Recording of Transactions: Journal, Ledger, and Trial Balance
This domain tests double-entry mechanics: turning a transaction into a journal entry, posting it to the correct ledger account, balancing the account, and extracting a trial balance that agrees.
Rules
- Traditional rule: debit the receiver, credit the giver; debit what comes in, credit what goes out; debit expenses and losses, credit incomes and gains.
- Modern rule: increases in assets and expenses are debits; increases in liabilities, capital and income are credits.
- A compound entry records more than two accounts in a single transaction.
- Ledger accounts are balanced at period end; the difference is the balance carried down. Debit balances are assets or expenses, credit balances are liabilities, income or capital.
- A trial balance lists debit and credit balances. It must agree, but agreement does not prove accuracy.
Worked example
Started with ₹2,00,000 cash; bought goods for ₹40,000 cash; sold goods costing ₹30,000 for ₹45,000 on credit; paid rent ₹5,000. Journal: Cash Dr 2,00,000 / Capital Cr; Purchases Dr 40,000 / Cash Cr; Debtors Dr 45,000 / Sales Cr; Rent Dr 5,000 / Cash Cr. Trial balance: Cash 1,55,000 Dr, Purchases 40,000 Dr, Debtors 45,000 Dr, Rent 5,000 Dr = ₹2,45,000; Capital 2,00,000 Cr and Sales 45,000 Cr = ₹2,45,000.
Traps
- Errors that still let a trial balance agree: complete omission, compensating errors, posting to a wrong account of the same class, and errors of principle.
- Debiting a furniture purchase to Purchases is an error of principle, yet the trial balance still tallies.
- Omitting narration, or confusing personal and nominal accounts.
- Forgetting that sales returns and purchase returns have separate accounts rather than being netted silently.