ACCOUNTING STANDARDS

Accounting Standards (ASs) are written policy documents issued by the Government with the
support of other regulatory bodies (e.g., the Ministry of Corporate Affairs (MCA) issuing
Accounting Standards for corporates in consultation with the National Financial Reporting
Authority (NFRA) covering the following aspects of accounting transaction in financial
statements.
• measurement,
• presentation,
• and disclosure.
The ostensible purpose of the standard-setting bodies is to promote the dissemination of timely
and useful financial information to investors and certain other stakeholders, have an interest in
the company's economic performance. Accounting Standards reduce the accounting
alternatives in the preparation of financial statements within the bounds of rationality, thereby,
ensuring the comparability of financial statements of different enterprises.
Accounting Standards deal with the following:
(i) recognition of events and transactions in the financial statements,
(ii) measurement of these transactions and events,
(iii) presentation of these transactions and events in the financial statements in a manner that
is meaningful and understandable to the reader, and
(iv) the disclosure relating to these transactions and events to enable the public at large and
the stakeholders and the potential investors in particular, to get an insight into what
these financial statements are trying to reflect and thereby facilitating them to take
prudent and informed business decisions.

OBJECTIVES AND FUNCTIONS OF THE ACCOUNTING STANDARDS BOARD

1. The following are the objectives of the Accounting Standards Board:
a) To conceive of and suggest areas in which Accounting Standards need to be developed.
To formulate Accounting Standards with a view to assisting the Council of the ICAI in
evolving and establishing Accounting Standards in India.
b) To examine how far the relevant International Accounting Standard/International
Financial Reporting Standard (see paragraph 3 below) can be adapted while formulating
the Accounting Standard and to adapt the same.
c) To review, at regular intervals, the Accounting Standards from the point of view of
 acceptance or changed conditions, and, if necessary, revise the same.
d) To provide, from time to time, interpretations and guidance on Accounting Standards.
To carry out such other functions relating to Accounting Standards.
2. The main function of the ASB is to formulate Accounting Standards so that such standards
may be established by the ICAI in India. While formulating the Accounting Standards, the
ASB will take into consideration the applicable laws, customs, usages and business
environment prevailing in India.
3. The ICAI, being a full-fledged member of the International Federation of Accountants (IFAC),
is expected, inter alia, to actively promote the International Accounting Standards Board’s
(IASB) pronouncements in the country with a view to facilitate global harmonisation of accounting
standards. Accordingly, while formulating the Accounting Standards, the ASB will give due
consideration to International Accounting Standards (IASs) issued by the International Accounting
Standards Committee (predecessor body to IASB) or International Financial Reporting Standards
(IFRSs) issued by the IASB, as the case may be, and try to integrate them, to the extent possible, in the
light of the conditions and practices prevailing in India.
4. The Accounting Standards are issued under the authority of the Council of the ICAI. The ASB
has also been entrusted with the responsibility of propagating the Accounting Standards and of
persuading the concerned parties to adopt them in the preparation and presentation of financial
statements. The ASB will provide interpretations and guidance on issues arising from
Accounting Standards. The ASB will also review the Accounting Standards at periodical
intervals and, if necessary, revise the same.

Development of Accounting Standards:

A. International Accounting Standards (IAS):
International Accounting Standard Committee (IASC):
It came into being on 29th June 1973 when 16 accounting bodies (Viz. The Institute of
Chartered Accountants from 10 nations i.e., USA, Canada, UK and Ireland, Australia, France,
Germany, Japan, Mexico and Netherlands) signed the constitution for its formation. Its
headquarters is situated at London. The Objectives of IAS is to develop accounting standards
which are to be observed in the presentation of audited financial statements and to promote
their worldwide acceptance.
Moreover, its other responsibility is to keep member bodies informed of the latest development
and standards by issuing exposure drafts form time to time.
The objectives of IASC, which are set out in its revised agreement and constitution (Nov.
1982), are:
(i) To formulate and publish in the public interest accounting standards to be observed in
the presentation of financial statements and to promote their worldwide acceptance and
observation, and
(ii) To work for the improvement and harmonisation of regulating accounting standards and
procedures relating to the presentation of financial statements.

