Recording of transactions

A trial balance is a statement prepared at the end of an accounting period that lists the debit and credit balances of all ledger accounts. If the double-entry system has been followed correctly, the total of the debit balances equals the total of the credit balances. It is prepared to check the arithmetical accuracy of the ledger and to serve as the base for preparing final accounts.

In the books of Ram Enterprises

Working notes: Ram's account shows $20{,}000 - 18{,}000 + 15{,}000 = \text{Rs } 17{,}000$ due before the last payment. Paying Rs 16,000 in full settlement gives a discount received of Rs 1,000. The capital of Rs 24,000 is taken as introduced in cash, and all payments are in cash.

(a) Journal

(b) Ledger

Cash A/c

The cash account is fully balanced, so there is no closing cash balance.

Ram's A/c

Purchases A/c: debit balance Rs 35,000 ($20{,}000 + 15{,}000$). Sales A/c: credit balance Rs 10,000. Capital A/c: credit balance Rs 24,000. Discount Received A/c: credit balance Rs 1,000.

(c) Trial Balance

Cash and Ram's accounts have nil balances, so they do not appear in the trial balance.

The double-entry system is based on the principle that every business transaction has two aspects, a debit and a credit. Every transaction affects at least two accounts, one account receives a benefit (debit) and another gives a benefit (credit) for an equal amount. Hence the total of debits always equals the total of credits.

(a) Journal Entries

Note: Ram's balance before the final payment is $15{,}000 + 20{,}000 - 10{,}000 = \text{Rs } 25{,}000$. As Rs 24,000 settles it in full, the difference of Rs 1,000 is discount received.

(b) Ledger Accounts

Cash Account

Ram's Account

Capital Account: By Cash Rs 2,00,000 (credit balance Rs 2,00,000). Purchases Account: To Ram Rs 15,000 and Rs 20,000 (debit balance Rs 35,000). Sales Account: By Cash Rs 18,000 (credit balance Rs 18,000). Discount Received Account: By Ram Rs 1,000 (credit balance Rs 1,000).

(c) Trial Balance

In the books of the trader

Working notes: Hamal's account shows $30{,}000 - 18{,}000 + 35{,}000 = \text{Rs } 47{,}000$ due before the last payment. Paying Rs 45,000 in full settlement gives a discount received of $47{,}000 - 45{,}000 = \text{Rs } 2{,}000$. All payments are taken as made in cash.

(a) Journal

(b) Ledger

Cash A/c

Hamal's A/c

Purchases A/c: debit Rs 30,000 + Rs 35,000 = balance Rs 65,000. Rent A/c: debit balance Rs 20,000. Capital A/c: credit balance Rs 6,00,000. Discount Received A/c: credit balance Rs 2,000.

(c) Trial Balance

Triple Column Cash Book

Working notes: the cash deposit on Poush 13 is a contra entry (both sides in the same book). The payment to Ram of Rs 32,000 settles Rs 35,000, so discount received is Rs 3,000. The machine sale is received as a cheque of Rs 19,000 (taken to the bank column) and Rs 3,000 cash.

Closing balances are cash Rs 33,000 and bank Rs 2,17,000.

Purchase Book

Working notes: Karuna Suppliers: coffee tables Rs 1,00,000 (10 tables at Rs 10,000), chairs $20 \times 4{,}000 = \text{Rs } 80{,}000$; total Rs 1,80,000, trade discount $10\% = \text{Rs } 18{,}000$. Anjali Traders: beds $5 \times 15{,}000 = \text{Rs } 75{,}000$, sofas $8 \times 25{,}000 = \text{Rs } 2{,}00{,}000$; no discount.

Note: furniture is a fixed asset, so in practice it is debited to Furniture A/c, not Purchases A/c; the book is prepared here as the question requires.

(i) Journal Entries

Sita's balance at the end is $4{,}00{,}000 - 1{,}00{,}000 + 50{,}000 = \text{Rs } 3{,}50{,}000$. Paying Rs 3,49,000 in full settlement gives a discount received of Rs 1,000.

(ii) Sita's Account

Purchase Book

Working notes: 20 dozens of pens $= 20 \times 12 = 240$ pens, so $240 \times 50 = \text{Rs } 12{,}000$; trade discount on pens only $= 10\% \times 12{,}000 = \text{Rs } 1{,}200$, so pens net $= \text{Rs } 10{,}800$. Pencils from Pradhan: $600 \times 10 = \text{Rs } 6{,}000$. From Joshi: copies $20 \times 50 = \text{Rs } 1{,}000$ and pencils $30 \times 10 = \text{Rs } 300$.

