, a trial balance is prepared in a separate sheet of prescribed form recording debit ledger balance, in the debit column and credit ledger balances in the credit money column.

Besides ledger balances, cash balance, and bank balance of cash book of that particular date are also included in the trial balance.

Thereafter the total of debit and credit money columns of a trial balance is calculated. The agreement of trial balance is the conclusive evidence of the accuracy of the ledger and trial balance.

Topic: Journal, ledger, and Trial balance – Financial Accounting (CONTINUE…)

A short description of the format of the trial balance is given below:

Topic: Journal, ledger, and Trial balance – Financial Accounting (CONTINUE…)

Rules for recording debit ledger account balances and credit ledger account balances in debit money column and credit money column of trial balance in absence of ledger account:

Important to remember:

Record the following transactions in the Journal and post them into the ledger and prepare a Trial Balance

Problem-1:

Solution 

To Capital a/c

To Karl a/c

To Goods/stock a/c

To Cash a/c

To Goods/stock a/c

To Goods/stock a/c

To Cash a/c

To Cash a/c

To Tarl a/c

To Goods/stock a/c

To Tarl a/c

To Loan from parl a/c

To Cash a/c

To Cash a/c

To Cash a/c

To Interest a/c

General Ledger  [Books of Mr. Neel]

Trial Balance  [Modern Method]

Enter the following transactions in the Journal and post them into the ledger and from the information obtained prepare a Trail Balance.

Solution

To Capital a/c

To Modern Furniture a/c

To Cash a/c

To B.Sen & Co a/c

To Cash a/c

To Sales a/c

To Bharat Stationery Mart a/c

To Sales a/c

To Bank a/c

To Zahir Khan a/c

To Bank a/c

To Bank a/c

To Bank a/c

To Bank a/c

To Zahir Khan a/c

To Cash a/c

To Sales a/c

To Commision Received a/c

General Ledger  [Books of Mrs. Roy]

Trial Balance [Modern Method]