The standards are:

IAS 1: Presentation of Financial Statements
IAS 2: Valuation and Presentation of Inventories
IAS 7: Cash Flow Statement
IAS 8: Net Profit or Loss for the Period― Fundamental Errors and Changes in Accounting
Policies
IAS 10: Events occurring after Balance Sheet Date
IAS 11: Accounting for Construction Contracts
IAS 12: Accounting for Taxes on Income
IAS 14: Reporting Financial Information by Segments
IAS 15: Information reflecting the effects of Changing Prices
IAS 16: Accounting for Property, Plant and Equipment
IAS 17: Accounting for Leases
IAS 18: Revenue Recognition
IAS 19: Accounting for Retirement Benefits of Employees in the Financial Statements of
Employers
IAS 20: Accounting for Government Grants and Disclosure of Government Assistance
IAS 21: Accounting for Effects of Changes in Foreign Exchange Rates
IAS 22: Accounting for Business Combinations
IAS 23: Capitalizations of Borrowing Costs
IAS 24: Disclosure of Related Party Transactions
IAS 26: Accounting and Reporting by Retirement Benefits Plans
IAS 27: Consolidated Financial Statements and Accounting for Investments
IAS 28: Accounting for Investments in Associates
IAS 29: Financial Reporting by Hyperinflationary Economics
IAS 30: Disclosure of Financial Statement and Banks and Similar Financial Institutions
IAS 31: Financial Reporting of Interests in Joint Ventures
IAS 32: Financial Instruments—Disclosure and Presentations
IAS 33: Earning per Share
IAS 34: Accounting for Interim Financials Reporting
IAS 35: Discontinuing Operations
IAS 36: Impairment of Assets
IAS 37: Provisions, Contingent Liabilities and Contingent Assets
IAS 38: Intangible Assets
IAS 39: Financial Investments—Recognition and Measurement
IAS 40: Investment Property
IAS 41: Accounting for Agriculture.

B. International Financial Reporting Standards (IFRS) (Standards Issued after

2001): Introduction:
International Financial Reporting Standards (IFRS) are practically principle-based standards
interpretations and the framework which were adapted by the International Accounting
Standard Boards. Some International Accounting Standards (IAS) which were issued between
1973 and 2001 by the IASC (International Accounting Standards Committee) form a part of
International Financial Reporting Standards (IFRS).

Needless to say that the International Accounting Standards Board (IASB) took the
responsibility to set the various International Accounting Standards on 1st April 2001 from the
IASC. The International Accounting Standards Board will continue to develop various needed
standards which are popularly known as IFRS. In short, IFRS are nothing but a set of
accounting standards which are developed by the IASB. These standards are global standards
in order to prepare the financial statement of public company.

Advantages of IFRS:
For the conversion from IAS to IF AS, the following advantage are advocated:
(a) IFRS helps to raise Capital abroad since both the countries use IFRS for their allocating
standards, i.e., the basis is same.
(b) IFRS helps to present its financial statement on the identical basis like its foreign
competitors, i.e., comparisons become easy.
(c) Subsidiary of a foreign company must use IFRS if its parent company follows the same.
(d) It helps the foreign investors who are using IFRS.
(e) One accounting language may be applied in case of a foreign company having subsidiary
to some other countries.

Disadvantages of IFRS:
The IFRS even is not free from snags. Some of them are:
(a) There are certain use issuers who will resist IFRS as they do not have any market
incentive for the preparation of IFRS financial statements.
(b) Adopting IFRS is costly.
Structures of IFRS:
IFRSs are basically ‘principle-based set of Standards’ which frame results and various specific
treatments of financial statement.

It computes:
(a) Framework for the preparation and presentation of Financial Statement 1989
(b) Standing Interpretation Committee (SIC) issued before 2001
(c) International Accounting Standards (IAS) issued before 1001
(d) Interpretations Originate from the International Financial Reporting Interpolations
Committee (IFRIC) — issued after 2001
(e) International Financial Reporting Standards (IFRS) —Issued after 2000.

List of IFRS:
The list of IFRS comprises:
IFRS 1: First Time Adoptions of IFRS IFRS 2: Share-Based Payments
IFRS 3: Business Combination IFRS 4: Insurance Contracts
IFRS 5: Non-Current Assets held for Sale and Discontinued Operations IFRS 6: Exploration
for and Evaluation of Mineral Resources
IFRS 7: Financial Instruments; Disclosures IFRS 8: Operating Segments
IFRS 9: Financial Instruments.

C. Indian Accounting Standards (OLD):

Accounting Standard Board of India:
On 21st April 1977, The Institute of Chartered Accountants of India, as a premier accounting
body in our country, set up the “Accounting Standard Board” (ASB) to harmonies the diverse
accounting policies and practice prevalent in our country.
The primary duty of ASB is to formulate the accounting standards for India. These standards
may be established by the Council of the Institute in India. During formulation of accounting
standards, the ASB considered the applicable laws, usages, customs and the business
environment existing in our country. For this purpose ASB took the valued views and
guidelines of various industrial houses, the Government, and other interested parties.
The body consists of the following members: Company Law Board, CBDT, Central Board of
Excise and Customs, Controller General of Accounts, SEBI, Comptroller & Auditor General
of India, UGC, Educational and Professional Institutions, Council of the Institute and
representatives of Industry, Banks.
The Accounting Standards will, however, be issued under the guidance of the Council. As such,
ASB has given the authority of propagating the Accounting Standards and instituting the parties
to prepare and present the accounts on the basis of Accounting Standards. ASB will explain
the basic concepts on which accounting principles should be oriented and will also explain the
accounting principles on which the practice and procedures should conform while performing
its functions.
However, this Council of the Institute of Chartered Accountants of India (ICAI) has issued 32
Accounting Standards (AS) so far.

