Journal Ledger & Trial Balance
Journal, Ledger & Trial Balance
Introduction
The Journal, Ledger, and Trial Balance are the three pillars of the accounting cycle. Every financial transaction flows through these stages: first recorded in the journal (book of original entry), then posted to the ledger (principal book), and finally summarised in the trial balance (verification tool). Mastering this flow is fundamental for the JAIIB exam.
The Accounting Cycle
Transaction → Source Document → Journal Entry → Ledger Posting → Trial Balance → Final Accounts
The Journal
The journal is the book of original entry where transactions are recorded in chronological order before posting to the ledger.
Format of a Journal Entry
| Date | Particulars | L.F. | Debit (Rs) | Credit (Rs) |
|---|---|---|---|---|
| Account to be debited ... Dr. | Amount | |||
| To Account to be credited | Amount | |||
| (Narration explaining the entry) |
Rules for Journal Entries
| Account Type | Debit | Credit |
|---|---|---|
| Personal | Receiver | Giver |
| Real | What comes in | What goes out |
| Nominal | Expenses/Losses | Incomes/Gains |
Common Journal Entries
1. Purchase of machinery for Rs 4,00,000 + transport Rs 50,000 + installation Rs 25,000 (trade discount Rs 10,000)
| Debit | Credit |
|---|---|
| Machinery A/c Dr. Rs 4,65,000 | Bank A/c Rs 4,65,000 |
Capitalised value = 4,00,000 + 50,000 + 25,000 - 10,000 = Rs 4,65,000 Note: Maintenance cost of Rs 15,000 is NOT capitalised — it is an expense
2. Issue of shares at premium (10,000 shares of Rs 10 at Rs 2 premium)
| Debit | Credit |
|---|---|
| Bank A/c Dr. Rs 1,20,000 | Share Capital A/c Rs 1,00,000 |
| Securities Premium A/c Rs 20,000 |
3. Depreciation on WDV basis (Rs 4,00,000 asset at 15%)
| Debit | Credit |
|---|---|
| Depreciation A/c Dr. Rs 60,000 | Machinery A/c Rs 60,000 |
Year 1: Rs 4,00,000 x 15% = Rs 60,000
Subsidiary Books
Subsidiary books (also called books of prime entry) are specialised journals that segregate recurring transactions to reduce workload.
| Subsidiary Book | Records |
|---|---|
| Cash Book | All cash and bank receipts and payments |
| Purchase Book | Credit purchases of goods only |
| Sales Book | Credit sales of goods only |
| Purchase Returns Book | Returns to suppliers |
| Sales Returns Book | Returns from customers |
| Bills Receivable Book | Bills received from debtors |
| Bills Payable Book | Bills accepted for creditors |
| Journal Proper | Non-routine entries (opening entries, adjustments, corrections) |
Key Points:
- Subsidiary books do NOT replace ledgers and journals
- They classify and segregate data for easier posting
- They are NOT prepared at year-end only — they are maintained throughout the year
- Cash transactions go in the Cash Book, NOT in the purchase/sales book
Petty Cash Book
- Records minor day-to-day expenses: postage, conveyance, stationery, office supplies
- Operates on the Imprest System: a fixed amount is given to the petty cashier, and only the spent amount is replenished
- Managed by a petty cashier (not by auditors)
- Not used for large one-time payments
The Ledger
The ledger is the principal book of account. All journal entries and subsidiary book entries are posted (transferred) to relevant ledger accounts.
T-Account Format
Dr. [Account Name] Cr.
Date | Particulars | J.F. | Rs || Date | Particulars | J.F. | Rs
Types of Ledger Accounts
| Type | Examples | Balancing |
|---|---|---|
| Personal | Debtor A/c, Creditor A/c, Capital A/c | Balanced periodically |
| Real | Cash A/c, Machinery A/c, Land A/c | Balance carried forward |
| Nominal | Salary A/c, Rent A/c, Interest A/c | Closed to P&L at year-end |
Posting Rules
- Journal Debit → Debit side of the ledger account
- Journal Credit → Credit side of the ledger account
- Cross-reference using folio numbers (J.F. and L.F.)
