From evidence to accounts
A source document (invoice, receipt, debit note or bank advice) supports a transaction. A voucher summarises it for recording. Analyse which accounts change; journalise; post to ledger accounts; balance accounts; prepare a trial balance; locate and rectify errors; then prepare statements.
Traditional rules: debit the receiver and credit the giver (personal); debit what comes in and credit what goes out (real); debit expenses/losses and credit incomes/gains (nominal). Use these rules only after identifying the accounts and transaction.
Journal and subsidiary books
A journal records transactions chronologically with date, accounts, debit, credit and narration. Cash transactions go in the cash book; credit purchases of goods in purchases book; credit sales in sales book; returns in returns books. Journal proper records entries that do not fit another special book. Trade discount is not separately recorded; cash discount is recorded when allowed or received.
Example: Goods bought on credit from Meera for ₹10,000 plus 18% intra-state GST: Purchases Dr ₹10,000; Input CGST Dr ₹900; Input SGST Dr ₹900; To Meera ₹11,800. This assumes the facts stated and eligible input credit.
Ledger and trial balance
Posting transfers each journal or subsidiary-book amount to the relevant ledger account. The ledger groups transactions by account and reveals its balance. A trial balance lists debit and credit balances. Agreement checks arithmetic equality; it does not prove every transaction was recorded, classified or posted correctly.
Common errors that can still exist: complete omission, posting to the wrong account on the correct side, or an error of principle can leave a trial balance balanced.
Bank reconciliation statement
A bank reconciliation explains why the cash-book bank balance differs from the bank statement on a date. Begin with the balance specified in the question and apply each item according to which record is already updated. Cheques issued but not presented, deposits in transit, bank charges, direct credits and errors require separate analysis; do not memorise plus/minus signs without checking the starting balance.
Starting with a favourable cash-book balance, a cheque issued but not yet presented means the bank has not yet reduced its balance. To reach the bank-statement balance from the cash book, subtract that cheque.
Depreciation, provisions and reserves
Depreciation allocates the depreciable amount of a tangible asset over its useful life. Straight-line depreciation = (cost − residual value) ÷ useful life. Written-down-value depreciation = opening carrying amount × rate. For cost ₹1,00,000, residual value ₹10,000 and five years, SLM charge is ₹18,000 each year. At 20% WDV, year one is ₹20,000 and year two is ₹16,000.
A provision is a charge against profit for a known liability or asset diminution whose amount is estimated. A reserve is an appropriation of profit. For disposal, follow the method and dates stated in the question.
Rectification of errors
Errors of omission, commission, principle and compensating error have different effects. Some leave the trial balance equal; others create a difference. Identify the original error and record only the correcting effect. A suspense account temporarily holds an unexplained difference and should close after correction.
Example: Furniture bought for cash ₹5,000 was wrongly debited to Purchases. Correct it with Furniture Dr ₹5,000; To Purchases ₹5,000.
Practice set
- Record a cash sale of goods ₹12,000 plus 5% intra-state GST.
- A machine costs ₹80,000, has a four-year life and zero residual value. Calculate annual SLM depreciation.
- A trial balance agrees. Give two errors that may still exist.
- Explain the effect of a deposit recorded by the business but not yet credited by the bank.