These Accounting Standards are presented:

Accounting Standards (OLD):
AS Title/Head No.
1. Disclosure of Accounting Policies
2. Valuation of Inventories
3. Cash Flow Statement
4. Contingencies and Events Occurring After Balance Sheet Date
5. Net Profit or Loss for the Prior Period Items and Changes in Accounting Policies—
Revised
6. Depreciation Accounting—Revised
7. Construction Contract—Revised
8. Accounting for Research and Development [Withdrawn from 1.4.2003]
9. Revenue Recognition
10. Accounting for Fixed Assets
11. Accounting for the Effects of Changes in Foreign Exchange Rates—Revised
12. Accounting for Government Grants
13. Accounting for Investments
14. Accounting for Amalgamation
15. Accounting for Employee Benefits
16. Borrowing Costs
17. Segment Reporting
18. Related Party Disclosures
19. Leases
20. Earnings per Share
21. Consolidated Financial Statements
22. Accounting for Taxes on Income
23. Accounting for Investments in Associates in Consolidated Financial Statement
24. Discounting Operations
25. Interim Financial Reporting
26. Intangible Assets
27. Financial Reporting of Interest in Joint Ventures
28. Impairment of Assets
29. Provisions, Contingent Liabilities and Contingent Assets
30. Financial Instruments: Recognition and Measurement
31. Financial Instruments: Presentations
32. Financial Instruments: Disclosures

D. Accounting Standards (New):

The Hon Minister for State, Ministry of Corporate Affairs, Mr. Salman Khursheed, had said
that the min Indian is try had met its commitments of starting IFRS-Compliant reporting by
2011. According to him, the next revolution after the software revolution will be in the world
of Accountancy with the convergence of IFRS where we would be contributing the best and
largest number of young accountants. For this, the Government of India is firm on the transition
of Indian Companies from GAAP to IFRS. We are on schedule for convergence with IFRS
from 2011. Accordingly, new Indian Accounting Standards (Ind AS) have been introduced
from April 2011.

Phase Approach:
Mr. S. Khursheed had announced a three phase convergence schedule in Jan. 2011: In
First phase:
The listed companies, including those on overseas exchanges and with a Net worth of Rs. 1,000
crores, will adopt IFRS Standards in April 2011.
In Second Phase:
It includes companies having a Net worth of Rs. 500 crores to Rs. 1,000 crores, which will
move to IFRS standing from April 2013.
In Third Phase:
Listed companies having a Net worth of Rs. 500 crores or less will adopt it in April 2014.

New 35 Indian Accounting Standards:

(Ind AS) 1: Presentation of Financial Statements
(Ind AS) 2: Valuation of Inventories
(Ind AS) 7: Statement of Cash Flow
(Ind AS) 8: Accounting Policies, Changes in Accounting Estimates and Errors
(Ind AS) 10: Events after the Reporting Period
(IndAS) 11: Construction Contracts
(Ind AS) 12: Income-Taxes
(Ind AS) 16: Property, Plant and Equipment
(Ind AS) 17: Leases
(Ind AS) 18: Revenue
(Ind AS) 19: Employee Benefits
(Ind AS) 20: Accounting for Government Grants and Disclosure of Government Assistance
(Ind AS) 21: The Effect of Changes in Foreign Exchange Rates
(Ind AS) 23: Borrowing Costs
(Ind AS) 24: Related Party Disclosures
(Ind AS) 27: Consolidated and Separate Financial Statements
(Ind AS) 28: Investments Associates
(Ind AS) 29: Financial Reporting in Hyperinflationary Economics
(Ind AS) 31: Interests in Joint Ventures
(Ind AS) 32: Financial Instruments: Presentation
(Ind AS) 33: Earning per Share
(Ind AS) 34: In-term Financial Reporting
(Ind AS) 36: Impairment of Assets
(Ind AS) 37: Provisions, Contingent Liabilities and Contingent Assets
(Ind AS) 38: Intangible Assets
(Ind AS) 39: Financial Instruments: Recognition and Measurement
(Ind AS) 40: Investment Property
(Ind AS) 101: First-Time Adoption of Indian Accounting Standards
(Ind AS) 102: Share-based Payment
(Ind AS) 103: Business Combination
(Ind AS) 104: Insurance Contract
(Ind AS) 105: Non-Current Assets held for Sale and Discontinued Operations
(Ind AS) 106: Exploration for and Evaluation of Minerals Resources
(Ind AS) 107: Financial Instruments: Disclosure
(Ind AS) 108: Operating Segments
Accounting Equation
The accounting equation summarizes the essential nature of double-entry system of accounting.
Under which, the debit always equal to credit, and assets always equal to the sum of equities
and liabilities. Accounting equation can be simply defined as a relationship between assets,
liabilities and owner’s equity in the business.
The accounting equation connotes two equations that are basic and core to accrual
accounting and double-entry accounting system.
The following are two basic rules of accounting equation that distinguishes the accrual system
of accounting from cash basis accounting, and single-entry system from the double-entry
system:
The first among them is the basic accounting equation which written as Assets = Liabilities +
Equities.
The second one is termed as ‘Expanded Accounting Equation’ which is a combination of the
basic equation and secondary equation i.e. Debit = Credit.
It derives its status only from the accrual system of accounting and thereby, it does not apply
in a cash-based, single-entry accounting system.
Assets = Liabilities + Owners Equities

