Unit 02 — The Accounting Process
Steps in the accounting cycle, Journal, Ledger and Trial Balance — the mechanical heart of the subject, and the unit that carries the most Class Test marks because it is the only one your syllabus pitches at "Apply" across two full lectures.
Lectures 3 and 4 are the only two MT-marked lectures whose teaching method is listed as "Numerical Problems" CP p. 3. Your faculty has also issued two dedicated problem sheets for this unit alone — seven journal problems and three trial-balance problems — and none for Unit 1. That is where a 45-minute, 20-mark test will go.
Expect: journalise these transactions (the big one), post to the ledger and balance, prepare / correct a trial balance, and a short theory question on the cycle or on why a tallied trial balance still proves nothing.
Which Account? Dr or Cr? is a five-step routine plus a 90-wording phrase-book built precisely for this unit. The Account Dictionary tells you the type and destination of any account name you meet.
1. The Accounting Cycle — the six stages Core syllabus concept
1Understand the sequence
Your L3 deck opens with a circular diagram of the stages L3 slide 2; the textbook gives the same thing as a linear flow with the purpose of each step written under it p. 49, §3.5. Learn it as six named steps with one purpose each:
- Identify transactions & prepare business documents. A transaction must be an exchange, expressible in money, evidenced by a voucher, bill or invoice.
- Journalising — record in the Journal, chronologically, with narration. Purpose: a complete, dated, primary record. Debits must equal credits on every page.
- Posting — transfer each debit and credit into its own account in the Ledger. Purpose: classify, so you can see one account's whole story in one place.
- Balancing — find the difference between each ledger account's two sides. Purpose: the net position of every account.
- Trial Balance — list every account's balance in a debit column and a credit column. Purpose: test arithmetical accuracy. Totals must agree.
- Financial Statements — Trading & Profit and Loss A/c (profit or loss for the period) and Balance Sheet (financial position at the end). Unit 4 — beyond the M1 portion.
The deck's version of the cycle inserts two extra stages that a longer question may ask for: unadjusted trial balance → adjusting entries → adjusted trial balance → financial statements slide 2. If the question says "steps in the accounting cycle", give the six; if it shows the deck's diagram, give all eight.
2. Accounts, Debit and Credit, and the Two Rule Systems Core syllabus concept
1What an account is
The deck's definition slide 3: the simplest form is a T-account; an account is used to calculate the net change in an item; increases go on one side and decreases on the other; it is balanced periodically. The textbook's fuller version p. 46: "the date-wise record of all dealings or transactions relating to a person, body of persons, corporate, property, liability, expense and income."
| Dr. (left hand side) | Cr. (right hand side) | ||
|---|---|---|---|
| Date · To [the account credited] | Amount | Date · By [the account debited] | Amount |
The textbook's advice, and it is good exam advice: "Wherever possible, prepare Account in 'T' form to avoid mistakes and ensure arithmetical accuracy." p. 46
Debit and credit mean nothing more than left and right. The deck says it plainly: "Left hand side of an account arbitrarily called debit side" slide 4. To debit is to make an entry on the LHS; to credit is to make one on the RHS.
2System A — the modern four-type classification
L3 slide 5 gives it slide 5: Asset, Liability, Income, Expense. Assets and liabilities are reported on the Balance Sheet and carried forward into the next period — "in this sense, they are permanent." Revenue and expense accounts are reported on the Income Statement and are wiped clean each year.
3System B — the traditional three-type classification and the golden rules
Taught side by side on slide 6 slide 6 and set out in full in the textbook pp. 46–48:
Credit the GIVER
Artificial: a limited company, a bank, an insurance company, a partnership firm, a government body, a co-operative society, a club
Representative: Outstanding Rent A/c, Outstanding Salaries A/c, Prepaid Insurance A/c — one account standing in for a group of people p. 47
Credit what GOES OUT
Intangible: Goodwill, Patents, Trademarks
The flagged trap: "Cash is real account, while a bank account is a personal account." Many students think bank is real because it feels like cash — but a balance in Bank of India must be distinguished from one in Andhra Bank; it belongs to an institution p. 47.
Credit all GAINS & INCOMES
The prefix rule: add a prefix or suffix and a nominal account becomes personal. Interest A/c → Outstanding Interest A/c; Salary A/c → Prepaid Salaries A/c p. 48.
