FINANCIAL ACCOUNTING AND

ANALYSIS

(ACCONTING EQUATION, JOURNAL, LEDGER AND TRIAL

BALANCE)

MBA 1ST SEM

BY
Ms. Arzoo Gupta
What are Debits and Credits?
 Business transactions are events that have a monetary
impact on the financial statements of an organization.
When accounting for these transactions, we record
numbers in two accounts, where the debit column is on
the left and the credit column is on the right.
 A debit is an accounting entry that either increases an
asset or expense account, or decreases a liability or
equity account. It is positioned to the left in an
accounting entry.
 A credit is an accounting entry that either increases a
liability or equity account, or decreases an asset or
expense account. It is positioned to the right in an
accounting entry.
Cont…
 Whenever an accounting transaction is created, at least two
accounts are always impacted, with a debit entry being recorded
against one account and a credit entry being recorded against
the other account.
 There is no upper limit to the number of accounts involved in a
transaction - but the minimum is no less than two accounts.
 The totals of the debits and credits for any transaction must
always equal each other, so that an accounting transaction is
always said to be "in balance."
 If a transaction were not in balance, then it would not be
possible to create financial statements. Thus, the use of debits
and credits in a two-column transaction recording format is the
most essential of all controls over accounting accuracy.
CLASSIFICATION OF ACCOUNTS

Related to
Related to Related to
Incomes/expe-
Person Properties
nditure
Personal Account
Real Account Nominal Account

Natural Personal
A/c
Loss and Expenses
Tangible Real A/c
A/c
Artificial Personal
A/c
Profit and Income
Representative Intangible Real A/c
A/c
Personal A/c
TYPES OF ACCOUNTS
 Illustration
An entity named Orange Ltd. has the following
transactions:
 It deposits Rs.10,000 into Bank

 It buys goods worth Rs.50,000 from Apple Ltd.

 It sells goods worth Rs.35,000 to Melon Ltd.

 It pays Rs.12,000 as Rent for its premises

 It earns Rs.3,000 as interest on a bank account.

First of all, let us identify the accounts involved in

these transactions.
Transaction Accounts involved Type of Accounts
Deposit Rs.10,000 in Bank Bank Account Personal Account
Cash Account Real Account

Purchase goods worth Purchase Account Nominal Account – Expense

Rs.50,000 from Apple Ltd. account
Apple Ltd. Account Personal Account – Creditors
account
Sale of goods worth Rs. Sales Account Nominal Account -Income
35,000 to Melon Ltd. Account
Melon Ltd. Account Personal Account – Debtors
Account
Pays Rs.12,000 as rent Rent Account Nominal Account
Bank Account Real Account – Asset account

Earn Rs.3,000 as interest Interest received Nominal Account – Income

on Bank account Bank Account Account
Real Account – Asset Account
 Accounting Equation:
 The accounting equation is the basic element of the
balance sheet and the primary principle of
accounting. It helps the company to prepare a
balance sheet and see if the entire enterprise’s
asset is equal to its liabilities and stockholder
equity. It is the base of the double-entry accounting
system.
 Double-entry accounting is a system that ensures
that accounting and transaction equation should be
equal as it affects both sides. Any change in the asset
account, there should be a change in related liability
and stockholder’s equity account.
 Classification:
This approach classifies the accounts as follows:
Assets Accounts: Assets are the properties, possessions or economic resources of a
business which help in business operations and in earning revenues. These are
measurable in terms of money. However, assets of a firm may be tangible or
intangible. Also, we can classify the assets as Fixed Assets and Current Assets. For
example, land, building, furniture and fixtures, plant and machinery, vehicles,
debtors, bills receivable, bank balance, cash, stock, etc.
Liabilities Accounts: Liabilities are the amounts that an entity owes to the outsiders
or the obligations or the debts payable by the entity. We can also classify the
liabilities as Long-term and Current. For example, debentures, bank loans, creditors,
bills payable, rent outstanding, short-term loans, bank overdraft, etc.
Capital Accounts: Capital or Owner’s Equity is the money that the owner brings into
the business. It is an obligation of the business and the business has to pay back
this amount to the owner as business is a separate entity from its owner. Therefore,
we show the Capital on the liabilities side of the Balance Sheet.
Also, we show Capital account after deducting the Drawings by the owner. Drawings
are the amount of cash, goods or assets that the owner takes for personal use from
the business.
Example:
Analyze the following transactions under the
Accounting Equation Approach.
 Commenced business with cash ₹500000

