Unit 2: Journal, ledger and trial balance
Basic Accounting notes · PTU syllabus (BSIT405/BSBC305)
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Unit summary
Transactions flow from the journal to the ledger and are checked in the trial balance. This unit covers recording entries in the journal with narration, posting to the ledger, the basics of the purchase book, sales book and cash book, the need and objectives of the trial balance, types of errors and preparing a trial balance.
After this unit you can
- Journalise transactions with narrations
- Post entries to ledger accounts and balance them
- Record transactions in the purchase, sales and cash books
- Prepare a trial balance and classify errors
PTU syllabus topics
- Recording entries in the journal with narration
- posting from journal to ledger
- purchase book/sales book/cashbook basics
- need and objectives of trial balance
- types of errors
- trial balance preparation
- 1Transaction
Supported by a voucher
- 2Journal
Debit, credit and narration
- 3Ledger
Posted to each account
- 4Balance the accounts
- 5Trial balance
Debits = credits
Topic 1
Recording entries in the journal
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Apr 1 | Cash A/c Dr. To Capital A/c (Being business started with cash) | 2,00,000 | 2,00,000 | |
| Apr 3 | Purchases A/c Dr. To Raj Traders A/c (Being goods bought on credit) | 40,000 | 40,000 | |
| Apr 8 | Cash A/c Dr. To Sales A/c (Being goods sold for cash) | 25,000 | 25,000 | |
| Apr 15 | Raj Traders A/c Dr. To Bank A/c (Being payment made by cheque) | 40,000 | 40,000 | |
| Apr 30 | Salary A/c Dr. To Cash A/c (Being salary paid) | 8,000 | 8,000 |
- Narration: a brief explanation beginning with "Being …" written below each entry.
- Compound entry: one entry with more than one debit or credit (e.g., goods sold to Ravi for ₹10,000, half received in cash).
Topic 2
Posting from journal to ledger
- 1
Open a ledger account for each account in the journal
- 2
Debit side: write "To" the other account and the amount
- 3
Credit side: write "By" the other account and the amount
- 4
Enter the ledger folio in the journal
- 5
Total both sides; the difference is the balance c/d
- 6
Bring the balance down (b/d) on the opposite side
Example
Cash A/c from the journal above: debits ₹2,00,000 + ₹25,000 = ₹2,25,000; credit ₹8,000; balance c/d ₹2,17,000 (debit balance).
- Balances: assets and expenses usually show debit balances; liabilities, capital and incomes show credit balances.
Topic 3
Purchase book, sales book and cash book
| Subsidiary book | Records |
|---|---|
| Purchases book | Credit purchases of goods |
| Sales book | Credit sales of goods |
| Purchases returns book | Goods returned to suppliers |
| Sales returns book | Goods returned by customers |
| Cash book | All cash (and bank) receipts and payments |
| Bills receivable / payable books | Bills received / accepted |
| Journal proper | Entries that fit no other book (opening, closing, adjustment) |
Records
Credit purchases of goods only
Credit sales of goods only
Source document
Inward invoice
Outward invoice
Posting
Supplier accounts credited; total debited to Purchases A/c
Customer accounts debited; total credited to Sales A/c
Simple cash book
Cash only
All cash receipts (Dr) and payments (Cr)
Two-column cash book
Cash and bank
Cash and bank transactions, contra entries marked C
Three-column cash book
Cash, bank and discount
Also discount allowed and received
Petty cash book
Small payments
Postage, stationery, conveyance under the imprest system
- Contra entry: a transaction affecting both cash and bank columns, such as cash deposited into the bank.
Topic 4
Trial balance: need and objectives
- Arithmetical accuracy
- Total debits equal total credits
- Summary of ledger
- All balances in one statement
- Basis for final accounts
- Trading, P&L and balance sheet are prepared from it
- Locating errors
- Disagreement signals posting or totalling errors
Topic 5
Types of errors
Errors of omission
Complete (not recorded) or partial (not posted)
Errors of commission
Wrong amount, wrong account of the same class, wrong side, wrong totalling
Errors of principle
Capital and revenue confused — machinery repairs debited to Machinery A/c
Compensating errors
One error cancels another
Topic 6
Errors and the trial balance
A trial balance lists all ledger balances to check that total debits = total credits, proving arithmetical accuracy.
Error of omission
Transaction not recorded at all
No
Error of commission
Wrong amount posted, wrong side
Often yes
Error of principle
Capital item treated as revenue
No
Compensating errors
Two errors cancel out
No
Exam tip
A trial balance that agrees does not prove the books are error-free — list the errors it cannot reveal.
- Suspense account: if the trial balance does not agree, the difference is put in a suspense account until the errors are found and rectified.
Topic 7
Preparing a trial balance
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Capital | 2,00,000 | |
| Cash | 2,17,000 | |
| Bank (overdraft) | 40,000 | |
| Purchases | 40,000 | |
| Sales | 25,000 | |
| Salary | 8,000 | |
| Total | 2,65,000 | 2,65,000 |
- Methods: balance method (most common — ledger balances), total method (totals of both sides) and a combination.
Key terms
- Narration
- Short explanation of a journal entry
- Ledger folio
- Page reference linking journal and ledger
- Contra entry
- Entry affecting both cash and bank
- Error of principle
- Wrong treatment of capital and revenue items
- Suspense account
- Temporary account holding the trial balance difference
Quick revision
- Journal format; narrations; compound entries.
- Posting with To and By; balancing c/d and b/d.
- Purchase and sales books for credit goods; simple, two- and three-column, petty cash books.
- Objectives of the trial balance.
- Errors of omission, commission, principle, compensating; suspense account; preparing a trial balance.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is a narration?
- Q2.What is a compound journal entry?
- Q3.What is recorded in the purchase book?
- Q4.What is a contra entry?
- Q5.State two objectives of a trial balance.
- Q6.Give an example of an error of principle.
Long-answer questions
- Q1.Journalise transactions and post them to the ledger (numerical).
- Q2.Explain the purchase book, sales book and types of cash book.
- Q3.Explain the objectives and preparation of a trial balance.
- Q4.Explain the types of errors with examples.
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