The textbook slips a third sub-category under Real Accounts p. 48: fictitious assets — expenditure treated as capital because its benefit lasts years, written off to the P&L in instalments, and sitting on the assets side until it is. Share issue expenses, discount on issue of shares, preliminary expenses, underwriting commission. And the line that is a ready-made MCQ: "Goodwill, patents cannot be called as fictitious assets as these are Intangible assets."
4The accounting equation behind both systems
The textbook works the Cherry & Co example through six transactions to show the equation never breaks pp. 43–45, and then tabulates every possible consequence — increase in an asset results in increase in liability or decrease in another asset, and so on. Profit increases capital; loss and drawings decrease it.
3. The Journal — the Book of Prime Entry Core syllabus concept
1What it is and what it is not
Your deck's five bullets slide 7, each of which can be a one-mark answer:
- Primary record of a transaction
- Chronological record of all transactions — a book of daily record
- Also contains a narrative description (the narration)
- Debit account is recorded first, then the credit account
- Does not replace but precedes the Ledger
2The five columns, and how to write an entry
| Column | What goes in it |
|---|---|
| Date | The date the transaction occurred. |
| Particulars | First line: the account debited, followed by "Dr.". Second line, indented: the account credited, beginning with "To". Below both: the narration in brackets, explaining why. Then a line is drawn to signify the transaction is complete. |
| L.F. — Ledger Folio | The page number of the ledger account the entry was posted into. Filled in after posting, for cross-referencing. |
| Amount (Dr.) | Rupees and paise, against the debited account. |
| Amount (Cr.) | Rupees and paise, against the credited account. |
Totals of the debit and credit columns are struck on every page, to confirm arithmetical accuracy as you go p. 50. The deck's proforma shows an invoice number in the Ref column — worth reproducing if the question gives one slide 8.
| Furniture A/c | Dr. | 2,000 | |
| To M/s XYZ Furnishers Ltd | 2,000 |
3The Shyam Enterprises illustration — with the trap
The deck's worked example slides 9–11 is five lines, and one of them is a deliberate trap.
| Date | Transaction | ₹ | Entry |
|---|---|---|---|
| Jan 1 | Starts business with | 1,000 | Cash A/c Dr. 1,000 / To Capital A/c 1,000 |
| Jan 8 | Buys goods and stores them | 800 | Purchases A/c Dr. 800 / To Cash A/c 800 (cash memo 378) |
| Jan 10 | Receives order from A | 500 | NO ENTRY — an order is not a transaction. Realisation Concept. |
| Jan 15 | Delivered the goods to A, customer invoiced | 500 | Mr A's A/c Dr. 500 / To Sales A/c 500 (sale bill 001) |
| Jan 31 | Customer A pays | 500 | Cash A/c Dr. 500 / To Mr A's A/c 500 |
Five transactions listed, four entries. If you journalise the order, your journal has an extra ₹500 of sales that never happened and your ledger, trial balance and profit are all wrong. Read every line and ask: has anything actually been exchanged?
4The eight tips for journalising — §3.7
This is the most useful two pages in your textbook pp. 51–54, and it answers directly the questions students get stuck on. Summarised; the full treatment with worked wordings is on the Decision Engine.
| Tip | The rule |
|---|---|
| (A) Clarity of fundamentals | Three questions, every time: which accounts are affected? what is the nature of each? which is debited or credited, and why? |
| (B) Open Purchases/Sales, not Goods | A consolidated Goods A/c cannot give you purchases and sales separately. Same for returns. |
| (C) Cash or credit? | If settled immediately, use Cash and ignore the person's name. If silent, treat as cash. Only a credit transaction needs the party's account. |
| (D) Payment vs advance | Service already rendered → debit the expense. Advance → debit the person (recoverable). |
| (E) Income vs advance received | Service already given → credit the income. Advance → credit the person (refundable). |
| (F) Trade discount | Record the net price only. No entry for the discount itself; mention it in the narration. |
| (G) Cash discount / full settlement | Always recorded. Expense to the giver (Discount Allowed), income to the receiver (Discount Received). |
| (H) Personal expenses of the owner | Drawings, in cash or in kind. Goods drawings recorded at cost, not selling price. |
And the closing note to students, worth remembering for any "in whose books?" question: "For every transaction, there are two persons… In the books of the buyer, the same transaction is a purchase, while it is a sale in the books of the seller." p. 53
4. The Ledger — the Book of Final Entry Core syllabus concept
1What it is
The deck's five points slide 12: a ledger is a set of accounts; it is called the main or principal book; it contains all accounts of the enterprise; it classifies the transactions recorded in the journal; and it may be split into groups (Sundry Debtors Ledger, Sundry Creditors Ledger).