 Purchased goods ₹25000

 Paid salary ₹10000

 Sold goods costing ₹20000 at a profit of 25% on

the cost
 Paid salary in advance ₹2000

 Introduced additional capital ₹10000

 Purchased computer ₹15000

 Deposited ₹50000 into the bank

 ASSETS LIABILITIES + CAPITAL
Pre-paid Bank Total Total
Cash Stock Computer Capital
Salary

1. 500000 500000 500000 500000

(25000) 25000
2. 500000 500000 500000
475000 25000

(10000)
3. 25000 490000 (10000) 490000 490000
465000

25000 (20000)
4. 495000 5000 495000 495000
490000 5000

(2000) 2000
5. 5000 495000 495000 495000
488000 2000

10000
6. 5000 2000 505000 505000 505000
498000

(15000)
7. 5000 15000 2000 505000 505000 505000
483000

(50000)
8. 5000 15000 2000 50000 505000 505000 505000
433000
Example 2
Prepare Accounting Equation from the following:-
1.Sandeep started business with Cash Rs. 1,00,000
2.Purchased furniture for cash Rs. 5,000
3.Purchased goods for cash Rs. 20,000
4.Purchased goods on credit Rs. 36,000
5.Paid for rent Rs. 700
 ACCOUNTING EQUATION
Assets = Liabilities + Capital
S. No. Transaction
Cash + Furniture + Stock = Creditors
(i) Sandeep started business with cash 1,00,000 + 1,00,000

1,00,000 = + 1,00,000

(ii) Purchased furniture for cash –5,000 +5,000

95,000 + 5,000 = + 1,00,000

(iii) Purchased goods for cash –20,000 +20,00

0

75,000 + 5,000 + 20,000 = + 1,00,000

(iv) Purchased goods on credit +36,00 +36,000

0

75,000 + 5,000 + 56,000 = 36,000 + 1,00,000

(v) Rent paid -700 –700

74,300 + 5,000 + 56,000 = 36,000 + 99,300

(vi) Goods costing Rs 40,000 sold at a +48,000 - +8,000

profit of 20% for cash 40,000

1,22,300 + 5,000 + 16,000 = 36,000 + 1,07,300

PROBLEM 1
The following transactions in the books of Mr. N
1.
Started business with capital 1,00,000
2.
Bought furniture 25,000
3.
Bought goods for cash 20,000
4.
Bought goods from Ram on Credit 5,000
5.
Sold goods for cash for 15,000
6.
Sold goods to Shyam on credit 8,000
7.
Paid cash to Ram 4,000
8.
Received cash from Shyam 5,000
9.
Paid Cash into Bank 25,000
10.
Withdrawn from bank 10,000
Solution
1. Capital+Liabilities=Assets
1,00,000+0=1,00,000 (Cash)
2. Capital+Liabilities=Assets
1,00,000+0= 75,000 (Cash)+ 25,000 (Furniture)
3. Capital+Liabilities=Assets
1,00,000+0= 55,000 (Cash)+ 25,000 (Furniture)+ 20,000 (Goods)
4. Capital+Liabilities=Assets
1,00,000+5,000 (Ram)= 55,000 (Cash) + 25,000 (Furniture) + 25,000 (Goods)
5. Capital+Liabilities=Assets
1,00,000+5,000 (Ram)= 70,000 (Cash) + 25,000 (Furniture) + 10,000 (Goods)
6. Capital+Liabilities=Assets
1,00,000+5,000 (Ram)= 70,000 (Cash) + 25,000 (Furniture)+ 2,000 (Goods) +
8,000 (Shyam) + 15,000 (Bank)
Solution cont….
7. Capital+Liabilities=Assets
1,00,000+1,000 (Ram)= 66,000 (Cash) + 25,000 (Furniture) + 2,000 (Goods) +
8,000 (Shyam)

8. Capital+Liabilities=Assets
1,00,000+1,000 (Ram)= 71,000 (Cash) + 25,000 (Furniture) + 2,000 (Goods) +
3,000 (Shyam)

9. Capital+Liabilities=Assets
1,00,000+1,000 (Ram)= 46,000 (Cash) + 25,000 (Furniture) + 2,000 (Goods)
+ 3,000 (Shyam) + 25,000 (Bank)

