Unit 1: Basic Accounting Procedures – Journal Entries

Hey there! Welcome to the exciting world of accounting. Think of accounting as the
language of business. To understand this language, we need to learn its alphabet and
grammar. This first unit is all about the fundamental steps we take when a business
transaction happens.

1. The Double Entry System

Imagine you're giving a friend ₹100. Two things happen:
1.​ You give ₹100.
2.​ Your friend receives ₹100.

Every single business transaction is like this – it has two aspects. This is the core idea
behind the Double Entry System. It's a scientific way of recording transactions
where every transaction affects at least two accounts, and for every debit, there's a
corresponding credit of an equal amount.
●​ Memory Tip: Think "Two Sides to Every Story!" or "Debit the Receiver, Credit the
Giver" (we'll get to this rule soon!).
This system was first described over 500 years ago by an Italian guy named Luca
Pacioli. Pretty old, right? But it's still the most reliable system because it helps check
accuracy.

Exam Point: Double Entry System means every transaction has a two-fold effect
(Debit and Credit), and both are recorded. It's the only scientific system.

2. What is an 'Account'?
An 'Account' is simply a place where we keep track of all transactions related to a
specific item or person. For example, a 'Cash Account' shows all money received and
paid. A 'Furniture Account' shows all furniture bought and sold.

Think of it like a dedicated page for each thing the business owns, owes, earns, or
spends.

Accounts often look like a 'T' shape:

Account Name​
----------------------------​
Debit Side | Credit Side​
----------------------------​
Increases | Decreases (for Assets)​
Decreases | Increases (for Liabilities/Capital)​

We record increases on one side and decreases on the other. The difference between
the total increases and decreases is the balance.

3. Debit and Credit: The Accounting Directions

Formally, accountants use the terms Debit (Dr.) for the left side of any account and
Credit (Cr.) for the right side of any account.
●​ Memory Tip: Dr = Left, Cr = Right. Simple! Don't think of them as good or bad,
just directions.

4. The Accounting Equation and Debit/Credit Rules

Remember the basic accounting equation?
Assets = Liabilities + Capital
This equation must always balance. The Debit and Credit rules are designed to keep
this equation in balance after every transaction.

Here's how the rules connect:

●​ Assets: Things the business owns (Cash, Furniture, Debtors).
○​ Increase in Asset: Debit the Asset Account. (Like receiving cash, putting it on
the left side of Cash A/c).
○​ Decrease in Asset: Credit the Asset Account. (Like paying cash, putting it on
the right side of Cash A/c).
●​ Liabilities: What the business owes to outsiders (Creditors, Loans).
○​ Increase in Liability: Credit the Liability Account. (Like taking a loan, owing
more, put on the right side of Loan A/c).
○​ Decrease in Liability: Debit the Liability Account. (Like repaying a loan, owing
less, put on the left side of Loan A/c).
●​ Capital: What the business owes to the owner (Owner's investment).
○​ Increase in Capital: Credit the Capital Account. (Owner invests more, put on
the right side of Capital A/c).
○​ Decrease in Capital: Debit the Capital Account. (Owner withdraws money, put
on the left side of Capital A/c).
●​ Expenses/Losses: Costs incurred by the business (Salary, Rent, Purchases).
Expenses reduce profit, which reduces capital. Since decreasing capital is a
Debit, increasing expenses is also a Debit.
 ○​ Increase in Expense/Loss: Debit the Expense/Loss Account.
○​ Decrease in Expense/Loss: Credit the Expense/Loss Account.
●​ Incomes/Gains: Money earned by the business (Sales, Interest Received).
Incomes increase profit, which increases capital. Since increasing capital is a
Credit, increasing income is also a Credit.
○​ Increase in Income/Gain: Credit the Income/Gain Account.
○​ Decrease in Income/Gain: Debit the Income/Gain Account.

Memory Trick: DEAD CLIC

●​ Debit: Expenses, Assets, Drawings (Drawings reduce capital, like an expense)
●​ Credit: Liabilities, Income, Capital

Exam Point: Understand these rules thoroughly! They are the foundation of journal
entries. Increases in Assets/Expenses/Drawings are Debits. Increases in
Liabilities/Income/Capital are Credits.

5. Transactions and Approaches

A Transaction is a business event that can be measured in money and affects the
financial position of the business. Buying goods, selling goods, paying salary – these
are all transactions.

We can analyze transactions using two approaches:

1.​ Accounting Equation Approach: See how the transaction affects Assets,
Liabilities, and Capital, ensuring the equation stays balanced. (We just used this
to understand the rules).
2.​ Traditional Approach: Classify the accounts involved and apply the "Golden
Rules".

6. Classification of Accounts (Traditional Approach)

This approach classifies accounts into three types:
1.​ Personal Accounts: Accounts related to persons or organizations.
○​ Natural Persons: Ram, Rita, etc.
○​ Artificial/Legal Persons: Companies, Clubs, Government, etc.
○​ Representative Personal Accounts: Accounts representing a group of persons
(e.g., Outstanding Salary A/c represents employees whose salary is due,
Capital A/c represents the owner).
○​ Golden Rule: Debit the Receiver, Credit the Giver. (If Ram receives cash,
Debit Ram's A/c. If Ram gives cash, Credit Ram's A/c).
2.​ Real Accounts: Accounts related to assets and properties (things the business
 owns).
○​ Examples: Cash, Furniture, Building, Machinery, Inventory.
○​ Golden Rule: Debit what comes in, Credit what goes out. (If furniture is
bought, Furniture A/c (asset coming in) is Debited. If cash is paid, Cash A/c
(asset going out) is Credited).
3.​ Nominal Accounts: Accounts related to expenses, losses, incomes, and gains.
○​ Examples: Salary, Rent, Purchases, Sales, Interest Received, Discount Allowed.
○​ Golden Rule: Debit all expenses and losses, Credit all incomes and gains.
(Salary paid is an expense, Debit Salary A/c. Rent received is income, Credit
Rent A/c).
Exam Point: Know the three types of accounts and their Golden Rules. Be able to
classify accounts and apply the rules to simple transactions.

