Financial Accounting

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Lecture – 06

Learning Objective

• This lecture will cover following areas: An overview of the flow of transactions. An introduction to the basic books of accounts. The General Ledger, and The ledger balance

Financial Accounting

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Lecture – 06

The Flow Of Transactions

General Journal

General Ledger Cash/Bank Book

Trial Balance Profit & Loss Account Balance Sheet

The Voucher

Occurrence of an Event

Financial Accounting

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Lecture – 06

The Voucher

The Voucher

Occurrence of an Event

• 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

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Lecture – 06

A Sample Voucher

Name Of Company

Type Of Voucher

Date: 1-1-20-- No: 01

Description Code

#

Debit

Amount

Credit Amount

Cash 01 100,000

Capital 02 100,000

Total: 100,000 100,000

Narration: Capital Introduced in Cash by Owner

Prepared By: Checked by:

Financial Accounting

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Lecture – 06

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 specially 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 Journal

Financial Accounting

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Lecture – 06

The Present Day Flow Of Transactions

General Journal

Trial Balance Profit & Loss Account Balance Sheet

The Voucher

Occurrence of an Event

General Ledger Cash/Bank Book

Financial Accounting

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Lecture – 06

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.

The Debit side.

Right hand side.

The Credit side.A ‘T’ account

Financial Accounting

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Lecture – 06

A Standard General Ledger

• Since the ledger keeps record of transactions that effect 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: Title of account Ledger page number, called Ledger Folio / Account

Code Date of transaction Voucher number Narration / particulars of transition Amount of transaction

Financial Accounting

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Lecture – 06

A Standard General Ledger

Capital Account (Title of Account)Account Code 02

Date Voucher

Number

Particulars /

Narration

Debit

Amount

Credit Amount

20--

Jan 01 01 Capital Introduced in cash by Owner 100,000

Financial Accounting

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Lecture – 06

Recording From Voucher To General Ledger

Voucher

Date: 1-1-20-- No: 01Description Code

#

Debit

Amount

Credit

Amount

Cash 01 100,000

Capital 02 100,000

Narration: Capital Introduced in Cash by Owner

Capital Account (Title of Account)Account code 02

Date Voucher

Number

Particulars /

Narration

Debit

Amount

Credit Amount

20--

Jan 01 01 Capital Introduced in cash by Owner 100,000

Financial Accounting

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Lecture – 06

Completing The Recording – Both Effects

Description Code #

Debit Amount

Credit Amount

Cash 01 100,000

Capital 02 100,000

Narration: Capital Introduced in Cash by Owner

Cash AccountAccount Code 01

Date Voucher Number

Particulars / Narration

Debit Amount

Credit Amount

20--

Jan 01 01 Capital Introduced in cash by Owner 100,000

Capital AccountAccount Code 02

Date Voucher Number

Particulars / Narration

Debit Amount

Credit Amount

20--

Jan 01 01 Capital Introduced in cash by Owner 100,000

VOUCHER

LEDGER

Financial Accounting

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Lecture – 06

A Simple Presentation Of A Recorded Transaction

Capital Account Code 02

Cash 100,000

Cash Account Code 01

Capital 100,000

Financial Accounting

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Lecture – 06

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 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).

Financial Accounting

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Lecture – 06

The Ledger Balance

Cash AccountAccount Code 01

Date VoucherNumber

Narration / Particulars

Debit Amount

Credit Amount

Balance Dr/(Cr)

20--

Jan 01 01 Capital Introduced in cash by Owner 100,000 100,000

Jan 01 02 Cash Paid for Purchase of Building 50,000 50,000

Jan 02 03 Cash Paid for Purchase of Furniture 10,000 40,000

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

Capital AccountAccount Code 02

Date VoucherNumber

Narration / Particulars

Debit Amount

Credit Amount

Balance Dr/(Cr)

20--

Jan 01 01 Capital Introduced in cash by Owner 100,000 (100,000)