10. Capital+Liabilities=Assets
1,00,000+1,000 (Ram)= 56,000 (Cash) + 25,000 (Furniture) + 2,000 (Goods)
+ 3,000 (Shyam)
JOURNAL ENTRIES:
EXAMPLE 1: Jeyaseeli is a sole proprietor having a provisions store. Following are
the transactions during the month of January, 2018. Journalise them.
Jan. Rs.
1 Commenced business with cash 80,000
2 Deposited cash with bank 40,000
3 Purchased goods by paying cash 5,000
4 Purchased goods from Lipton & Co. on credit 10,000
5 Sold goods to Joy and received cash 11,000
6 Paid salaries by cash 5,000
7 Paid Lipton & Co. by cheque for the purchases made on 4th Jan.
8 Bought furniture by cash 4,000
9 Paid electricity charges by cash 1,000
10 Bank paid insurance premium on furniture as per standing
instructions 300
 EXAMPLE 2
Ananth is a trader dealing in textiles. For the following transactions, pass
journal entries for the month of January, 2018.
Jan. Rs.
1 Commenced business with cash 70,000
2 Purchased goods from X and Co. on credit 30,000
3 Cash deposited into bank 40,000
4 Bought a building from L and Co. on credit 95,000
5 Cash withdrawn from bank for office use 5,000
6 Cash withdrawn from bank for personal use of Ananthu 4,000
7 Towels given as charities 3,000
8 Shirts taken over by Ananth for personal use 12,000
9 Sarees distributed as free samples 3,000
10 Goods (table clothes) used for office use 200
 TRIAL BALANCE
 A trial balance is a sheet recording all the ledger balances categorized
into debit and credit. A typical trial balance will have name of ledger
and the balances.
 This is prepared as at a particular date which can be financial year end
or calendar year.
 Trial Balance is a statement summarizing the closing balance of all
the ledger accounts, prepared with the view to verify the arithmetical
accuracy of ledger posting.
 In Trial balance, all the ledger balances are posted either on the debit
side or credit side of the statement.
 The total of debit balance in trial balance should match with a total of
credit balance, only then it is said to be arithmetically accurate.
 Trial balance is a primary source for preparing various financial
statements such as Trading and Profit & Loss account, Balance sheet
etc.
 Trial balance objective
1. To ascertain the arithmetical accuracy of ledger accounts:
As a summary of all the ledger accounts closing balance, trial balance helps in
determining the accuracy of journal and ledger posting. The trial balance is
assumed to be accurate only when the total debit is equal to the credit.
2. Helps to locate errors
If there any difference in the trial balance, it signals that journal or ledger posting
is not carried out efficiently. It clearly implies that there are errors and it is
high time for accountants to find and correct it. The error may have occurred
at any of the following stages of accounting.
 Posting journal entries to the ledger account
 Totaling of subsidiary books
 Calculation errors
 Posting of Balance from Ledger account to trial balance
 Error in totalling Trial balance and so on ...
CONT….
3. Helps to prepare financial statement
Trial balance is a bridge between accounting
records and financial statements. Trial balance
is the steppingstone for preparing all the
financial statements such as Trading and Profit
& loss account, balance sheet etc. Using the
trial balance, all the income and expenses
related ledger accounts are compiled to create
Profit and loss account and rest are used for
preparing a balance sheet.
 Features of trial balance
 It is a summary of debit and credit balances which are extracted from
various ledger accounts
 It is a summary of debit and credit balances
 The motive behind the preparation of Trial balance is to establish
arithmetical accuracy of the transactions recorded in the Books of
Accounts
 Trial balance does not prove any arithmetical accuracy of accounts
which can only be determined by the audit
 It is not an account. It is only a statement of account
 It is not a part of the final statements
 A Trial balance at the end of the accounting year but it can also be
prepared anytime as and when required like weekly, monthly,
quarterly or half-yearly
 It acts as a bridge between books of accounts and the Profit and Loss
Account and Balance sheet
 How to prepare a trial balance?
Preparing trial balance is one of the first steps towards preparing final accounts
and other financial statements. Following are the steps to prepare trial
balance:
 Preparing ledger accounts to determine the closing balance of each account.
 Post the ledger Accounts into trial balance and place the balance in the debit
or credit column. The format of the trial balance is explained in the next
section.
 All the assets and expenses should have debit balance while liabilities and
income should have a credit balance.
 Calculate the total of the debit balance
 Similarly, compute the total of the credit column
 Finally, the sum of debit balance should match the sum of credit balance.
 If there is any difference, the process of error rectification should be started.
Errors could be of commission errors, errors of omissions, errors of
principle, compensating error and so on…
 Trial Balance Format
The initial trial balance report contains the
following columns:
 Account number