7. The Journal
The Journal is the very first book where transactions are recorded. It's called the
Book of Original Entry because this is where transactions are initially entered, in
chronological order (date-wise).

The process of recording in the journal is called Journalizing.

Journal Format:

JOURNAL​
-----------------------------------------------------------------------​
Date | Particulars | L.F. | Debit (₹) | Credit (₹)​
-----------------------------------------------------------------------​
YYYY | Account to be Debited Dr. | | [Amount] |​
MM DD| To Account to be Credited | | | [Amount]​
| (Narration - brief explanation) | | |​
-----------------------------------------------------------------------​

●​ Date: When the transaction happened.

●​ Particulars: Names of accounts debited and credited, plus a brief explanation
(Narration).
●​ L.F. (Ledger Folio): Page number in the Ledger where this entry is later posted
(we'll learn about Ledger next!). This is left blank during journalizing.
●​ Debit Amount: Amount being debited.
●​ Credit Amount: Amount being credited.
Key Points about Journalizing:
●​ Record transactions daily, in order.
●​ Identify the accounts involved.
●​ Classify the accounts (Traditional or Modern approach - both lead to the same
Debit/Credit).
●​ Apply the Debit/Credit rules.
●​ Write the narration.
●​ Ensure Debit amount equals Credit amount for each entry.

Compound Journal Entry: Sometimes, one transaction might involve more than two
accounts (e.g., paying a creditor partly in cash and partly by cheque, receiving cash
with discount). You can combine these into one journal entry, as long as the total
debits equal the total credits.

Advantages of Journal:
●​ Chronological record.
●​ Provides a complete picture of each transaction (dual aspect).
●​ Helps in posting to the ledger.
●​ Reduces chances of errors.

8. Accounting for GST (Goods and Services Tax)

GST is a single tax on the supply of goods and services in India. It replaced many old
taxes like VAT, Excise Duty, Service Tax.
●​ Intra-State Supply: Supply within the same state. Attracts CGST (Central GST,
goes to Central Govt.) and SGST (State GST, goes to State Govt.) or UTGST
(Union Territory GST).
●​ Inter-State Supply: Supply between different states or a state and a UT. Attracts
IGST (Integrated GST, goes to Central Govt., is the sum of CGST and SGST).
Input GST vs. Output GST:
●​ Input GST: Tax paid on purchases of goods/services. This is an asset (Input Tax
Credit - ITC) because you can use it to reduce your Output GST liability.
○​ Recorded as Input CGST A/c Dr., Input SGST A/c Dr. (for intra-state
purchases) or Input IGST A/c Dr. (for inter-state purchases).
●​ Output GST: Tax collected on sales of goods/services. This is a liability because
you have to pay it to the government.
○​ Recorded as Output CGST A/c Cr., Output SGST A/c Cr. (for intra-state
sales) or Output IGST A/c Cr. (for inter-state sales).
Basic GST Journal Entries:
●​ For Purchases (on credit):​
Purchases A/c Dr. (Net value)​
Input CGST A/c Dr. (CGST amount)​
Input SGST A/c Dr. (SGST amount)​
To Creditor A/c (Total amount)
●​ For Sales (on credit):​
Debtor A/c Dr. (Total amount)​
To Sales A/c (Net value)​
To Output CGST A/c (CGST amount)​
To Output SGST A/c (SGST amount)
(Note: Entries for IGST would use Input/Output IGST instead of CGST/SGST).
●​ Utilisation of ITC: You use Input GST to pay Output GST. Rules exist for which
Input GST can be set off against which Output GST (IGST first, then CGST/SGST).
This is typically done at the time of paying GST to the government.
Exam Point: Understand the basic concept of GST, the difference between
intra/inter-state, and how Input and Output GST are recorded (Debit for Input, Credit
for Output).

Recap/Summary of Unit 1
●​ Double Entry: Every transaction has two sides (Debit and Credit).
●​ Account: A record for a specific item/person, with a Debit (left) and Credit (right)
side.
●​ Rules: DEAD CLIC (Debit: Expenses, Assets, Drawings; Credit: Liabilities, Income,
Capital).
●​ Traditional Classification: Personal (Receiver Dr., Giver Cr.), Real (What comes in
Dr., What goes out Cr.), Nominal (Expenses/Losses Dr., Incomes/Gains Cr.).
●​ Journal: The first book of entry, chronological record.
●​ Journalizing: The process of recording in the Journal.
●​ GST: Tax on supply. Input GST (Asset) is Debited, Output GST (Liability) is
Credited.
You've got this! Mastering these basics is key. Let's move on to the next step in the
accounting process: the Ledger!
Unit 2: Ledgers
Alright, future accountant! We've learned how to record transactions for the first time
in the Journal. But imagine having thousands of transactions in a journal – it would be
hard to find the total sales or the balance owed by a specific customer, right? That's
where the Ledger comes in!

