Thus the accounting process consists of three major parts:

i. The recording of business transactions during that period;

ii. The summarizing of information at the end of the period and

iii. The reporting and interpreting of the summary information.

Learning Objectives

Understand the Rules of Debit and Credit
Pass Journal Entries
Prepare Ledger Accounts
Prepare a Trial Balance
Make Adjustment and Closing Entries

The Account

The transactions that take place in a business enterprise during a specific period may effect increases and decreases in assets, liabilities, capital, revenue and expense items.
For e.g. It is necessary to have a separate record devoted exclusively to record increases and decreases in cash, another one to record increases and decreases in supplies, a third one on machinery, etc.

The simplest form of an account has three parts:

i. A title which gives the name of the item recorded in the account

ii. Space for recording increases in the amount of the item, and

iii. Space for recording decreases in the amount of the item. This form of an account is known as a ‘t’ account because of its similarity

to the letter ‘t’ as illustrated below:

Title

Left side

(debit side)

Right side

(credit side)

Debit And Credit

To debit (dr) an account means to make an entry on the left-hand side of an account and to credit (cr) an account means to make an entry on the right-hand side. The words debit and credit has no other meaning in accounting, though in common parlance; debit has a negative connotation, while credit has a positive connotation.

The equality of debits and credits is maintained in accounting simply by specifying that the left side of the asset, accounts are to be used for recording increases and the right side to be used for recording decreases; the right side of liability and capital accounts is to be used to record increases and the left side to be used for recording decreases.

1. Assets = liabilities + owners’ equity

2. Debits = credits

From the above arrangement we can state that the rules of debits and credits are as follows:

Debit Signifies	Credit Signifies
1. Increase in asset accounts 2. The decrease in liability accounts 3. The decrease in owners’ equity accounts	1. The decrease in asset accounts 2. increase in liability accounts 3.increase in owners’ equity accounts

if the revenue accounts are to be increased they must be credited and if they are to be decreased they must be debited. Similarly, we have seen that expenses decrease the owners’ equity.

Debit Signifies	Credit Signifies
Increase in expenses Decrease in revenues	Increase in revenues Decrease in expenses

Journal

When a business transaction takes place, the first record of it is done in a book called journal. The journal records all the transactions of a business in the order in which they occur. The journal may, therefore, be defined as a chronological record of accounting transactions. It shows names of accounts that are to be debited or credited, the amounts of the debits and credits and any other additional but useful information about the transaction.

1: Sale in cash

Journal

Date	Particulars	L.F.	Debit	Credit
2005 August 3	Cash a/c Dr. To sales a/c	3 9	30,000	30,000

The Trial Balance

The trial balance is simply a list of the account names and their balance as of a given moment of time with debit balances in one column and credit balances in another column. It is prepared to ensure that the mechanics of the recording and posting of the transaction have been carried out accurately. If the recording and posting have been accurate then the debit total and credit total in the trial balance must tally thereby evidencing that equality of debits and credits has been maintained.

Illustration 2:

January 1 - started a business with rs.3,000

January 2 - bought goods worth rs.2,000

January 9 - received the order for half of the goods from ‘g’

January 12 - delivered the goods, g invoiced rs.1,300

January 15 - received an order for the remaining half of the total goods purchased

January 21 - delivered goods and received cash rs.1,200

January 30 - g makes payment

January 31 - paid salaries rs.210

- received interest rs.50

Let us now analyze the transactions one by one.

Journal

Date	Particulars		L.F.		Debit		Credit
Jan. 1		Cash A/C Dr. To Capital A/C (Being Business Started)		3,000		3,000
Jan. 2		Purchases A/C Dr. To Cash (Being Goods Purchased)		2,000		2,000
Jan. 12		Receivables A/C Dr. To Sales A/C (Being Goods Sold On Credit)		1,300		1,300
Jan. 21		Cash A/C Dr. To Sales A/C (Being Goods Sold For Cash)		1,200		1,200
Jan. 30		Cash A/C Dr. To Receivables A/C (Being Cash Received For Sale Of Goods)		1,300		1,300
Jan. 31		Salaries A/C Dr. To Cash A/C (Being Salaries Paid)		210		210
Jan. 31		Cash A/C Dr. To Interest A/C (Being Interest Received)		50		50

Now the above journal entries are posted into respective ledger accounts which in turn is balanced.

Cash Account

Debit	Rs.	Credit	Rs.
To Capital A/C	3,000	By PurchasesA/C	2,000
To Sales A/C	1,200	By Salaries A/C	210
To Receivables A/C To Interest A/C	1,300 50	By Balance C/D	3,340
5,550		5,550

Capital Account

Debit	Rs.	Credit	Rs.
To Balance C/D	3,000	By Cash A/C	3,000
	3,000		3,000

Purchases Account

Debit	Rs.	Credit	Rs.
To Cash A/C	2,000	By Balance C/D	2,000
	2,000		2,000

Receivables Account

Debit	Rs.	Credit	Rs.
To Balance C/D	1,300	By Cash A/C	1,300
	1,300		1,300

Sales Account

Debit	Rs.	Credit	Rs.
To Balance C/D	2,500	By Receivables A/C By Cash A/C	1,300 1,200
	2,500		2,500

Salaries Account

Debit	Rs.	Credit	Rs.
To Cash A/C	210	By Balance C/D	210
	210		210

Interest Account

Debit	Rs.	Credit	Rs.
To Balance C/D	50	By Cash A/C	50

Now A Trial Balance Can Be Prepared And When Prepared It Would Appear As Follows:

Trial Balance

Debit	Rs.	Credit	Rs.
Cash Purchases Salaries	3,340 2,000 210	Capital Sales Interest	3,000 2,500 50
5,550		5,550

Explain in Brief

Closing Entries
Periodically, usually at the end of the accounting period, all revenue and expense account balances are transferred to an account called income summary or profit and loss account and are then said to be closing balance in the profit and loss account, which is the net income or net loss for the period, is then transferred to the capital account and thus the profit and loss account is also closed. In the case of corporation the net income or net loss is transferred to retained earnings account which is a part of owners’ equity. The entries which are passed for transferring these accounts are called as closing entries

closing entries would appear as follows:

Journal	Particular LF	Debit	Credit
1	Profit And Loss a/c Dr. To Salaries A/C To Salaries A/C	2,210	210 2,000
2	Sales A/C Dr. To Profit And Loss A/C	2,500	2,500
3	Interest A/C Dr. To Profit And Loss A/C	50	50