The textbook adds the detail that each account gets its own page, with the first few pages devoted to an alphabetical index p. 72.
Cash and bank entries are posted directly into the Cash Book, so it is treated as part of the journal; but because it also shows the daily cash balance, it serves as a ledger account too. The textbook's line: "Cash Book is a journal as well as a Ledger." Purchase Book and Sales Book, by contrast, are subsidiary books p. 72.
2Journal vs Ledger — the ten-row comparison
| Basis | Journal | Ledger |
|---|---|---|
| Nature of book | Book of original entry | Book of second / final entry |
| Record | Chronological — date-wise | Account-wise, irrespective of date |
| Legal evidence | Greater weight — it is the source record | Lesser weight — derived from the journal |
| Basis of recording | The transaction | The account |
| Process name | Journalising | Posting |
| Place | One account's transactions are scattered across dates | One account's transactions are gathered in one place |
| Narration | Needed for every transaction | Not needed |
| Folio | Folio of the ledger is written | Folio of the journal is written |
| Final accounts | Cannot be prepared from it | Can — it is the basis of the trial balance |
| Accuracy | Cannot be tested | Can be tested, via the trial balance |
Textbook §4.4 pp. 72–73. The five advantages of a ledger (§4.5) are a separate short question: knowledge of accounts, details of income and expenditure, test of accuracy, knowledge of assets and liabilities, and evidence in business disputes.
3The four rules of posting — and the To/By convention
| Rule | What to do |
|---|---|
| (A) Open separate accounts | One account per item, never opened twice. All its debits and credits gather there. |
| (B) Post to the concerned side | Debited in the journal → debited in the ledger. No flipping. |
| (C) Use "To" and "By" | On the debit side, write "To" + the name of the account that was credited. On the credit side, write "By" + the name of the account that was debited. Always the name of the OTHER account. |
| (D) Balance the account | Total the heavier side first. Put that same total on the other side. The difference is the balance: if debits are larger, a debit balance, and vice versa. |
The entry was Cash A/c Dr. / To Capital A/c. When you post it into the Cash account, you are standing inside Cash — so you write the other name: "To Capital A/c" on the debit side. When you post the same entry into the Capital account, you write "By Cash A/c" on the credit side.
Mnemonic: To goes on the debit side (both short words), By on the credit side. And the name you write is never your own.
4The Shyam Enterprises ledger, posted and read
The deck posts its five journal entries into five accounts slides 14–15. Here is Cash, with the balancing the deck leaves for you to do:
| Dr. | Cr. | ||
|---|---|---|---|
| Jan 1 To Capital A/c | 1,000 | Jan 8 By Purchases A/c | 800 |
| Jan 31 To Mr A's A/c | 500 | Jan 31 By Balance c/d | 700 |
| 1,500 | 1,500 | ||
| Feb 1 To Balance b/d | 700 | ||
Reading it: debits total ₹1,500, credits ₹800. Debit side is heavier by ₹700, so the account has a debit balance of ₹700 — which is right, because cash is an asset. The balancing figure is entered on the lighter side as "By Balance c/d" to make the two sides equal, then brought down on the opposite side on day one of the next period as "To Balance b/d".
The other four accounts end with: Capital ₹1,000 credit, Purchases ₹800 debit, Mr A's A/c nil (he was debited ₹500 and credited ₹500 — his debt is settled), Sales ₹500 credit.
5. The Trial Balance Core syllabus concept
1What it is and how it is built
The deck's definition slide 16: at the end of each financial year the balance of each account is extracted; a summary statement of all accounts and their balances is prepared; that summary statement is the Trial Balance.
- Accounts whose LHS total exceeds the RHS have a debit balance.
- Accounts whose RHS total exceeds the LHS have a credit balance.
- All debit balances in one column, all credit balances in another.
- If every entry was correctly made and every balance correctly extracted, the two column totals tally.