1. What is a Ledger?
The Ledger is like a big book containing a separate page (or account) for every single
item we track in accounting – Cash, Sales, Rent, specific customers, specific
suppliers, etc.

It's called the Principal Book of Accounts because it summarizes all the transactions
for each account, and the balances from the Ledger are used to prepare important
financial statements.

Think of the Journal as your diary (chronological record) and the Ledger as your
organized contact book or subject-wise notebook (categorized record).

2. Specimen of a Ledger Account

We saw the 'T' form earlier. The formal Ledger account looks like this:

Dr. [Account Name] Cr.​

---------------------------------------------------------------------------------​
Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹)​
---------------------------------------------------------------------------------​

●​ Date: Date of the transaction.

●​ Particulars: A brief description, usually mentioning the other account involved in
the journal entry.
●​ J.F. (Journal Folio): The page number of the Journal from where this entry was
transferred (posted). This helps you trace back to the original entry.
●​ Amount: The monetary value of the transaction.

3. Posting
Posting is the process of transferring information from the Journal to the relevant
accounts in the Ledger. It's like taking notes from your diary and putting them into the
right subject notebooks.
This is done periodically (e.g., daily or weekly).

Rules for Posting:

1.​ Separate Accounts: Open a separate account in the Ledger for each item (Cash,
Sales, Ram, etc.).
2.​ 'To' and 'By':
○​ When posting to the Debit side of a Ledger account, use the word 'To'
followed by the name of the account that was credited in the Journal entry.
○​ When posting to the Credit side of a Ledger account, use the word 'By'
followed by the name of the account that was debited in the Journal entry.
○​ (Note: Some modern practices omit 'To' and 'By', but for CA Foundation, it's
generally expected).
3.​ Debit in Journal = Debit in Ledger: If an account is debited in the Journal, the
corresponding amount is posted to the Debit side of that account in the Ledger.
The 'Particulars' column will show the credited account's name.
4.​ Credit in Journal = Credit in Ledger: If an account is credited in the Journal,
the corresponding amount is posted to the Credit side of that account in the
Ledger. The 'Particulars' column will show the debited account's name.
Example (from Unit 1):
Journal Entry:
Cash A/c Dr. ₹1,000
To Sales A/c ₹1,000
(Being goods sold for cash)
Posting:
●​ Go to the Cash Account in the Ledger. Since Cash was Debited in the Journal,
post ₹1,000 on the Debit side of the Cash Account. In the 'Particulars' column,
write 'To Sales A/c'.
●​ Go to the Sales Account in the Ledger. Since Sales was Credited in the Journal,
post ₹1,000 on the Credit side of the Sales Account. In the 'Particulars' column,
write 'By Cash A/c'.
Exam Point: Understand the process of posting and the use of 'To' and 'By'. Be able
to post simple journal entries to Ledger accounts.

4. Balancing an Account
At the end of a period (month, quarter, year), we need to find the final figure for each
account. This is called Balancing the account.

Steps to Balance:
 1.​ Total the Debit side of the account.
2.​ Total the Credit side of the account.
3.​ Find the difference between the two totals.
4.​ Write this difference on the side with the smaller total to make both sides equal.
This difference is the balance.
5.​ If the Debit side total is more than the Credit side total, it's a Debit Balance.
Write the difference on the Credit side as "By Balance c/d" (carried down).
6.​ If the Credit side total is more than the Debit side total, it's a Credit Balance.
Write the difference on the Debit side as "To Balance c/d" (carried down).
7.​ Draw double lines below the equal totals to show the account is balanced for the
period.
8.​ Bring down the balance to the opposite side below the double lines as the
opening balance for the next period. Write "To Balance b/d" (brought down) for a
debit balance or "By Balance b/d" for a credit balance.
Example (Simple Cash Account Balancing):
Suppose total cash receipts (Debit side) are ₹5,000 and total cash payments (Credit side) are
₹3,000.
●​ Debit total = ₹5,000
●​ Credit total = ₹3,000
●​ Difference = ₹2,000 (Debit balance)
●​ Write "By Balance c/d ₹2,000" on the Credit side to make totals ₹5,000 on both
sides.
●​ Below the totals, write "To Balance b/d ₹2,000" on the Debit side for the next
period.
Important Note:
●​ Nominal Accounts (Expenses, Incomes): These accounts are not balanced.
Their balances are transferred to the Profit and Loss Account at the end of the
year.
●​ Personal and Real Accounts (Assets, Liabilities, Capital): These accounts are
balanced, and their balances are carried forward to the next period and shown in
the Balance Sheet.
Exam Point: Be able to balance a Ledger account and understand the difference
between 'Balance c/d' and 'Balance b/d'. Remember which accounts are balanced and
which are transferred.

Recap/Summary of Unit 2
●​ Ledger: Principal book, contains categorized accounts.
●​ Posting: Transferring entries from Journal to Ledger.
●​ Rules of Posting: Use 'To' on Debit side (referencing Credit A/c), 'By' on Credit
side (referencing Debit A/c).
●​ Balancing: Finding the difference in an account. Debit balance (Dr > Cr) shown as
'By Bal c/d' on Cr side, brought down as 'To Bal b/d' on Dr side. Credit balance (Cr
> Dr) shown as 'To Bal c/d' on Dr side, brought down as 'By Bal b/d' on Cr side.
●​ Nominal accounts are not balanced, they are transferred to P&L.