Triple Column Cash Book

Working notes: on Falgun 3 the purchase of Rs 25,000 is paid Rs 10,000 cash and $25{,}000 - 10{,}000 = \text{Rs } 15{,}000$ by cheque. On Falgun 10, Rs 48,000 settles Rs 50,000, so discount allowed is Rs 2,000. Falgun 20 and 28 are contra entries.

Closing balances are cash Rs 73,000 and bank Rs 55,000.

A petty cash book is a subsidiary book in which small, routine cash payments of a business, such as postage, stationery, conveyance and refreshments, are recorded. It is kept by the petty cashier, usually under the imprest system, which reduces the burden on the main cash book.

Two purposes of preparing a trial balance are:

1. To check the arithmetical accuracy of the ledger postings, since the total of debit balances should equal the total of credit balances.
2. To provide a summary of all ledger balances that serves as the basis for preparing the final accounts (trading account, profit and loss account and balance sheet).

A ledger is the principal book of account in which all the transactions recorded in the journal and other subsidiary books are classified and posted account-wise. It contains separate accounts of persons, properties and incomes and expenses, and it is also called the book of final entry.

A purchase book (purchase journal) is a subsidiary book in which only credit purchases of goods meant for resale are recorded in chronological order. Cash purchases and purchases of assets are not entered in it.

A journal is the book of original (prime) entry in which business transactions are first recorded in chronological order, showing the accounts to be debited and credited with a short narration. It is also called the day book.

One importance of the double-entry system is that it gives a complete record of every transaction and makes it possible to check arithmetical accuracy through the trial balance, since the total of debits must equal the total of credits.

Double Column Cash Book (cash and bank columns)

Working notes: the deposit on Baisakh 10 and the withdrawal on Baisakh 25 are contra entries, so they appear on both sides of the cash book (marked C in L.F.).

Check: cash $= 1{,}50{,}000 + 20{,}000 - 60{,}000 - 12{,}000 = \text{Rs } 98{,}000$ and bank $= 2{,}50{,}000 + 60{,}000 + 35{,}000 - 45{,}000 - 20{,}000 = \text{Rs } 2{,}80{,}000$.

Double Column Cash Book (cash and bank columns)

Working notes: the opening bank balance is nil. The deposit on Shrawan 13 is a contra entry. The Rs 10,000 withdrawn from bank for personal use is drawings, so it is a payment from the bank column only and not a contra entry.

Check: cash $= 90{,}000 - 20{,}000 = \text{Rs } 70{,}000$ and bank $= 20{,}000 - 10{,}000 = \text{Rs } 10{,}000$.

Purchase Book

Working notes:

• Arun Stores: mugs $10 \times 1{,}000 = \text{Rs } 10{,}000$; cups $50 \times 800 = \text{Rs } 40{,}000$; total Rs 50,000; trade discount $50{,}000 \times \frac{10}{100} = \text{Rs } 5{,}000$; net Rs 45,000.
• Barun Suppliers: bowls $300 \times 200 = \text{Rs } 60{,}000$; chopsticks $80 \times 300 = \text{Rs } 24{,}000$; total Rs 84,000 (no trade discount).

Triple Column Cash Book (discount, cash and bank columns)

Working notes: the deposit on Kartik 10 is a contra entry. Kumar paid Rs 18,000 after being allowed a discount of Rs 2,000, so his account is settled at Rs 20,000; the discount is entered in the discount allowed column on the debit side. The money from Kumar is taken as received in cash.

Check: cash $= 50{,}000 + 8{,}000 + 18{,}000 - 25{,}000 = \text{Rs } 51{,}000$ and bank $= 75{,}000 + 25{,}000 - 10{,}000 = \text{Rs } 90{,}000$.

Triple Column Cash Book of Mr. Karan Bhatt (discount, cash and bank columns)

Working notes: goods of Rs 40,000 were bought from Rohit and Rs 30,000 was paid by cheque, so Rs 10,000 is still due to him. The cheque of Rs 10,000 on Jan 22 exactly settles this balance, so no discount is received and the discount column is nil.

Check: cash $= 15{,}000 - 8{,}000 = \text{Rs } 7{,}000$ and bank $= 60{,}000 - 30{,}000 - 10{,}000 = \text{Rs } 20{,}000$.