System of Accounting
There are following two systems of recording transactions in the books of accounts:
 Double Entry System
 Single Entry System
Double-entry system
 The double entry system is based on the Dual Aspect Principle.
 Every transaction has two aspects, ‘a Debit’ and ‘a credit’ of an equal amount.
 This system of accounting recognizes and records both aspects of the transaction.
Single entry system
 Under this system, both aspects are not recorded for all the transactions.
 Either only one aspect is recorded both aspects are not recorded for all the transactions.

Advantages of the Double-entry System of Accounting

The following are the main advantages of the double-entry system of accounting:
 Scientific system- As compared to the other systems, this system of recording
transactions is morescientific and useful to achieve the objective of accounting.
  A complete record of the transaction- Since both aspects of transactions are
considered there is a complete recording of each and every transaction. Using these
records we are able to compute profit or loss easily.
 Checks arithmetical accuracy of accounts- Under this system, by preparing a Trial
Balance we are able to check the arithmeticalaccuracy of the records.
 Determination of profit/loss and depiction of financial position- Under this system
by preparing ‘Profit & Loss A/c’ we get to know about the profitearned or loss
incurred. By preparing the ‘Balance Sheet’ the financial position of the business can
beascertained, i.e. position of assets and liabilities is depicted.
 Helpful in decision making- Administration and management are able to take
decisions on the basis of factual information under the double-entry system of
accounting.

Golden rules of accounting

 Debit the receiver, credit the giver
If a person gives something to a firm, it must be recorded as credit in the books of accounts.It
is used as in personal accounts.
 If anything coming then Debit, if anything goes out then credit.
Real accounts consist of machinery, land and building etc. debit what comes in means it
will add to the existing balance similarly, credit what goes means it will be deducted from
the existence balance.
 All expenses and losses are to be debited, all incomes and gains are to be credited.
When a firm get a profit, it will credit all incomes and gains means it will increase firm’s
capital. Similarly, by debiting expenses and losses means it will decrease its capital. These
are used in nominal accounts.

Type of account Golden rules

 Debit what comes in

Real account
 Credit what goes out

 Debit the receiver

Personal account
 Credit the giver

 Debit the expenses or losses

Nominal account
 Credit the income or gain
 Journal
Meaning of Journal
A journal is the book of original entry which records transactions as they take place, such an
entry into the journal must contain a source document. Maintaining a journal ensures all
transactions are recorded and in one place and debit and credit for each transaction is linked
properly.

What is Journal Entry

Journal entry means recording the business transactions in the journal. The transaction is
analyzed to determine which account is to be debited and which account is to be credited.

Journalizing
Journalizing is the process of recording journal entries in the Journal. It is a systematic act of
entering the transaction in a daybook in order of their occurrence i.e., date-wise or event-wise.
At the time of Journalizing of the transactions, when an account is debited it is denoted by 'Dr.'
and crediting of an account by "To'.

Nature of Journal
 It is a book in which the transaction are recorded first of all, as and when they take
place.
 It is daily accounting record.
 In journal, transaction are recorded in a chronological order i.e., in a date-wise order.
 Each entry in the journal is followed by a brief explanation of the transaction
which is called "narration".
 A journal is only a book of original entry.

