2-General Journal General Ledger Trial Balance

Chapter # 2 General Journal, General Ledger

& Trial Balance

Principles of Accounting B.Com Part - I

Sameer Hussain

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General Journal, General Ledger, Trial Balance

Chapter # 2

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WHAT THE EXAMINER USUALLY ASK?

General Journal. General Ledger. Trial Balance. Accounting Equation.


Chapter # 2

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Chapter # 2

GENERAL JOURNAL, GENERAL

LEDGER, TRIAL BALANCE HEADS OF ACCOUNTS

There are only five heads of accounts to maintain the books of accounts. 1) Assets. 2) Liabilities. 3) Owners equity / Proprietorship. 4) Revenue and income. 5) Expenditure.

1 ASSETS Something controlled by an entity that provides benefits and whose cost can be measured are called assets. For something to be classified as an asset, and to appear on the balance sheet, it must provide probable future benefits, be owned by the entity as a result of a past transaction. There are two types of assets:

a) Current assets. b) Fixed assets (Non current assets).

a CURRENT ASSETS Assets on the balance sheet that represent amounts that are cash or will be converted to cash, or that will be used up during the next year or during the operating cycle of the entity, whichever is longer.

Cash/Bank: Legal tender in the form of banknotes and coins.

Accounts Receivable: The amounts owing to a business from customers for invoiced amounts are called accounts receivable.

Notes Receivable It is a type of trade receivable representing amounts owed by customers for an entitys business activity and involving a written promise to pay the unpaid amount and interest.

Allowance for Bad Debts:

A provision calculated to cover the debts during an accounting period is called allowance for bad debts. It is contra account of accounts receivable.

Merchandise

Inventory: The item which is purchased for resale is called merchandise and the unsold merchandise is called merchandise inventory.

Prepaid: Any amount paid in advance to get services in future is called prepaid.

Supplies: Any amount paid to purchase office stationary is called supplies and the supplies will consume on future so this is definitely prepaid but do not use the word prepaid before supplies.

Marketable Securities: A marketable security means that market or organization will provide security against the investment made.


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b FIXED ASSETS An asset of a business intended for continuing use, rather than a short-term current asset (such as merchandise) is called fixed asset. There are two types of fixed assets:

Tangible Fixed Assets: Those assets which have physical existence are called tangible fixed assets. Example: Land, Building, Machinery, Furniture, Equipment, etc.

Intangible Fixed Assets:

Those assets which do not have physical existence are called intangible fixed assets. Example: Goodwill, Copyright, Trademark, Patents, etc.

2 LIABILITIES Liabilities are legal obligations to pay on demand or in future means commitment date. OR any amount which is liable to pay is called liabilities. There are two types of liabilities:

a) Current liabilities / Short term liabilities. b) Long term liabilities.

a CURRENT LIABILITIES Amounts owed by a business to other organizations and individuals that should be paid within one year from the balance sheet date.

Accounts Payable: Accounts payable is the money which is liable to a company by supplier for products purchased on credit.

Notes Payable: A formal debt agreement in which the borrower promises to pay certain amounts at specified times. The borrower pays interest on the principal for the period of time the debt is outstanding.

Accrued Expenses: The amount for which services are have been used but not paid is called accrued expenses like salaries earned by employees but not yet paid.

Unearned: Any amount received in advance to deliver services in future is called unearned.

Bank Overdraft: A loan made to a customer with a cheque account at a bank in which the account is allowed to go into debit, usually up to a specified limit.

b LONG TERM LIABILITIES A sum that does not have to be repaid within the next accounting period of a business is called long term liabilities.

Bank Loan: A specified sum of money lent by a bank to a customer, usually for a specified time, at a specified rate of interest is called bank loan. If the time period is less than 12 months, it is treated as current liabilities.

Mortgage Payable: An interest in property created as a security for a loan or payment of a debt and terminated on payment of the loan or debt.


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Debentures Payable:

Debenture is the most common form of long-term loan taken by a company. It is usually a loan repayable at a fixed date, although some debentures are irredeemable securities. Most debentures also pay a fixed rate of interest, and this interest must be paid before a dividend is paid to shareholders.

3 OWNERS EQUITY The right of the owner in the business is known as owners equity. The owner has the right to make investment in the business and only he has the right to make withdrawals from business. So he has right to enjoy the profit of the business. This right is owners equity. It is calculated by subtracting total liabilities from the total assets of the firm. It is also called as Capital.