Purchase Book

Working notes:

• Mr. Sah: fans $15 \times 1{,}200 = \text{Rs } 18{,}000$; lamps $10 \times 600 = \text{Rs } 6{,}000$; total Rs 24,000.
• Mr. Kumar: cookers $15 \times 600 = \text{Rs } 9{,}000$; heaters $25 \times 400 = \text{Rs } 10{,}000$; trade discount on heaters $10{,}000 \times \frac{5}{100} = \text{Rs } 500$, so heaters net Rs 9{,}500; total $9{,}000 + 9{,}500 = \text{Rs } 18{,}500$.

Journal

Working notes: Bhola is owed $50{,}000 - 30{,}000 = \text{Rs } 20{,}000$; he is settled by a cheque of Rs 19,500, so discount received is $20{,}000 - 19{,}500 = \text{Rs } 500$. Discount allowed to Santa is $25{,}000 \times \frac{2}{100} = \text{Rs } 500$, so he pays Rs 24,500, taken as paid in cash.

In the books of Himalayan Enterprises

Working notes: on Baisakh 18, Rs 50,000 of the amount due to Ramesh is settled by paying Rs 48,000, so discount received is Rs 2,000. Ramesh's account therefore still shows Rs 30,000 payable ($80{,}000 - 50{,}000$).

(a) Journal

(b) Ledger

Cash A/c

Ramesh's A/c

(c) Trial Balance as on Baisakh 28

In the books of Trilok Company

Working notes: the mode of payment is not given for the furniture and salary, so both are taken as paid in cash. On 5 Jan, Rs 60,000 of the purchase is on credit (supplier not named, shown as Creditors). On 15 Jan, the balance of Rs 40,000 of the sale is on credit (shown as Debtors).

(a) Journal

(b) Ledger

Cash A/c

Bank A/c

Capital A/c

Purchases A/c

Furniture A/c

Sales A/c

Debtors A/c

Creditors A/c

Salary A/c

(c) Trial Balance as on 25 Jan 2021

Meaning of ledger

A ledger is the principal book of account in which all the transactions first recorded in the journal or subsidiary books are classified and grouped under separate accounts, such as Cash A/c, Sales A/c and Ram's A/c. Each account shows at one place all the debits and credits of one item and its balance.

Why the ledger is called the king of books

• It is the main book of accounts: the journal and subsidiary books are only books of first entry, and their entries are finally posted to the ledger.
• It gives complete information about each account, such as how much is owed by debtors, how much is owed to creditors, and how much has been spent on each expense or earned from each income.
• The trial balance is prepared from the ledger balances, and the final accounts (trading account, profit and loss account and balance sheet) are prepared from the trial balance.
• It helps in finding errors, since the accounts can be checked and balanced.
• It is permanent and is the main record on which management, auditors and tax authorities rely.

Because all accounting work finally depends on the ledger, it is called the king of books.

Difference between journal and ledger

(b) Ram's A/c Dr. 10,000; To Sales A/c 10,000

Since the sale is on credit, Ram becomes a debtor (personal account — debit the receiver) and sales is a revenue (credit what goes out in the form of goods). Cash is not involved, so options (a) and (d) are wrong, and option (c) reverses the debit and credit.

In the books of Mr. Hari
Journal

Note: In transaction 3, the cost of goods sold, Rs. 50,000, is not recorded in the journal under the periodic inventory system. Only the selling price, Rs. 70,000, is recorded.

Sales A/c

By Balance b/d 90,000

Shyam's A/c

To Balance b/d 40,000

Adjusted Trial Balance as on 31st Chaitra 2080

Working Notes:

1. Closing stock Rs. 70,000: Closing stock is not shown in the Trial Balance because it is not a ledger balance. It appears in the Trading Account and Balance Sheet, so it is excluded from the adjusted trial balance.

2. Depreciation on furniture:
   $60{,}000 \times \frac{10}{100} = \text{Rs. } 6{,}000$
   Adjustment entry: Depreciation on Furniture A/c Dr. Rs. 6,000; To Accumulated Depreciation on Furniture A/c Rs. 6,000.

3. Outstanding salaries: Rs. 5,000 is added to Salaries, making it Rs. 45,000 on the debit side, and shown as Outstanding Salaries on the credit side.

The adjusted trial balance tallies at Rs. 6,71,000 on both sides.