Functions of Journal
 To keep a chronological order (i.e. date-wise) record of all transaction.
 To analyses each transaction into debit or credit aspects by using double-entry system
of book-keeping.
 To provide a basis for posting into ledger.
 To maintain identity of each transaction by keeping a complete record of each
transaction at one place on a permanent basis.
Importance of Journal
 Since a transaction is recorded as soon as it occurs, the chances of it being excluded are
very low. Journal makes sure that all entries are recorded irrespective of the size of the
entity.
 The accounting journal records all transactions in a chronological order. As a result,
accessing information about a certain transaction on a specific date becomes easy.
 Not only are transactions documented, but they are also written in a precise manner that
gives the entire story of a financial event.
 All transactions are segregated into debit and credit categories, and for each debit entry,
an equivalent amount of monetary value is assigned to the corresponding credit item.
This guarantees that your accounting procedure is mathematically correct.
 Since journal entries include all of the details, they do not need to be added to the ledger
again. This is quite useful for keeping your ledger neat and simple.
 Any inconsistencies or errors in the ledger or trial balance can be rectified using a
journal. As a result, the accounting journal also serves as a source of information for
financial statements.

Advantages of the Journal

The following are the advantages of a journal:
 Chronological Record: Journal book records transactions as and when it happens.
Therefore it is possible to get day-to-day information.
 Minimizing the possibility of errors: The nature of the transaction and its effect on the
financial position of the business is ascertained by recording and analyzing into debit and
credit aspect.
 Narration: It means the explanation of every recorded transaction.
 Helps to finalize the accounts: It is the basis of ledger posting and the ultimate Trial
Balance.

Limitation of Journal
 It is very bulky and voluminous in size due to huge transaction.
 It is very costly.
 Need a proper knowledge to record a transaction.
 It is very time consuming process.
Steps of Recording Transactions.
Some steps are followed in Journalizing:
i. Find out what accounts are involved in business transaction.
ii. Ascertain what is the nature of accounts involved?
iii. Ascertain the golden rule of debit and credit is applicable for each of the accounts
involved.
iv. Find out what account is to be debited which is to be credited.
v. Record the date of transaction in the "Date Column".
vi. In the 'Particulars Column' along with the word
vii. 'Dr.' on the same line against the name of the account, the amount to be debited in the
'Debit Amount column'.
viii. Record the name of the account to be credited in the next line preceded by the word "To'
at a few space towards right in the 'Particulars Column' and the amount to be credited
in the 'Credit Amount Column' in front of the name of the account.
ix. Record narration (i.e. a brief explanation of the transaction) within brackets in the
following line in 'Particulars Column'.
x. A thin line is drawn all through the particulars column to separate one Journal entry
from the other and it shows that the entry of a transaction has been completed.
xi. After it, ledger posting would be posted.

Format of Journal
The format of journal is given below:
In the books of .................... Journal

A journal contains five columns; Date, Particulars, L.F., Debit and Credit.
 Date column: In this column the date of the transaction is recorded.
 Particulars column: The accounts involved in the transaction are recorded in this
column. The account debited is recorded first with the word ‘Dr.’ entered towards the
end of the row and the account credited is entered in the next line after leaving a little
space on the left and preceded by the word ‘To’.
  Leder Folio column (L.F.): The page number of ledger in which the accounts debited
and credited are maintained is recorded here. Folio means page and ledger folio means
page number of ledger. This L.F. helps in cross verification of accounts in the ledger
and helps in audit of accounts.
 Debit column: The amount to be debited is recorded in this column. The unit of
measurement, that is, amount expressed in the currency of the country is recorded in
this column. For example, in India amount is recorded in rupees (Rs.).
 Credit column: The amount to be credited is recorded in this column. The unit
of measurement, that is, the currency of the country is written in this column. For
example, in India amount is recorded in rupees (Rs.).
 Narration: A short description of each transaction is written under each entry
which is called narration.

Subdivision of Journal
Definition of Subdivision
In a large business concern a journal is divided into parts so that several clerk could work at
the same time. This is known as subdivision of journal.

Purpose of Subdivision
In small concerns only one journal and one ledger may serve the purpose, because the number
of transactions is very small. But in large business concerns the number of transactions are
numerous, just one journal and one ledger will not do the job. That will cause much
inconvenience i.e., if we have only one journal in a large scale business, it is not possible for
one bookkeeper to record all the transactions in time. On the other hand, it will not be possible
for more than one person to use the same journal simultaneously with the result that the
accounting work will fall in arrears.
There are some more factors which necessitate the use of more than one subsidiary book
(journal):
1. If all the transactions are recorded in one book (journal), the book will be very large,
bulky, and difficult to handle.
2. If one bookkeeper is asked to record all the transactions, the possibility of errors
and mistakes will be great. It will also create opportunities for committing fraud.
3. If all the transactions are recorded in one book, it will be difficult to trace out a particular
transaction in future.
Journal is mainly divided into two
1. Special journal
2. General journal