Great job! We've moved from recording to organizing. Now, let's see how we check if
our recording and organizing were accurate – with the Trial Balance!
Unit 3: Trial Balance
Hello again! So far, we've recorded transactions in the Journal and then transferred
them to the Ledger accounts. The next logical step is to check if everything balances
out. This is the purpose of the Trial Balance.

1. What is a Trial Balance?

A Trial Balance is a statement (not an account!) prepared on a specific date, listing
the balances of all the Ledger accounts. It has two columns: one for Debit balances
and one for Credit balances.

Think of it as a summary list of all your Ledger account final figures.

Why prepare a Trial Balance?

●​ Check for Arithmetical Accuracy: The main purpose! If the total of the Debit
balances equals the total of the Credit balances, it means that for every debit
entry, there was a corresponding credit entry of the same amount. This confirms
the arithmetical accuracy of the double-entry system posting.
●​ Basis for Financial Statements: The Trial Balance provides all the necessary
account balances needed to prepare the final accounts (Trading Account, Profit
and Loss Account, and Balance Sheet).
●​ Summary of Ledger: It gives a quick overview of all the account balances
without having to go through the entire Ledger.
Exam Point: Trial Balance is a statement, not an account. Its primary purpose is to
check arithmetical accuracy.

2. Format of Trial Balance

Trial Balance​
as at [Date]​
---------------------------------------------------​
S.No. | Ledger Account Name | Debit Balance (₹) | Credit Balance (₹)​
---------------------------------------------------​
1. | Cash Account | [Balance] |​
2. | Bank Account | [Balance] |​
... | ... | ... | ...​
| **Total** | **[Sum of Debits]** | **[Sum of Credits]**​
---------------------------------------------------​
The totals of the Debit Balance column and the Credit Balance column should be
equal if there are no arithmetical errors in journalizing, posting, and balancing.

3. Methods of Preparation
There are a few ways to prepare a Trial Balance, but the most common and useful one
for preparing financial statements is the Balance Method.
●​ Total Method: Lists the total of the debit side and the total of the credit side for
each Ledger account. While totals will match if posting is correct, it doesn't show
the final balance needed for financial statements. (Less common).
●​ Balance Method: Lists only the final balances (Debit or Credit) of each Ledger
account. This is the widely used method.
●​ Total and Balance Method: Combines both, showing totals and balances for
each account. (Less common).
Exam Point: The Balance Method is the most important one to understand for
preparing final accounts.

4. Rules for Preparing Trial Balance (Balance Method)

Based on our Debit/Credit rules (DEAD CLIC), here's where different account balances
go in the Trial Balance:
●​ Debit Balance Column:
○​ Assets (Cash, Bank, Debtors, Furniture, Building, Investments, Closing
Inventory, Bills Receivable, Prepaid Expenses, Interest Receivable)
○​ Expenses (Purchases, Salaries, Rent Paid, Discount Allowed, Depreciation,
Bad Debts, etc.)
○​ Losses (Loss on Sale of Asset)
○​ Drawings
●​ Credit Balance Column:
○​ Liabilities (Creditors, Loans, Bills Payable, Outstanding Expenses, Income
Received in Advance, GST Payable)
○​ Capital
○​ Incomes (Sales, Interest Received, Discount Received, Bad Debts Recovered,
Rent Received, etc.)
○​ Gains (Profit on Sale of Asset)
○​ Provisions (like Provision for Doubtful Debts - though this can sometimes be
debated, it often has a credit balance as it reduces debtors).
Memory Tip: All accounts with a Debit nature (increase by Debit) will usually have a
Debit balance and appear on the Debit side of the Trial Balance. All accounts with a
Credit nature (increase by Credit) will usually have a Credit balance and appear on the
Credit side.

Exam Point: Be able to correctly place the balances of various accounts in the Debit
or Credit column of the Trial Balance.

5. Limitations of Trial Balance

While a tallying Trial Balance is a great sign, it's not conclusive proof of 100%
accuracy. Some errors might still exist even if the Trial Balance agrees. These include:
●​ Errors of Complete Omission: A transaction completely missed from the Journal
and Ledger. (Both debit and credit aspects are missing, so the Trial Balance still
balances).
●​ Errors of Commission (affecting two accounts equally):
○​ Recording a wrong amount in the Journal (e.g., ₹100 recorded as ₹1,000 in
both debit and credit).
○​ Posting to the wrong account but on the correct side (e.g., Debit Ram instead
of Shyam, both are Debtors, so total Debtors might still be correct, or the error
is balanced by another error).
●​ Errors of Principle: Treating a capital expense as a revenue expense (e.g., buying
furniture and debiting Rent A/c). The amount is on the correct side (Debit), just in
the wrong type of account.
●​ Compensating Errors: Two or more errors cancelling each other out (e.g.,
Purchases A/c is undercast by ₹100, and Sales A/c is also undercast by ₹100).
Exam Point: Know that a tallying Trial Balance indicates arithmetical accuracy but
doesn't guarantee complete accuracy due to certain types of errors (complete
omission, compensating errors, errors of principle, posting to wrong account on
correct side).