Faculty Trial Balance Q1–Q3 TB sheet give you a flat list of balances with no indication of side. You do not need to think about any of them individually. Apply the deck's rule mechanically slide 17:
All LIABILITIES, CAPITAL and INCOMES → credit column.
The only items that need a second's thought are the four returns and discount pairs, and the handful of contra items — all listed in the table below.
2The side of every item that appears in your faculty sheets
| Debit column Dr | Credit column Cr |
|---|---|
| Fixed Assets · Plant & Machinery · Freehold Premises · Motor cycle · Land & Building | Capital A/c |
| Debtors / Sundry Debtors | Creditors / Sundry Creditors |
| Cash in hand · Cash at Bank · Deposit with SBI | Bank Overdraft · Bank Loan |
| Bills Receivable | Bills Payable |
| Opening Stock | Sales |
| Purchases | Returns Outward (Purchase Returns) |
| Returns Inward (Sales Returns) | Commission Received · Rent Received |
| Wages & Salaries · Salaries · Rent & Taxes · Printing & Stationery · Office Expenses | Share Premium · Share Capital · P&L b/f |
| Carriage Inward and Carriage Outward — both are expenses, both debit | Land & Building — Depreciation (accumulated; a contra-asset) |
| Discount Allowed · Bad Debts · Commission (Dr.) · Interest paid | Discount Received · Interest received |
| Drawings (reduces capital, so it sits opposite capital) |
Returns Inward is a DEBIT (it reduces sales, and sales is a credit) — Returns Outward is a CREDIT (it reduces purchases, and purchases is a debit). Say it to yourself as: a return always sits opposite the thing it reduces.
Carriage Inward and Carriage Outward are BOTH debits. They differ in which statement they land in (Trading vs P&L), not in which column of the trial balance.
Drawings is a DEBIT even though Capital is a credit — because drawings reduce capital. Bank Overdraft is a CREDIT even though Bank is normally a debit — because you owe the bank.
3Interest in the debit column vs the credit column
The deck makes a point that generalises to any ambiguous item slide 18:
The same logic reads Commission (Dr.) as commission paid and Commission Received as income; Discount (Dr.) as discount allowed. If a Trial Balance gives you a bare word and a column, the column tells you what it is.
4A tallied trial balance does not mean correct books
This is the highest-value theory point in Unit 2, because it is short, quotable, and repeatedly examined slide 18, textbook p. 48.
The textbook's example is the clearest one to reproduce: cash paid towards repairs ₹100 — but instead of debiting Repairs A/c, Radha's A/c is debited. The trial balance still tallies. The books are arithmetically perfect and financially wrong, because Repairs A/c does not show the repairs actually incurred.
| Error type | What it is | Does the TB still tally? |
|---|---|---|
| Errors of Principle | A correct amount posted to the wrong class of account — e.g. machinery debited to Purchases, or repairs debited to the asset. | Yes — debit still equals credit. |
| Compensating errors | Two or more errors that cancel out in size and direction. | Yes. |
| Errors of omission (complete) | A transaction not recorded at all. | Yes — nothing on either side. |
| Errors of commission | Posted to the right class but the wrong account — e.g. debiting Ram instead of Ramesh. | Yes. |
| One-sided errors | Posted to one side only, or a wrong amount on one side. | No — this is what the trial balance catches. |
The deck names the first two explicitly — "There still may be errors of Principle and compensating errors" slide 18. The others follow the same logic and are worth a line each if a question asks for "errors not disclosed by the trial balance".
5The XYZ Associates trial balance — read it, don't just copy it
The deck closes with a real trial balance that tallies at ₹30,47,000 slide 20. Three things in it are worth noticing because they are exactly what a "correct this trial balance" question hides:
- Land & Building ₹13,00,000 on the debit side; Land & Building — Depreciation ₹1,95,000 on the credit side. That is the Provision for Depreciation method from Unit 3 — the asset stays at cost, the accumulated depreciation sits separately as a credit.
- Plant & Machinery — Net ₹6,60,000, a single debit. The other method: depreciation written straight off the asset.
- Profit & Loss as at 31st March 2004 ₹1,60,000 on the credit side. Last year's retained profit belongs to the owners, so it is credit-natured.
Unit 02 — How to Solve Anything works every transaction in all 7 faculty journal problems and all 3 trial-balance problems, plus the textbook's ledger illustrations and its full MCQ bank — each in a two-column why / what to write layout.