Accounting Process: Journal, Ledger, Subsidiary Books and Trial Balance
What the domain tests
This section tests the double-entry cycle: applying debit and credit rules, journalising transactions, posting to ledgers, using subsidiary books and extracting a trial balance. Questions often ask for the correct entry or the book in which a transaction is recorded.
Core rules
- Debit increases assets and expenses; credit increases liabilities, capital and income. A debit decreases the opposite.
- A journal entry shows date, particulars, ledger folio, debit amount, credit amount and narration.
- A compound entry has more than one debit or credit, but total debits must equal total credits.
- Subsidiary books: purchases book for credit purchases of goods, sales book for credit sales, purchase returns book, sales returns book, cash book, petty cash book and journal proper.
- Posting transfers entries to ledger accounts; balancing produces account balances.
- A trial balance lists debit and credit balances on a date to test arithmetical accuracy.
Worked example
Bought goods on credit from A Traders for Rs. 20,000. Journal: Purchases A/c Dr 20,000; To A Traders 20,000. Post Rs. 20,000 to the debit of Purchases account and the credit of A Traders account. In the trial balance, purchases appear on the debit side and A Traders on the credit side. If goods worth Rs. 2,000 are returned, the entry is A Traders Dr 2,000; To Purchase Returns 2,000. A cash purchase would use Cash or Bank and would not enter the purchases book.
Traps
Do not record credit sales in the cash book; do not confuse trade discount with cash discount; do not post a debit as a credit; and do not believe a trial balance proves there are no errors. It does not detect errors of principle, complete omission or compensating errors.