 Account name

 Ending debit balance (if any)

 Ending credit balance (if any)

Format of Trial Account
Particular (name of accounts) L.F. Dr. Amount Cr. Amount

(1) (2) (3) (4)

Methods Of Preparation Of Trial
Balance

Balance Method

Total Amount Method

 Example 1
 Journalize the following transactions and post them into ledger. Also ,
prepare the Trial balance.

Date Particulars
2014
Apr. 1 Shyam commenced business with Rs. 2,00,000 in cash.
Apr. 3 He buys merchandise of Rs. 1,50,000 on account from Dinesh.
Apr. 5 He buys furniture for Rs. 30000 on account from Dharma.
Apr. 8 He pays Dharma Rs. 29000.
Apr. 10 He pays Dinesh Rs. 30000.
Apr. 15 Cash sales Rs. 50000
Apr. 18 He sells goods to Rajesh on credit Rs. 7000
Apr. 30 Salary paid in cash Rs. 5000
Rent paid in cash Rs. 4000
Date Particular L.F. Dr. Cr.

1 apr Cash a/c dr. 2,00,000

to shyam capital a/c 2,00,000

3 apr. Purchase a/c d r. 1,50,000

to dinesh a/c 1,50,000

5 apr. Furniture a/c dr. 30000

to dharma a/c 30000

8 apr Dharma a/c dr. 29000

to cash a/c 29000

10 Dinesh a/c dr. 30000

apr to cash a/c 30000

15 Cash a/c dr. 50000

apr to sales a/c 50000

18 Rajesh a/c dr. 7000

apr to sales a/c 7000
30 Salary a/c dr. 5000
apr Rent a/c dr. 4000
date Part. J.F Amt. date Part. J.f. Amt.

Capital A/c
30apr To bal c/d 2,00,000 1 apr By cash a/c 2,00,000

2,00,000 2,00,000

1 may By bal b/d 2,00,000

Cash A/c
1 apr To shyam 2,00,000 8 apr By dharma a/c 29000
capital a/c

15 To sales a/c 50000 10 apr By dinesh a/c 30000

apr
30 apr By salary a/c 5000

30 apr By rent a/c 4000

30 apr By bal c/d 1,82,000

 Dinesh a/c
10 apr. To cash a/c 30000 3 apr. By purchase a/c 1,50,000

30 apr. To bal c/d 1,20,000

1,50000 1,50,000

1 may By bal b/d 1,20,000

Furniture a/c
5 apr To dharma a/c 30000 30 apr By bal c/d 30000

30000 30000

1 may To bal. b/d 30000

Dharma A/c
8 apr To cash a/c 29000 5 apr By furniture a/c 30000
 Sales a/c
30 apr To bal c/d 57000 15 apr By cash a/c 50000
18 apr By rajesh a/c 7000
57000 57000
1 may By bal b/d 57000
Rajesh a/c
18 apr To sales a/c 7000 30 apr By bal c/d 7000
7000 7000
1 may To bal b/d 7000
Salary a/c
30 apr To cash a/c 5000 30 apr By bal c/d 5000
5000 5000
1 may To bal b/d 5000

Rent a/c
30 apr To cash a/c 4000 30 apr By bal c/d 4000

4000 4000
1. Balance Method
 In order to prepare a trial balance under this
method, all the accounts showing debit balance
in the ledger are put on the debit side of the trial
balance and the accounts showing credit
balance we put on the credit side.
 If account shows no balance, the account is not
included in the trial balance.
 After this we totaled the Dr. and Cr. Column of
trial balance and if total is equal, it is said that
the trial balance has tallied.
 1. BALANCE METHOD
Trial balance as on Apr. 30, 2014
PARTICULAR L.F. DR. CR.
Capital A/c 2,00,000
Cash A/C 1,82,000