6. Adjusted Trial Balance / Suspense Account

If the Trial Balance doesn't tally, there's an arithmetical error somewhere. To proceed
with preparing financial statements without delay, the difference is temporarily put
into a Suspense Account.
●​ If the Debit side total is less than the Credit side total, the difference is put on the
Debit side of the Trial Balance and Debited to the Suspense Account.
●​ If the Credit side total is less than the Debit side total, the difference is put on the
 Credit side of the Trial Balance and Credited to the Suspense Account.
Later, when the errors are found and rectified, the Suspense Account balance will
become zero.

Exam Point: The Suspense Account is a temporary account used to force the Trial
Balance to tally when errors are not immediately found.

Recap/Summary of Unit 3
●​ Trial Balance: A statement listing Ledger balances to check arithmetical
accuracy.
●​ Purpose: Arithmetical check, basis for final accounts, ledger summary.
●​ Method: Balance Method is standard.
●​ Rules: Debit balances (Assets, Expenses, Losses, Drawings) on Debit side; Credit
balances (Liabilities, Capital, Incomes, Gains) on Credit side.
●​ Limitations: Doesn't detect all errors (complete omission, compensating,
principle, wrong account/correct side).
●​ Suspense Account: Temporary account used when Trial Balance doesn't tally.
You're doing great! We've checked our work. Now, let's explore how businesses handle
many similar transactions efficiently using special books.
Unit 4: Subsidiary Books
Welcome back! We've covered the core accounting cycle steps: Journalizing and
Posting to the Ledger, and then checking accuracy with the Trial Balance. Now, let's
talk about how businesses handle a large volume of similar transactions more
efficiently.

Imagine a large business that buys and sells goods thousands of times a day. If they
had to pass a full journal entry for every single sale or purchase, the main Journal
would become huge and difficult to manage. This is where Subsidiary Books come
in!

1. What are Subsidiary Books?

Subsidiary Books are specialized books of original entry used to record specific types
of frequent transactions. Instead of recording everything in the main Journal, similar
transactions are grouped and recorded in these separate books.

They are also called Books of Original Entry or Books of Prime Entry because
transactions are recorded in them first.

Why use Subsidiary Books? (Advantages)

●​ Division of Work: Different employees can maintain different subsidiary books
(one for sales, one for purchases, etc.), speeding up the work.
●​ Specialization: Employees become experts in handling specific types of
transactions.
●​ Time Saving: Reduces the work of passing full journal entries for routine
transactions.
●​ Easy Information Retrieval: All transactions of a specific type (like all credit
sales) are found in one place.
●​ Facilitates Checking: Helps in locating errors more easily if the Trial Balance
doesn't tally.
Exam Point: Subsidiary books are books of original entry for specific types of
transactions. Know their advantages.

2. Subsidiary Books vs. Principal Books

●​ Subsidiary Books: Books of original entry (where transactions are first
recorded). Examples: Purchases Book, Sales Book, etc.
●​ Principal Books: Books that contain accounts and their balances, used for
 preparing the Trial Balance and Financial Statements. Examples: Ledger, Cash
Book (Cash Book is special - more on that in Unit 5!).
Subsidiary books provide the data that is later summarized and posted to the Principal
Books (Ledger accounts).

3. Common Subsidiary Books

Here are the most common subsidiary books:
●​ Cash Book: Records all cash receipts and cash payments (including bank
transactions if it has a bank column). (We'll cover this in detail in Unit 5 - it's both
a subsidiary and a principal book!)
●​ Purchases Book (or Purchases Journal): Records only credit purchases of
goods that the business deals in.
○​ Excludes: Cash purchases (go to Cash Book), credit purchases of assets (go
to Journal Proper).
○​ The total of the Purchases Book is periodically posted to the Debit of the
Purchases Account in the Ledger. Individual supplier accounts are Credited.
●​ Sales Book (or Sales Journal): Records only credit sales of goods that the
business deals in.
○​ Excludes: Cash sales (go to Cash Book), credit sales of assets (go to Journal
Proper).
○​ The total of the Sales Book is periodically posted to the Credit of the Sales
Account in the Ledger. Individual customer accounts are Debited.
●​ Purchase Returns Book (or Returns Outward Book): Records goods returned
to suppliers that were previously bought on credit.
○​ Total is posted to the Credit of the Purchase Returns Account (or Returns
Outward A/c). Individual supplier accounts are Debited. A Debit Note is
issued to the supplier.
●​ Sales Returns Book (or Returns Inward Book): Records goods returned by
customers that were previously sold on credit.
○​ Total is posted to the Debit of the Sales Returns Account (or Returns Inward
A/c). Individual customer accounts are Credited. A Credit Note is issued to
the customer.
●​ Bills Receivable Book: Records promissory notes (Bills Receivable) received from
customers.
●​ Bills Payable Book: Records promissory notes (Bills Payable) issued to suppliers.
●​ Journal Proper (or General Journal): This is the original Journal we discussed
in Unit 1, but its role is reduced when subsidiary books are used. It records all
 transactions that don't fit into any of the other subsidiary books.
Exam Point: Be able to identify which transactions go into which subsidiary book.
Remember what is excluded from the Purchases Book and Sales Book (cash
transactions and asset transactions). Understand the posting of totals and individual
entries from these books.