Balancing Ledger Accounts
- Total both sides
- Find the difference
- Enter the difference on the shorter side as "Balance c/d" (carried down)
- Start next period with "Balance b/d" (brought down) on the opposite side
Principal Books of Account in Banking
As per the Banking Regulation Act, banks maintain these core general ledgers:
| Ledger | Purpose |
|---|---|
| General Ledger | Master record of all accounts |
| Loan Ledger | Individual loan account details |
| RD Ledger | Recurring deposit accounts |
| Investment Ledger | Securities and investment holdings |
| Profit and Loss Ledger | Income and expense tracking |
Important: The Income Ledger is NOT classified as a core general ledger in the banking system.
Trial Balance
A Trial Balance is a statement listing all ledger account balances (debit and credit) at the end of an accounting period.
Purpose
- Verify arithmetic accuracy of the double entry system
- Provide a summary of all ledger balances
- Serve as the basis for preparing final accounts (Trading A/c, P&L A/c, Balance Sheet)
Format
| Account Name | L.F. | Debit Balance (Rs) | Credit Balance (Rs) |
|---|---|---|---|
| Cash A/c | xxx | ||
| Capital A/c | xxx | ||
| Sales A/c | xxx | ||
| Purchases A/c | xxx | ||
| Total | xxx | xxx |
Rule: Total Debits MUST equal Total Credits
What Trial Balance Can Do
- Check the arithmetic accuracy of posting
- Detect one-sided errors (posting to wrong side)
- Provide a summary for financial statement preparation
What Trial Balance CANNOT Do
A trial balance does NOT guarantee error-free final accounts. The following errors remain undetected:
| Error Type | Description | Example |
|---|---|---|
| Error of Omission | Transaction completely omitted | Forgot to record a sale |
| Error of Commission | Posted to wrong account of same type | Debited Ram instead of Raman |
| Error of Principle | Posted to wrong type of account | Machinery purchase debited to Repairs |
| Compensating Errors | Two errors cancel each other | Over-debit of Rs 500 offset by under-debit of Rs 500 |
| Error of Original Entry | Wrong amount in both debit and credit | Rs 560 recorded as Rs 650 in both |
| Error of Complete Reversal | Debit and credit entries swapped | Debit and credit reversed |
Suspense Account
- When trial balance does not tally, the difference is placed in a Suspense Account
- As errors are found and corrected, entries are passed through Suspense Account
- Once all errors are corrected, Suspense Account balance becomes zero
From Trial Balance to Final Accounts
Trial Balance → Trading Account → Profit & Loss Account → Balance Sheet
| Statement | Purpose |
|---|---|
| Trading Account | Determines Gross Profit (Sales - COGS) |
| Profit & Loss Account | Determines Net Profit (Gross Profit - Expenses + Other Income) |
| Balance Sheet | Shows financial position (Assets = Liabilities + Equity) |
Key Points to Remember
- Journal is the book of original entry; Ledger is the principal book of account
- Subsidiary books reduce workload by segregating recurring transactions — they do NOT replace ledgers
- Petty Cash Book records minor expenses on the imprest system
- Capitalised cost includes purchase + transport + installation, minus trade discount — NOT maintenance
- Trial Balance checks arithmetic accuracy but does NOT guarantee error-free accounts
- Errors of omission, commission, principle, compensation, and original entry escape trial balance detection
- Suspense Account holds the unresolved trial balance difference
- Nominal accounts are closed at year-end to P&L; Real accounts are carried forward
- In banking, core GLs: Loan, RD, Investment, P&L — Income Ledger is NOT a core GL
- WDV depreciation: Year 1 on Rs 4,00,000 at 15% = Rs 60,000
Previous Year Questions
A suspense account showed a debit balance of ₹12,000. Later, a purchase of ₹12,000 was omitted. Mana
A trader purchased goods worth ₹4,50,000 on credit but erroneously debited purchases account by ₹5,4
A trader omitted posting of a sales return of ₹48,000 from returns inward book. Trial balance differ
An accountant failed to post a credit purchase to the supplier’s account but recorded it in the purc
A firm recorded the purchase of machinery by debiting repairs expense and crediting bank. The error
A trial balance difference of ₹9,600 was temporarily placed in suspense account on the debit side. S
Furniture costing ₹1,20,000 was wrongly debited to purchases account. Additionally, sales return of
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