Dinesh a/c 1,20,000

Furniture a/c 30000
Dharma a/c 1000
Sales a/c 57000
Purchase a/c 1,50,000
Rajesh a/c 7000
Salary a/c 5000
Rent a/c 4000
GRAND TOTAL 3,78,000 3,78,000
2. Total Amount Method
 Under this method, the total amount of debit
side of each ledger are put on the debit side of
the trial balance and the total amount of credit
side of each ledger we put on the credit side.
 2. TOTAL METHOD
Trial balance as on Apr. 30, 2014
PARTICULAR L.F. DR. CR.
Capital A/c 2.,00,000
CASH A/C 2,50,000 68000
Dinesh a/c 30000 1,50,000
Furniture a/c 30000
Dharma a/c 29000 30000
Sales a/c 57000
Purchase a/c 1,50,000
Rajesh a/c 7000
Salary a/c 5000
Rent a/c 4000
GRAND TOTAL 5,05,000 5,05,000
 1. Error of • Where there is any variation in figure/amount, e.g. instead of ` IDR
800 either ` IDR 80 or `IDR 8,000 is recorded, in both sides of ledger
Commission: accounts – trial balance will agree.

• When the transaction is not at all recorded in the books of

2. Errors of
accounts, i.e. neither in the debit side nor in the credit side of
Omission: the account – trial balance will agree.

• If one account in the ledger is debited with Rs 500 less and another
3. Compensating account in the ledger is credited Rs 500 less, these errors cancel
themselves. That is, one error is neutralized by similar error on the
Errors: opposite side.

• If an invoice for Rs 632 is entered in Sales Book as Rs 623, the Trial

4. Error of Amounts Balance will come out correctly, since the debit and credit have been
recorded as Rs 623. The arithmetical accuracy is there, but in fact there is
in Original Book: an error

• When accounts are prepared not according to double-entry

5. Errors of Principle principle e.g. Purchase of a Plant wrongly debited to Purchase
Account – Trial balance will agree.
How to prepare correct trial balance-
if balances are given:
Rules:

Debit • Assets, drawings,

debtors, losses and
Balances: expenses.

Credit • liabilities, capital,

sundry creditors, gains
Balances: and incomes
 Problem – 1: if the given trial balance is not
correct, prepare a correct trial balance.
Particulars Dr. Rs. Cr. Rs. Particulars Dr. Rs. Cr. Rs.

Capital 1556 Bills payables 100

Drawings 564 Salaries 598
Land 741 Opening stock 264
Sales 2756 Rent and taxes 465
Due from customers 530 Sales returns 98
Purchases 1268
Purchase returns 264
Loan from bank 250
Creditors 528
Office expenses 784
Bank 142
Grand Total 5454 5454
 Solution : Corrected Trial balance
Particulars Dr. Rs. Cr. Rs. Particulars Dr. Rs. Cr. Rs.

Capital 1556 Bills payables 100

Drawings 564 Salaries 598
Land 741 Opening stock 264
Sales 2756 Rent and taxes 465
Due from customers 530 Sales returns 98
Purchases 1268
Purchase returns 264
Loan from bank 250
Creditors 528
Office expenses 784
Bank 142
Grand Total 5454 5454
Problem 2: the following trial balance was drawn from the books of Ram Traders.
Even though the Dr. and Cr. Sides agree the trail balance contains mistake.
Redraft the trial balance.
Particulars Dr. Rs. Cr. Rs.
Machinery 17000
Building 60000
Returns outward 2600
Bad debts 2800
Capital 73,600
Fixtures 5600
Cash 400
Sales 1,04,000
Discount received 3000
Bank overdraft 10000
Debtors 60000
Creditors 50000
Purchases 1,00,000
Interest received 2600
Grand total 2,45,800 2,45,800
Solution: Redraft trial balance
Particulars Dr. Rs. Cr. Rs.
Machinery 17000
Building 60000
Returns outward 2600
Bad debts 2800
Capital 73,600
Fixtures 5600
Cash 400
Sales 1,04,000
Discount received 3000
Bank overdraft 10000
Debtors 60000
Creditors 50000
Purchases 1,00,000
Interest received 2600
Grand total 2,45,800 2,45,800