Capital: The money, property and other valuables which collectively represent the wealth of an individual or business is called capital.

Drawings: An asset (cash or goods) withdrawn from an incorporated business by its owner is called drawings. It is contra account of capital. It means that it decreases the balance of capital.

4 REVENUE AND INCOME Revenue is the total amount of money received by the company for goods sold or services provided during a certain time period. It also includes all net sales, exchange of assets, interest and other increase in owners equity from operation of business and is calculated before any expenses are subtracted. Net income can be calculated by subtracting expenses from revenue.

OR The source of earning in the organization from the operational activities of business is called revenue.

Sales: Merchandise sold to customers is called sales.

Sales Returns & Allowance:

Goods return by customers is called sales return and allowances. It is contra account of sales.

Sales Discount: Discount allowed to customers is called sales discount. It is also contra account of sales.

Other examples of revenue are: Commission income, Rent income, Interest income, etc.

5 EXPENDITURE The cost paid to earn revenue from business activities is called expenses. There are two types of expenses:

a) Capital expenditure. b) Revenue expenditure.

a CAPITAL EXPENDITURE The expenditure incurred for acquiring a fixed asset or which results in increasing the earning capacity of the business is known as capital expenditures. The benefits of capital expenditures are generally availed in several accounting years. It is classified as an asset in the balance sheet. For example: Building, land, equipment, furniture, machinery, vehicles, etc.


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b REVENUE EXPENDITURE The expenditure which is benefited for limited time period maximum for one year is called revenue expenditure. It is classified as an expense and charged to the income statement in the accounting period in which it is made. For example, rent expense, interest expense, salaries expense, bad debts expense, depreciation expense, utilities expense, purchases, etc.

Purchases: Purchase of merchandise only is treated as purchases in merchandising business. Purchase discount and purchase return and allowances are the contra accounts of purchases.

Bad Debts Expense: An amount owed by a debtor that is likely to be unpaid is called bad debts expense. It is charged to the income statement of the period.

Depreciation Expense:

A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached.

CONTRA ACCOUNTS

Contra accounts are the opposite accounts of its main account. They are used always to reduce its main account balance. Some examples of contra accounts are given below:

Main Accounts Contra Accounts

Accounts receivable. Allowance for bad debts.

All fixed assets (except land). Allowance for depreciation.

Capital. Drawings.

Sales. Sales returns and allowances. Sales discount.

Purchases. Purchase returns and allowances. Purchase discount.

DEBIT

Debit means to write on the left hand side of account.

CREDIT

Credit means to write on the right hand side of account. RULES OF DEBIT AND CREDIT

Head of Accounts Increases Decreases Assets Recorded as Debit Recorded as Credit Liabilities Recorded as Credit Recorded as Debit Owners Equity Recorded as Credit Recorded as Debit Revenue & Income Recorded as Credit Recorded as Debit Expenses Recorded as Debit Recorded as Credit

GENERAL JOURNAL

It is the simplest and the most flexible type of journal. The general journal can be used to record any kind of transactions. For each transaction, it provides date, name of the accounts included, the amount of each debit and credit, references, an explanation of transaction and a column to which each debit and credit was recorded. The debits of a transaction must always equal to the credits.


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Format of General Journal: Name of Business General Journal

For the Month of _____ Date Particulars P/R Debit Credit

STEPS TO MAKE GENERAL ENTRY

Step # 1: Analyze the name of accounts in a transaction.

Step # 2: Analyze the nature of accounts (Heads of accounts).

Step # 3: Analyze the movement of accounts (Increase or decrease).

Step # 4: Rules of debit and credit.

Example: January 1: Mr. Ali started business with cash investment of Rs.100,000. Solution:

Step # 1 Step # 2 Step # 3 Step # 4 Cash Asset Increase Debit

Capital Owners equity Increase Credit

Date Particulars P/R Debit Credit January 1 Cash 100,000

Capital 100,000 (To record the cash invested by owner)

GENERAL LEDGER

Ledger accounts are maintained to get the latest or accurate balance of each and every account because ledger account is prepared on individual basis; we post all transactions from general journal to general ledger account. There are two sides of ledger account. Left side is used for debit and right for credit amount of that particular account. After the completion of posting, we just calculate the balance of every account.

Posting: The accounting procedure for putting the amounts recorded in the journal into the ledger accounts.