Special Journal
By special journal we mean, a journal in which transactions relating to a certain special group
or recorded. Special journal is again subdivided into eight groups:
1. Purchases book or purchases journal
2. Sales book or sales journal
3. Purchases returns book or purchases returns journal
4. Sales returns book or sales returns journal
5. Bills receivable book
6. Bills payable book
7. Cash book or cash journal
8. Petty cash book

General Journal
The transactions which do not fall within the scope of above mentioned books, are recorded in
this journal e.g. purchase of an asset on credit, depreciation on assets, expenses payable, bad
debts etc. It is also known as journal proper, Modern journal or principle journal. Some authors
call it only "journal".
The main function of the above books is to supply necessary information to the ledger. All the
transactions are posted in the ledger on the basis of information available from these books, so
these books are called subsidiary books.
Advantages of Subdivision of Journal
The following advantages are derived from division of journal:
1. Because of subdivision the books cannot be bulky and hence there will be no difficulty
in handling them.
2. Accounting work is divided amongst a large number of employees. So work is done
nicely and promptly and no work is left in arrears.
3. Each employee can be held responsible for mistakes committed by him. This serves
as caution and care to the employees.
4. The efficiency of the employees increases because of the division of labor.
5. By keeping the book under the custody of different employees the chances of fraud and
defalcation are minimized.
 Ledger
Meaning of Ledger
A ledger in accounting refers to a book that contains different accounts where records of
transactions pertaining to a specific account are stored. It is also known as the book of final
entries or the principal book of accounts. It is a book where all transactions, whether debited or
credited, are stored.
A ledger account is a combination of all the ledgers and contains information related to all the
accounting activities of an organization. It is regarded as the most important book in accounting
as it helps in creating a trial balance that acts as a precursor to the preparation of financial
statements.
The information stored in a ledger account contains both starting and ending balances, which
are adjusted during the course of the accounting period with respective debits and credits.
A ledger contains different components, which include various transaction elements such as
date, amount, particulars, and L.F. (ledger folio). Individual transactions are contained within
a ledger account and are identified by a transaction number or any other type of notation.

Features of Ledger
Some of the features of a ledger account are:
1. Classification
The first significant attribute of the ledger is the order of monetary exchanges. The
purpose of ledger accounts is to characterize the exchange into accounts. The ledger
contains various accounts. Every budgetary exchange is grouped into these accounts.
2. All accounts
The ledger contains all accounts, such as purchase accounts, sales accounts, and so
forth. In other words, the ledger is a book or register that contains all accounts. Accounts
are opened in the ledger both at the hour of the beginning of business (desire bases) and
during the year (need bases).
3. Significant Information
One of the features of the ledger in accounting is holding applicable data in a single
spot. For instance, the exchange with client A can be found in the general ledger of Mr.
A. This account would mirror all the exchanges of Mr. A
4. Mix-up Tracking
Among other features of the ledger, optimizing data is the most important. This is
extremely useful for mistake rectification. For instance, when a purchase is
 exaggerated, at that point in the perfect world, the bookkeeper would survey the
purchase accounts following the slip-up.
5. Trial Balance
The preparation of the trial balance is removed from the closing balance of the general
ledger. In this way, the ledger assumes a significant role in the readiness of fiscal
reports. Trial balance extraction is the initial move towards the arrangement of budget
reports with both journal entry and ledger entry.

General Ledger and Subsidiary Ledger

The general ledger is utilized by small-scale associations and contains all accounts of budgetary
things, while auxiliary ledgers are kept in the huge association as a memorandum ledger, which
contains the individual accounts of clients and creditors. The general ledger likewise contains
total accounts for these things. These were some of the features of the ledger.

Importance of Ledger
The importance of a ledger is described in the following:
 Figuring of Profit/Loss: Its planning is an inescapable advance for any association for
computing the situation of profit or loss in their business since it is difficult to make
further accounts without getting ready pertinent ledgers.
 The Definite Situation of an Account: It refers to the situation of the accounts,
whether they have a remarkable or owing balance at the hour of shutting the ledger.
 Time Saver: As all the entries are recorded in one spot, it gets simpler and more
efficient while getting further accounts ready, for example, trading and profit and loss
accounts.
 Imperative: One importance of ledger is that it encourages the rightness or precision
of the exchanges held during the life expectancy of the organization.

