Books of Accounts

Books of Accounts

Books of account are used to record the business transactions. There may be thousand of transaction (Cash & credit) during a financial year. These transactions are recorded or processed in books of accounts. Primarily there are two books of account i.e. Journal & Ledger.

Books of accounts concept are more relevant in manual book keeping. In computerized environment all accounting processing is perfumed by the accounting software. All you need to enter accurate amount in accurate heads of accounts and then accounting software automatically maintains the books of accounts.

1.    General Journal

In first place the transactions are recorded in the General Journal. In Journal transaction are recorded in chronological order. Transactions are recorded with help of debit & credit rules. There are two basic rules for double entry system. Every transaction shall have two aspects (Debit & Credit) and debit aspect must be equal to credit aspect. Thus every debit has a credit of same amount.

1.    Journal is primary book.

2.    Two aspects of a transaction are recorded.

3.    Entries are recorded in chronological order.

4.    Special journal are used for high volume of transaction like sales Journal.

2.    Special Journal

Special journals may be maintained for credit sales and credit purchases in large organizations due to high volume of transactions.  Total of such special journal is posted in General ledger (total credit purchase, total credit sales, total debtor account, total creditor account).

1.    Special Journal is a special type of Journal.

2.    Special Journal total amounts are entered in General Ledger.

3.    Special Journal form part of Double entry system.

4.    Special Journal is maintained for high volume transactions like sales Journal and purchase Journal.

3.    General Ledger

A register which contains both individual accounts and total accounts of special journals is known as General ledger. It is important note that, when there is special journals maintained in the organization, then General ledger contains the total account of debtor, total account of creditor, total account sales,  total account of purchases, and separate account for other heads. In this case individual account of creditor and customer are not part of general ledger , and those account are maintained as memorandum account.

In absence of Special journals , all accounts are separately maintained in General ledger and there is no use of total accounts.

4.    Trial Balance

Closing balance of General ledger is extracted in the form of trial balance. This balance can be extracted any time, because it is a report, which can be extracted or prepared anytime. Trial balance provides a foundation for the preparation of financial statement. It is to be noted that trial balance extracted from General ledger may require some adjustment for doubtful debt, prepaid expenses, accruals etc.

1.    Trial  balance extracted from General Ledger

2.    Trial balance is a report, which is extracted from General Ledger.

3.    Trial balance may required  adjustment  (Depreciation ,accruals etc)

5.    Financial Statements

Financial statements can be prepared from the trial balance extracted from the General ledger. like trial balance, Financial statements are also reports which can be prepared anytime. Financial statements consist of statement of financial position, statement of comprehensive income, statement of cash flows, and statement of changes in equity. These component have been explained in my other article.