Footing: The process of calculating the balance of an account. The debits and credits are totaled, and the two are combined to get the balance.

Standard form general ledger. Skeleton form general ledger (T accounts). Subsidiary ledger.

Format of Skeleton Form (T Account): Name of Account


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Format of Standard Form: Name of Account

Date Particulars P/R Amount Date Particulars P/R Amount

Format of Subsidiary Ledger:

Name of Customer/Supplier Date Invoice No. Particulars P/R Debit Credit Balance

TRIAL BALANCE

A Trial Balance is a statement of ledger account balances within a ledger, at particular instance. Its main purpose is to check mathematical\arithmetic accuracy of accounting. It is not an account. After the closing process of footing and balancing of each and every account, and all the ledger accounts are summarized into a statement known as trial balance. Since equal amounts of debit and credit are recorded in the ledger accounts of each transaction, therefore, the sum of debit and credit must be equal, if the balances had been extracted correctly.

Format of Trial Balance:

Name of Business Trial Balance

For the Month Ended _____ Title of Accounts P/R Debit Credit

Illustration # 1: (General Journal, General Ledger & Trial Balance)

1991 Regular & Private BIEK On February 1, 1991 Aslam started a business with a cash investment of Rs.100,000. He completed the following transactions during the month: February: 3: Purchased merchandise on credit from Esajee Rs.25,000. 5: Purchased sales equipment on account from Babar & Co. Rs.20,000. 15: Sold merchandise for cash Rs.10,000 and on credit Rs.15,000. 20: Paid to Esajee Rs.15,000. 25: Collection from customers Rs.10,000. 28: Paid office salaries Rs.3,000. REQUIRED

a) Record the above transactions in the General Journal. b) Post the entries from General Journal into the ledger using T-accounts. c) Balance the accounts and prepare pre-closing trial balance in proper form on February

28, 1991 with complete title and column headings.


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solution # 1:

ASLAM GENERAL JOURNAL

FOR THE MONTH OF FEBRUARY 1991 Date Particulars P/R Debit Credit

1.Feb Cash 100,000 Capital 100,000 (To record the investment by owner) 3.Feb Purchases 25,000 Accounts payable (Esajee) 25,000 (To record the goods purchased on account) 5.Feb Sales equipment 20,000 Accounts payable (Babar & Co.) 20,000 (To record the sales equipment purchased on

account)

15.Feb Cash 10,000 Accounts receivable 15,000 Sales 25,000 (To record the goods sold for cash and on account) 20.Feb Accounts payable (Esajee) 15,000 Cash 15,000 (To record the cash paid to supplier) 25.Feb Cash 10,000 Accounts receivable 10,000 (To record the cash collected from customers) 28.Feb Office salaries expense 3,000 Cash 3,000 (To record the salaries paid)

ASLAM GENERAL LEDGER

Cash

1.Feb Capital 100,000 20.Feb A/P (Esajee) 15,000 15.Feb Sales 10,000 28.Feb Salaries expense 3,000 25.Feb Accounts receivable 10,000 18,000 28.Feb c/d balance 102,000 120,000 120,000

1.Mar b/d balance 102,000

Accounts Receivable 15.Feb Sales 15,000 25.Feb Cash 10,000 28.Feb c/d balance 5,000 15,000 15,000


Sales Equipment 5.Feb Cash 20,000 28.Feb c/d balance 20,000 20,000 20,000



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Accounts Payable 20.Feb Cash 15,000 3.Feb Purchases 25,000 28.Feb c/d balance 30,000 5.Feb Sale equipment 20,000 45,000 45,000


Capital 1.Feb Cash 100,000 28.Feb c/d balance 100,000 100,000 100,000


Purchases 3.Feb A/P (Esajee) 25,000 28.Feb c/d balance 25,000 25,000 25,000

1.mar b/d balance 25,000

Sales 15.Feb Cash/A/R 25,000 28.Feb c/d balance 25,000 25,000 25,000


Salaries Expense 28.Feb Cash 3,000 28.Feb c/d balance 3,000 3,000 3,000


ASLAM TRIAL BALANCE

FOR THE MONTH OF 28 FEBRUARY 1991 NO. PARTICULARS P/R DEBIT CREDIT

1 Cash 102,000 2 Accounts receivable 5,000 3 Sales equipment 20,000 4 Accounts payable 30,000 5 Capital 100,000 6 Purchases 25,000 7 Sales 25,000 8 Shop rent expense 3,000 Total 155,000 155,000