Advantages of Ledger
Some of the advantages of the ledger are:
 It is the ledger through which effective use of the double-entry system of accounting is
guaranteed. Every single transaction is partitioned into two sections—collector and
supplier—and recorded in the two concerned accounts in the ledger.
 Exchanges identifying various people or concerns are recorded in the account of every
individual or concern independently. Therefore, complete and reliable data is accessible
in regard to every single account.
  Various kinds of income and expenses are recorded in various accounts independently.
Thus, it is conceivable to learn the measure of income and expenditure under each head
and the general outcome at the year-end through trading and profit and loss accounts.
 A separate account is opened for every detail of assets and liabilities. It is, in this
manner, conceivable to find out the estimation of various assets and liabilities and the
genuine budgetary situation at year-end through the company balance sheet.
 Exchanges being recorded in the journal last longer in the ledger, and the chances of
mistakes and defalcations are distant.
 One of the advantages of a ledger is that significant data and measurements are gathered
from it and provided to the administration to empower them to run the whole thing
proficiently.

Disadvantages of ledger
 There are chances of the ledger being totally unsafe if someone else gets access to the
book or system file. If the user is careful, then the ledger is way safer.
 You will have to keep a constant eye on the ledger files, as they can contain very serious
and sensitive files along with other such information.
 The ledger depends on the transaction data entered in it. If an error occurs in the
transaction data, the entire result will have an error and will thus become undependable.
 The ledger will take a lot of users’ time and energy. It is also difficult, as we have to
check if our records are safe or not.
Ledger Posting
The process of transferring entries from a journal to the respective ledger accounts is known as
ledger posting. For this process, first, the entries are recorded in journals and then transferred
to their respective ledger accounts.
Format of Ledger A/C
* represents that a ledger a/c can either have a debit balance or a credit balance.
We will discuss the items in the format one by one:
1. Date: In this column, the date on which the transaction was recorded is mentioned.
The year is written at the top, following the month and then the day.
2. Particulars: Every transaction affects at least two accounts. The name of the other
account that is affected by the transaction is recorded here.
3. Journal Folio, or J.F.: Journal Folio, shows the number of pages on which the journal
account of that particular item is made and on the basis of which the particular
transaction has been made.
4. Amount: The amount involved in the transaction is mentioned here.

Posting from Journal

Posting is the process of transferring the entries from the books of the original entry (journal)
to the ledger. In other words, posting means grouping all the transactions with respect to a
particular account in one place for a meaningful conclusion and to further the accounting
process. Posting from the journal is done periodically, may be weekly, fortnightly, or monthly,
as per the requirements and convenience of the business.
The complete process of posting from journal to ledger has been discussed below:
Step 1: Locate in the ledger the account to be debited as entered in the journal.
Step 2: Enter the date of the transaction in the date column on the debit side.
Step 3: In the ‘Particulars’ column, write the name of the account through which it has been
debited in the journal. For example, furniture sold for cash 'was'34,000. Now, in the cash
account on the debit side, the particulars column ‘Furniture’ will be entered, signifying that cash
is received from the sale of furniture. In the furniture account, in the ledger on the credit side
is the particulars column, where the word cash will be recorded. The same procedure is followed
with respect to all the entries recorded in the journal.
Step 4: Enter the page number of the journal in the folio column, and in the journal, write the
page number of the ledger on which a particular account appears.
Step 5: Enter the relevant amount in the amount column on the debit side. It may be noted that
the same procedure is followed for making the entry on the credit side of that account to be
credited. An account is opened only once in the ledger, and all entries relating to a particular
account are posted on the debit or credit side, as the case may be.
 Trial Balance
A Trial Balance is a statement that keeps a record of the final ledger balance of all accounts in
a business. It has two columns – debit and credit. Trial Balance is prepared at the end of a year
and is used to prepare financial statements like Profit and Loss Account or Balance Sheet. The
main objective of a Trial Balance is to ensure the mathematical accuracy of the business
transactions recorded in a company’s ledgers.
Preparing a Trial Balance
There are three methods by which you can prepare a Trial Balance. They are as follows:
 Total Method – Total Method records each ledger account’s debit and credit columns
to the Trial Balance. Both the columns should be equal as this method follows the
double- entry bookkeeping method.
 Balance Method – This method uses each ledger account’s final debit/credit balance
in the Trial Balance. Once the balance figures of all accounts are listed, the Trial
Balance (both on the debit and credit side) helps check the accuracy of all transactions.
The Balance Method of preparing Trial Balance is more popular compared to its
alternatives.
 Total cum Balance Method – This method is a combination of both the Total Method
and Balance Method. The Trial Balance has four columns – two for the credit and debit
totals of a ledger account and two for that account’s credit/debit balances.