4. Importance of Journal Proper

Even with all the specialized subsidiary books, the Journal Proper is still essential for
recording transactions like:
●​ Opening Entries: Recording assets, liabilities, and capital at the start of a new
accounting period.
●​ Closing Entries: Transferring nominal accounts (expenses, incomes) to the
Trading and Profit & Loss Account.
●​ Rectification Entries: Correcting errors (we'll cover this in detail in Unit 6).
●​ Transfer Entries: Moving amounts from one account to another.
●​ Adjusting Entries: Made at the end of the period for items like outstanding
expenses, prepaid expenses, depreciation, interest on capital.
●​ Entries for Dishonour of Bills: When a bill is not paid on time.
●​ Miscellaneous Entries: Any other transaction not covered by specialized books
(e.g., credit purchase/sale of an asset, goods withdrawn by owner, goods given as
charity/free samples, abnormal losses).
Exam Point: Know the specific types of entries recorded in the Journal Proper when
subsidiary books are maintained.

Recap/Summary of Unit 4
●​ Subsidiary Books: Specialized books for frequent transactions (Purchases,
Sales, Returns, Bills, Cash).
●​ Purpose: Efficiency, division of work, better information.
●​ Exclusions: Purchases/Sales Books only record credit transactions of goods.
Cash transactions go to Cash Book, asset transactions (credit) go to Journal
Proper.
●​ Posting: Totals of Purchases/Sales/Returns books go to the respective main
accounts. Individual entries go to personal accounts.
●​ Journal Proper: Records transactions not fitting into other subsidiary books
(opening, closing, adjusting, rectification, etc.).
Great progress! We've seen how transactions are categorized. Now, let's take a closer
look at the most active book in any business – the Cash Book!
Unit 5: Cash Book
Hello there! Let's talk about money – specifically, how businesses keep track of cash
and bank transactions. This is the job of the Cash Book.

1. Cash Book: Subsidiary and Principal Book

The Cash Book is a bit unique. It's a Subsidiary Book because it's a book of original
entry where cash and bank transactions are recorded first.

But it's also treated as a Principal Book because it serves as both the Cash Account
and the Bank Account in the Ledger. Its final balance goes directly to the Trial
Balance.

Exam Point: Cash Book is both a subsidiary book (book of original entry) and a
principal book (acts as Cash and Bank Ledger accounts).

2. Kinds of Cash Book

Cash Books come in different formats depending on the business's needs:
●​ Simple Cash Book (Single Column): Has one amount column on each side
(Debit for Receipts, Credit for Payments). Only records cash transactions.
●​ Two-Column Cash Book: Has two amount columns on each side. Common
types:
○​ Cash and Discount Columns: Records cash transactions and cash discounts
allowed (Debit side) or received (Credit side).
○​ Cash and Bank Columns: Records cash transactions and bank transactions
(deposits and withdrawals).
●​ Three-Column Cash Book: Has three amount columns on each side (Discount,
Cash, and Bank). Records cash, bank, and cash discount transactions.
●​ Petty Cash Book: Records small, frequent cash payments (like postage, cartage).
Purely a subsidiary book.

3. Simple Cash Book (Single Column)

This is the most basic type, just like a regular Ledger account but specifically for cash.

Dr. Cash Book Cr.​

--------------------------------------------------------------------​
Date | Receipts | L.F. | Amount (₹) | Date | Payments | L.F. | Amount (₹)​
--------------------------------------------------------------------​
 ●​ Debit Side: Records all cash receipts (money coming in).
●​ Credit Side: Records all cash payments (money going out).
●​ Balancing: Similar to balancing a Ledger account. The Debit side total (receipts)
will always be greater than or equal to the Credit side total (payments), because
you can't pay out more cash than you have! The balance is always a Debit balance
(Cash in Hand).
Exam Point: Simple Cash Book records only cash receipts and payments. Debit side
total is always >= Credit side total.

4. Double-Column Cash Book (Cash and Discount)

This adds columns for cash discount.

Dr. Cash Book Cr.​

------------------------------------------------------------------------------------
------​
Date | Receipts | L.F. | Discount (₹) | Cash (₹) | Date | Payments | L.F. | Discount (₹) |
Cash (₹)​
------------------------------------------------------------------------------------
------​

●​ Debit Side: Cash received and Discount Allowed (given to customers for prompt
payment).
●​ Credit Side: Cash paid and Discount Received (from suppliers for prompt
payment).
●​ Balancing: Cash columns are balanced like a Simple Cash Book. Discount
columns are only totalled, not balanced. The total of the Debit Discount column
is debited to Discount Allowed A/c in the Ledger. The total of the Credit Discount
column is credited to Discount Received A/c in the Ledger.
Exam Point: Discount columns are totalled, not balanced. Debit side discount is
Discount Allowed (Expense, Dr.), Credit side discount is Discount Received (Income,
Cr.).

5. Three-Column Cash Book (Discount, Cash, Bank)

This is the most comprehensive main Cash Book, including bank transactions.
Dr. Cash Book Cr.​
------------------------------------------------------------------------------------
------------------​
Date | Receipts | L.F. | Discount (₹) | Cash (₹) | Bank (₹) | Date | Payments | L.F. |
Discount (₹) | Cash (₹) | Bank (₹)​
------------------------------------------------------------------------------------
------------------​

●​ Debit Side: Discount Allowed, Cash Receipts, Bank Receipts (deposits, cheques
received and deposited).
●​ Credit Side: Discount Received, Cash Payments, Bank Payments (cheques
issued, withdrawals).
●​ Balancing: Discount columns are totalled. Cash and Bank columns are balanced.
Bank column can have a Debit balance (favorable) or a Credit balance (overdraft).
Contra Entries ('C'): Transactions involving both Cash and Bank accounts of the
same business are recorded on both sides of the Three-Column Cash Book. These are
called Contra Entries.
●​ Cash deposited into Bank: Bank A/c Dr., Cash A/c Cr. In the Cash Book: Debit
Bank column, Credit Cash column. Write 'C' in the L.F. column on both sides.
●​ Cash withdrawn from Bank: Cash A/c Dr., Bank A/c Cr. In the Cash Book: Debit
Cash column, Credit Bank column. Write 'C' in the L.F. column on both sides.
Exam Point: Understand Contra Entries and how they are recorded in the
Three-Column Cash Book (affecting both Cash and Bank columns with 'C' in L.F.).