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LIST OF POSSIBLE ACCOUNTS

Assets Liabilities Owners Equity

Revenue & Income

Expenditure

Current Assets: Current Liabilities:

Capital Sales Purchases

Cash on hand Accounts payable

Drawings Commission income

Salaries expenses

Cash at bank Notes/bills payable

Profit and loss Rent income Rent expenses

Accounts receivable

Accrued expenses

Interest income Commission expenses

Notes/bills receivable

Unearned Fees income Interest expenses

Merchandise inventory

Bank overdraft Repairs income Repairs expenses

Accrued income Long Term Liabilities:

Other Income Advertising expenses

Prepaid Bank loan payable

Contra Income: Utilities expenses

Supplies Mortgage payable

Sales returns and allowance

Transportation

Marketable securities

Debentures payable

Sales discount Depreciation expenses

Contra Current Asset:

Bad debts expenses

Allowance for bad debts

Other Expenses

Fixed Assets: Contra Expenses:

Tangible Fixed Assets:

Purchase returns and allowance

Land Purchase discount

Building

Equipment

Furniture

Machinery

Vehicles

Contra Fixed Assets:

Allowance for depreciation

Intangible Fixed Assets

Goodwill

Patents

Copyright

Trademark


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Sameer Hussain

Practice questions

Question # 1: 1990 Regular & Private BIEK Transactions of Nasir & Company are listed below:

a) Nasir the proprietor invested into the business cash Rs.10,000 and Furniture valued at Rs.6,000.

b) Purchased merchandise for cash Rs.6,000. c) Purchased merchandise on credit from Khalid Rs.2,000. d) Sold merchandise for cash Rs.8,000. e) Sold merchandise on credit to Rashid Rs.4,000. f) Returned merchandise to Khalid Rs.300. g) Merchandise returned by Rashid Rs.200. h) Paid shop rent Rs.150 in cash. i) Opened current account with the bank with Rs.10,000. j) Withdrew from the bank Rs.4,000 for private expenses of the proprietor.

REQUIRED a) Entries in the General Journal to record the above transactions. b) T-accounts in the ledger complete with all postings. c) Trial Balance after all the postings has been done.

Question # 2: 2006 Regular & Private BIEK M/s. Khalid Traders started business on March 1, 2006 with a cash investment of Rs.700,000. They completed the following transactions during the month: Mar.2: Paid shop rent in advance for one year Rs.120,000. Mar.4: Purchased furniture for shop on cash Rs.50,000. Mar.5: Opened a bank account with Rs.200,000. Mar.7: Purchased a computer for the business worth Rs,50,000. Mar.10: Purchased merchandise for cash Rs.150,000. Mar.15: Sold merchandise for cash Rs.150,000. Mar.18: Purchased merchandise on credit Rs.50,000. Mar.20: Sold merchandise on credit for Rs.80,000. Mar.23: Proprietor withdrew cash and merchandise for Rs.10,000 and Rs.5,000

respectively. Mar.27: Paid for advertising Rs.25,000. Mar.31: Paid salary to the salesman Rs.15,000 by cheque. REQUIRED Record the above transactions in the General Journal of M/s. Khalid Traders. Question # 3: 1996 Regular UOK Arif Company completed the following transactions:

(a) Sold for Rs.200,000 half portion of building bearing cost Rs.130,000. Received according to terms of sales Rs.150,000 in cash and a 10% six months note for balance.

(b) Sold merchandise to Mushtaq Brothers Rs.50,000 on list price subject 10% trade discount on credit terms 5/15, 2/20 and n/30 on June 1, 1996.

(c) On June 5, 1996 Mushtaq Brothers returned merchandise Rs.10,000 and paid balance in cash on June 19, 1996.

(d) Merchandise worth Rs.50,000 and cash Rs.30,000 were burnt by fire. REQUIRED Record the above transactions in General Journal of Arif Company. Question # 4: 2009 Regular UOK Give the journal entries to record any five of the following:

(1) The corrected cash balance at end for a NSF cheque of Rs.1,000. (2) The merchandise drawing by the owner valued Rs.2,000.


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(3) The business cash deposited into the business bank account Rs.3,000. (4) The discount lost under net price method Rs.4,000. (5) The closing entry for owners drawings of Rs.5,000. (6) The correction entry for overcharged bad debts after closing Rs.6,000.