Objectives of Trial Balance

The following are the main objectives of preparing the trial balance:
1] To check the arithmetical accuracy of books of accounts:
According to the principle of the double-entry system of bookkeeping, every business
transaction has two aspects, debit and credit. They base on the double-entry principle of
debit equals credit or credit equals debt. As a result, the debit and credit columns of they
must always be equal. If they do, it assumes that the recordings of financial transactions
are accurate.
2] Helpful in preparing final accounts:
They record the balances of all the ledger accounts at one place, which helps in the
preparation of final accounts, i.e. Profit and Loss Account and Balance Sheet. But,
unless they agree, the final accounts cannot prepare. Final accounts prepare to show
profit and loss and the financial position of the business at the end of an accounting
period.
 3] To serve as an aid to the management:
By comparing the trial balances of different years changes in figures of certain important
items such as purchases, sales, debtors, etc. ascertain and their analysis make for taking
managerial decisions. Therefore, it serves as an aid to the management.
4] To summarize the financial transactions:
A business performs several numbers of financial transactions during a certain period.
The transactions themselves cannot portray any picture of the financial affairs of the
business. For that purpose, a summary of the transactions has to draw. They prepare to
intend to summarize all the financial transactions of the business.
5] To help to detect accounting errors:
Since the trial balance indicates if there is any error committed in the journal and the
ledger. It helps the accountant to locate the error because the starting point of locating
errors is trial balance itself. It has been pointed out in an earlier paragraph that if they
not agree, the accountant must locate such errors.

Advantages of Trial Balance:

The important advantages of a trial balance are;
 To help of summarizes all the financial transactions of the business. Also, presents to
the businessman a consolidated list of all ledger balances.
 It is the shortest method of verifying the arithmetical accuracy of entries made in the
ledger.
 If the total of the debit side/column is equal to the total of the credit side/column, the
trial balance says to agree. Otherwise, it implies that some errors have been committed
in the preparation of accounts.
 It helps in the preparation of the final accounts i.e., Trading a/c. Profit and loss a/c and
Balance Sheet.
 To help in locating or detecting errors in accounting balances. As well as, helps the
accountant to locate the error. Because, the starting point of locating errors is trial
balance itself.
 They serve as a summary of all the ledger accounts and provides a complete summary
report of each account in the ledger.
Limitations of Trial Balance:
The following are the main limitations of the Trial Balance;
 They can prepare only in those concerns where the double-entry system of accounting
adopts.
 Though trial balance gives arithmetic accuracy of the books of accounts but there are
certain errors; which not discloses by the trial balance. That is why it says that trial
balance is not conclusive proof of the accuracy of the books of accounts.
 If the trial balance does not prepare correctly then the final accounts prepared will not
reflect the true and fair view of the state of affairs of the business. Whatever conclusions
and decisions are made by the various groups of persons will not be correct and will
mislead such persons.
 When the accountant makes an excess debit; or, excess credit entry although the same
being neutralized by excess credit; or, excess debit respectively in the same or another
account, such error recognizes as an error of compensation.
 When if the wrong amount writes at the initial stage then also the error cannot disclose
through the totals of trial balance are agreed upon.

Meaning of Errors in Trial Balance:

Errors in Trial Balance are mistakes made during the accounting process that cannot always be
detected by the trial balance. These errors are classified under two heads:
1. Errors disclosed by a trial balance: If the trial balance does not tally, it shows that
the accountant has committed certain mistakes while recording the transactions. These
are due to the lack of attention.
2. Errors not disclosed by a trial balance: The agreement of trial balance not always
necessarily shows an accuracy check. There may be a number of errors that cannot be
disclosed by the trial balance as the debit and credit side shows equal value. Such errors
are known as limitations of Trial Balance.

Types of Errors not disclosed by a Trial Balance:

1. Errors of Omission: Errors of Omission occur when a transaction is fully skipped.
This means that the transaction has not been recorded either in the Journal or in
Subsidiary Books. Under such a situation, the agreement of trial balance remains
unaffected, as the transaction has neither been entered in the debit side nor the credit
side of any account.
 2. Errors of Commission: Errors of Commission occur when a wrong amount has been
recorded either in the Journal or in Subsidiary Books. The trial balance, despite such
errors, still continues to tally because the same wrong amount has been recorded on
both sides of the accounts.
3. Errors of Principle: Errors of Principle occur when Accounting Principles are not
applied or are violated while recording a transaction. These errors are of two types:
When capital expenditure is treated as revenue expenditure.
Example: Furniture worth ₹ 50,000 purchased is wrongly debited to the purchase
account, instead of the Furniture account. Despite such Errors of Principle, the trial
balance shows an agreement.
When a revenue expenditure is treated as capital expenditure.
Example: Amount of ₹2,000 spent on repair of old machinery being debited to
machinery account, instead of repair account.
4. Compensating Errors: When the wrong amount posted in one account is compensated
by the wrong posting of the same amount in another account is called Compensating
Errors.
Format of Trial Balance according to the Balance Method