6. Posting the Cash Book

●​ Cash and Bank Columns: These columns are the Ledger accounts. Their
balances go directly to the Trial Balance.
●​ Discount Columns: These are memorandum columns. Their totals are posted to
the respective Discount Allowed A/c (Debit total to Dr. side) and Discount
Received A/c (Credit total to Cr. side) in the Ledger.
●​ Other Accounts: For entries in the Cash/Bank columns, the corresponding
accounts mentioned in the 'Particulars' column are posted in the Ledger. If
Cash/Bank is Debited in the Cash Book, the other account is Credited in the
Ledger. If Cash/Bank is Credited in the Cash Book, the other account is Debited in
the Ledger.

7. Petty Cash Book and Imprest System

For small, frequent expenses (like bus fare, postage), maintaining them in the main
Cash Book is cumbersome. A Petty Cash Book is used for this.

Imprest System: A fixed amount (imprest amount) is given to the Petty Cashier at the
beginning of a period. At the end of the period, the Petty Cashier is reimbursed for the
amount spent, bringing the cash in hand back to the original imprest amount.

Advantages of Petty Cash Book:

●​ Saves time for the main cashier.
●​ Reduces entries in the main Cash Book.
●​ Provides control over small expenses.

Format (Analytical Petty Cash Book): Has a Receipts column and multiple Payment
analysis columns (Postage, Cartage, Stationery, etc.) plus a Sundries column for
infrequent expenses.

Posting Petty Cash Book:

●​ The amount received from the main cashier is Debited to the Petty Cash Account
in the main Ledger.
●​ The total of each analysis column in the Petty Cash Book is periodically Debited to
the respective Expense Account in the main Ledger (e.g., total of Postage column
is Debited to Postage A/c).
●​ The total amount spent (sum of all analysis columns) is Credited to the Petty Cash
Account in the main Ledger.
Exam Point: Understand the Imprest System and how the Petty Cash Book total is
posted to the main Ledger (Debiting specific expense accounts and Crediting the
Petty Cash A/c).

8. Accounting for Credit/Debit Card Sales

From a seller's perspective, sales made via credit/debit cards are treated like cash
sales because the money is eventually received in the bank.

Journal Entries:
1.​ At the time of sale:​
Bank A/c Dr. (Gross amount received)​
To Sales A/c (Gross sales value)
2.​ When bank charges commission:​
Commission Expenses A/c Dr. (Commission amount)​
 To Bank A/c (Commission amount)
Exam Point: Credit/Debit card sales are treated as cash/bank sales. Bank commission
is an expense.

Recap/Summary of Unit 5
●​ Cash Book: Both subsidiary and principal book.
●​ Types: Simple (Cash), Two-Column (Cash+Discount or Cash+Bank),
Three-Column (Discount+Cash+Bank).
●​ Contra Entries: Transfers between Cash and Bank within the same business,
recorded on both sides of the Cash Book with 'C'.
●​ Discount Columns: Totalled, not balanced.
●​ Petty Cash Book: For small payments, often uses Imprest System. Analyzed
totals are posted to expense accounts.
●​ Card Sales: Treated as cash sales.
Excellent work! We've covered the Cash Book in detail. Now, let's tackle a crucial topic:
finding and fixing mistakes!
Unit 6: Rectification of Errors
Hi there! Even the best accountants can make mistakes. It's important to know how to
find and correct these errors properly. This unit is all about Rectification of Errors.

1. What are Errors?

Errors are unintentional mistakes made during the accounting process (recording,
posting, balancing, etc.). They are not frauds (intentional mistakes).

2. Stages of Errors
Errors can be discovered at different points:
1.​ Before preparing the Trial Balance.
2.​ After preparing the Trial Balance, but before preparing the Final Accounts.
3.​ After preparing the Final Accounts (in the next accounting period).

The method of rectification depends on when the error is found.

3. Types of Errors
Errors can be classified in a few ways:
●​ Based on Nature:
○​ Errors of Principle: When accounting principles are violated (e.g., treating
purchase of an asset as an expense). The entry might be on the correct side
(Debit/Credit) but in the wrong type of account.
○​ Clerical Errors: Mistakes in the process of recording or posting.
■​ Errors of Omission: Transaction is completely or partially missed.
■​ Errors of Commission: Wrong amount, wrong side, wrong account, wrong
totalling, wrong balancing.
○​ Compensating Errors: Two or more errors that cancel each other out, so the
Trial Balance still agrees.
●​ Based on Effect on Trial Balance:
○​ Errors affecting the Trial Balance (One-sided errors): These errors cause
the Debit and Credit totals of the Trial Balance to not match. Usually affect
only one account or cause an unequal impact on two accounts. Examples:
wrong casting of a subsidiary book, posting to the wrong side, omitting to
post an entry, wrong balancing of an account.
○​ Errors not affecting the Trial Balance (Two-sided errors): These errors do
not prevent the Trial Balance from tallying because the debit and credit
aspects are equally affected (or both are missing). Examples: complete
 omission of a transaction, wrong amount in original entry affecting both debit
and credit, posting to the wrong account but on the correct side, errors of
principle, compensating errors.
Exam Point: Be able to classify errors and understand whether a specific error will
affect the Trial Balance or not. Errors of Principle and Complete Omission do not
affect the Trial Balance.