Question # 5: 2009 Regular UOK Sumsan Traders completed the following related transactions for a month:

(1) Purchased merchandise under the term 2/10, n/30, valued Rs.100,000. (2) Paid transportation on it Rs.3,000. (3) Returned defective merchandise valued Rs.5,000. (4) Availed the discount as payment made within 10 days.

REQUIRED Record the above transactions in the General Journal of the trader. Question # 6: Quetta Club Park was organized on 1 September for the purpose of operating automobile parking lot. The transactions during September were as follows: September 1: Shahid Khan deposited Rs.100,000 cash in bank account in the name of business. September 5: Purchased land for Rs.320,000 of which Rs.80,000 was paid in cash. A short term

note payable was issued for the balance of Rs.240,000. September 6: An arrangement was made with the century club to provide parking privileges

for its customers. Century club agreed to pay Rs.2,400 monthly, payable in advance. Cash was collected for the month of September.

September 7: Arranged with Quetta printing company for a regular advertisement in the Quetta at a monthly cost of Rs.780. Paid for advertising during September by cheque Rs.780.

September 15: Parking receipts for the first half of the month were Rs.3,672 exclusive of the monthly fee from Qesco Club.

September 20: Received bill for light and power from Qesco Power Company in the amount of Rs.156 to be paid by October 10.

September 23: Paid Rs.5,440 to employees for service rendered during the month. September 26: Shahid withdrew Rs.4,000 for personal use. September 30: Parking receipts for the second half of the month amounted to Rs.10,676. September 30: Paid Rs.10,000 cash on the note payable incurred with the purchase of land. REQUIRED Journalize the September transactions. Question # 7: 1990 Regular & Private BIEK You have obtained the following data from the accounting records of Ideal Company at December 31, 1989. However certain figures could not be propers read and you are to determine the missing figures. Show the working applied to arrive at those figures. Accounts Payable Rs. 15,830 Accounts Receivable ? Bank Loan Payable 6,000 Buildings 50,000 Cash 8,730 Furniture 3,800 Prize Bonds 15,000 Office Supplies 1,500 Prepaid Insurance 2,600 Total Assets 91,630 Total Liabilities ? Total Owners Equity ?


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Question # 8: 1993 Regular & Private BIEK For each of the following determine the underlined missing item:-

(a) The liabilities of a business entity having assets of Rs.200,000 and owners equity of Rs.90,000.

(b) The assets of a business entity having liabilities of Rs.50,000 and owners equity of Rs.100,000.

(c) The owners equity of a business having assets of Rs.80,000 and liabilities of Rs.40,000. (d) The revenue of a business entity having expenses of Rs.60,000 and net income of

Rs.15,000. (e) The expenses of a business entity having revenues of Rs.90,000 and net loss of Rs.8,000.

Question # 9: 2002 Regular BIEK

a) On July 1, Basit began operating a business. After each of the five transactions, the accounting equation for the business showed the following balances. Analyze the equation and describe each of the five transactions with their amounts.

BALANCE AFTER: Transaction + Cash +Accounts

receivable + Office supplies

+ Office furniture

= Accounts payable

+ Basits capital

(i) Rs.30,000 0 0 0 = 0 30,000 (ii) Rs.29,200 0 2,000 0 = 1,200 30,000 (iii) Rs.11,200 0 2,000 18,000 = 1,200 30,000 (iv) Rs.11,200 2,400 2,000 18,000 = 1,200 32,400 (v) Rs.8,200 2,400 3,400 19,600 = 1,200 32,400

b) During the month of September, AB Company had cash receipts of Rs.36,000 and cash

payments of Rs.40,500. The September 30 cash balance was Rs.8,000; calculate the August 31 cash balance.

c) Aqeel, the owner of a business had a capital account balance of Rs.230,000 on May 31 and Rs.296,000 on June 30. His net income for the month June was Rs.72,000; calculate withdrawals during June from the business.

d) The ending balance of an owners equity is Rs.42,000. During the year the owner contributed Rs.12,000 and withdrew Rs.8,000. If the firm had Rs.16,000 net incomes for the year, what was the owners equity at the beginning of the following?: (i) Rs.38,000. (ii) Rs.22,000. (iii) Rs.42,000. (iv) Rs.46,000.

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