4. Steps to Locate Errors (If Trial Balance Doesn't Tally)

If the Trial Balance totals don't match, you need to find the error(s). Here's a
systematic approach:
1.​ Re-total the Trial Balance: Simple, but often effective!
2.​ Check Cash and Bank Balances: Ensure they are included.
3.​ Calculate the Difference: Note the exact amount.
4.​ Look for the Difference: See if any account balance equals the difference and
might have been omitted.
5.​ Halve the Difference: Divide the difference by two. See if any account balance
equals half the difference – this could mean an amount was posted to the wrong
side.
6.​ Check Postings of the Difference/Half Difference: Trace postings of amounts
equal to the difference or half the difference.
7.​ Re-balance Ledger Accounts: Check the balancing of all accounts.
8.​ Check Casting of Subsidiary Books: Verify the totals of Purchases Book, Sales
Book, etc.
9.​ Compare with Previous Period: Look for significant changes in account
balances that might indicate an error.
10.​Detailed Checking: If still not found, check all postings from subsidiary books to
the Ledger, starting with nominal accounts.

5. Rectification of Errors
Errors should be corrected by passing a Rectification Entry (a journal entry) or by
making a correction directly in the account, depending on the stage of detection.
Never overwrite or erase!

Stage 1: Errors Detected Before Trial Balance Preparation

●​ One-sided errors: Corrected by making a direct entry on the appropriate side of
the affected account. A brief explanation (narration) is written.
○​ Example: Sales Book undercast by ₹100. Go to Sales A/c (Credit side) and
write "By Undercasting of Sales Book ₹100".
 ●​ Two-sided errors: Corrected by passing a regular Journal Entry (Rectification
Entry) that debits the account that should have been debited and credits the
account that should have been credited. No Suspense Account is needed as the
Trial Balance hasn't been prepared yet.
○​ Example: Purchase of Furniture ₹500 debited to Purchases A/c.​
Rectification Entry: Furniture A/c Dr. ₹500, To Purchases A/c Cr. ₹500.
Stage 2: Errors Detected After Trial Balance Preparation (But Before Final
Accounts)

At this stage, the Trial Balance might not tally, and a Suspense Account is often
opened with the difference. All errors are now rectified using Journal Entries.
●​ One-sided errors: Rectified by a Journal Entry involving the affected account
and the Suspense Account.
○​ Example: Sales Book undercast by ₹100 (Trial Balance Credit side short,
Suspense A/c Credited by ₹100).​
Rectification Entry: Suspense A/c Dr. ₹100, To Sales A/c Cr. ₹100. (This
corrects the Sales A/c and closes the Suspense A/c entry related to this
error).
●​ Two-sided errors: Rectified by a Journal Entry just like in Stage 1. The Suspense
Account is not involved unless the error itself involved an unequal debit/credit that
led to the Suspense Account balance.
Exam Point: Understand how the Suspense Account is used to rectify one-sided
errors when detected after the Trial Balance.

Stage 3: Errors Detected After Final Accounts (In the Next Accounting Period)

If errors from the previous year are found after the books are closed and profits are
calculated, correcting them directly in nominal accounts (Expenses, Incomes) will
affect the current year's profit. To avoid this, a special account called Profit and Loss
Adjustment Account (or Prior Period Items) is used for corrections related to nominal
accounts.
●​ Corrections affecting previous year's nominal accounts (expenses/incomes) are
routed through the Profit and Loss Adjustment Account.
○​ If a previous year's expense was understated or income overstated, Profit &
Loss Adjustment A/c is Debited.
○​ If a previous year's expense was overstated or income understated, Profit &
Loss Adjustment A/c is Credited.
●​ Corrections affecting previous year's real or personal accounts (assets/liabilities)
 are made directly to those accounts.
●​ The Suspense Account (if it had a balance carried forward from the previous
year) is used to rectify errors that caused the previous year's Trial Balance
difference.
Exam Point: When rectifying errors in the next period, use the Profit and Loss
Adjustment Account for nominal items from the prior period. Suspense Account is
used for errors that caused the prior period's Trial Balance difference.

Recap/Summary of Unit 6
●​ Errors: Unintentional mistakes.
●​ Types: Principle, Omission, Commission, Compensating. Know which affect Trial
Balance.
●​ Location: Systematic steps to find errors if TB doesn't tally.
●​ Rectification: Depends on when detected.
○​ Before TB: Direct correction in account (one-sided), Journal Entry
(two-sided).
○​ After TB: Journal Entry with Suspense A/c (one-sided), Journal Entry
(two-sided).
○​ Next Period: P&L Adjustment A/c (prior period nominal items), Suspense A/c
(TB difference), direct to Real/Personal A/cs.
●​ Suspense Account: Temporary account for TB difference.
●​ P&L Adjustment A/c: Used in the next period for prior period nominal errors.
You've made it through the core Accounting Process units! That's fantastic. Keep
reviewing these concepts and practicing problems. Feel free to ask if anything is
unclear. Happy learning!