👁 Preview — Study, Practice and Revise are open; mock tests and the rest of the syllabus unlock on subscription. Unlock all · ₹4,999
← Back to Basic Accounting
Study mode

Double entry system journal ledger

Study Practice Revise 🔒 Test

Introduction to Basic Accounting: The Double Entry System, Journal, and Ledger

Accounting is the systematic process of recording, summarizing, and reporting financial transactions of a business. It helps stakeholders understand the financial health and performance of an organization. At the heart of accounting lies the double entry system, a reliable method that ensures every financial transaction is recorded accurately and completely.

Two essential books in this process are the Journal and the Ledger. The journal is the first place where transactions are recorded in chronological order, while the ledger organizes these transactions by account, providing a clear view of each account's activity and balance. Together, they form the foundation of the accounting cycle, leading to the preparation of financial statements.

Double Entry System

The double entry system is a fundamental accounting principle stating that every financial transaction affects at least two accounts in such a way that the accounting equation remains balanced. This means for every debit entry, there must be an equal and corresponding credit entry.

The accounting equation is:

Accounting Equation

Assets = Liabilities + Owner's Equity

Ensures that the total resources owned by the business equal the claims against those resources.

Assets = Resources owned
Liabilities = Obligations owed
Owner's Equity = Owner's claim on assets

For example, if a business buys goods worth INR 10,000 in cash, it affects two accounts:

  • Goods Account (an asset) increases by INR 10,000 (debit)
  • Cash Account (an asset) decreases by INR 10,000 (credit)

Thus, the total assets remain balanced.

graph LR    Transaction --> Debit[Debit Account]    Transaction --> Credit[Credit Account]    Debit -- Amount --> Credit    Credit -- Amount --> Debit    style Debit fill:#b3d9ff,stroke:#333,stroke-width:2px    style Credit fill:#ffb3b3,stroke:#333,stroke-width:2px

Journal

The journal is known as the book of original entry because it is the first place where transactions are recorded. It records transactions in chronological order, capturing the date, accounts affected, and amounts debited and credited.

The journal entry format typically includes:

Date Particulars Ledger Folio (L.F.) Debit (INR) Credit (INR)
01-06-2024 Purchase Account Dr.
    To Supplier Account		 12 / 25 50,000 50,000

Key Points:

  • Each transaction is recorded with a debit and a credit entry.
  • Particulars include the name of the accounts involved, with the debit account written first.
  • Ledger Folio (L.F.) is a reference number linking to the ledger account.
  • Chronological recording helps track transactions over time.

Ledger

The ledger is the book of final entry. Transactions recorded in the journal are posted to individual ledger accounts. Each ledger account shows all transactions related to a particular account, making it easier to see the cumulative effect on that account.

The ledger account is often represented as a T-account, with two sides:

  • Debit side (left)
  • Credit side (right)
Purchase Account
Debit (INR) Credit (INR)
01-06-2024
To Supplier Account
50,000
Total: 50,000 Total: 0
Balance c/d: 50,000 (Debit)

Balancing the Ledger Account: After posting all entries, the difference between debit and credit sides is calculated. This balance is carried forward to the next period.

Trial Balance

The trial balance is a statement prepared to verify that total debit balances equal total credit balances in the ledger accounts. It helps detect errors in recording or posting transactions.

A sample trial balance format is:

Account Name Debit (INR) Credit (INR)
Cash Account 30,000
Purchase Account 50,000
Supplier Account 50,000
Sales Account 30,000
Totals 80,000 80,000

Importance: If the totals do not match, it indicates errors such as omission, wrong posting, or incorrect amounts, which need to be investigated and corrected.

Worked Examples

Example 1: Purchase on Credit Easy
A business purchased goods worth INR 50,000 on credit from a supplier on 1st June 2024. Record the transaction in the journal and post it to the ledger accounts.

Step 1: Identify accounts involved:

  • Purchase Account (Goods bought)
  • Supplier Account (Credit supplier)

Step 2: Apply double entry rule:

  • Purchase Account is debited (increase in asset)
  • Supplier Account is credited (liability increases)

Step 3: Journal entry on 01-06-2024:

Date Particulars L.F. Debit (INR) Credit (INR)
01-06-2024 Purchase Account Dr.
    To Supplier Account		 12 / 25 50,000 50,000

Step 4: Posting to ledger accounts:

Purchase Account
Debit (INR) Credit (INR)
01-06-2024
To Supplier Account
50,000
Supplier Account
Debit (INR) Credit (INR)
01-06-2024
By Purchase Account
50,000

Answer: The transaction is correctly recorded in the journal and posted to the respective ledger accounts.

Example 2: Recording a Cash Sale Transaction Easy
On 5th June 2024, a business made a cash sale of goods worth INR 30,000. Record the journal entry and post it to the ledger accounts.

Step 1: Identify accounts:

  • Cash Account (asset increases)
  • Sales Account (revenue increases)

Step 2: Apply double entry:

  • Cash Account debited (increase in asset)
  • Sales Account credited (increase in income)

Step 3: Journal entry on 05-06-2024:

Date Particulars L.F. Debit (INR) Credit (INR)
05-06-2024 Cash Account Dr.
    To Sales Account		 15 / 30 30,000 30,000

Step 4: Posting to ledger accounts:

Cash Account
Debit (INR) Credit (INR)
05-06-2024
To Sales Account
30,000
Sales Account
Debit (INR) Credit (INR)
05-06-2024
By Cash Account
30,000

Answer: The cash sale transaction is correctly recorded and posted.

Example 3: Balancing a Ledger Account Medium
The Cash Account has the following transactions in June 2024:
- Debit side: Opening balance INR 20,000; Cash sales INR 30,000
- Credit side: Rent paid INR 10,000; Purchase of equipment INR 15,000
Calculate the closing balance of the Cash Account.

Step 1: List debit side totals:

  • Opening balance: 20,000
  • Cash sales: 30,000
  • Total Debit: 20,000 + 30,000 = 50,000

Step 2: List credit side totals:

  • Rent paid: 10,000
  • Purchase of equipment: 15,000
  • Total Credit: 10,000 + 15,000 = 25,000

Step 3: Calculate balance:

Debit total (50,000) > Credit total (25,000), so balance is debit.

Closing balance = 50,000 - 25,000 = INR 25,000 (Debit)

Step 4: Record balance on credit side as balance carried down (c/d).

Cash Account
Debit (INR) Credit (INR)
Opening Balance
20,000		 Rent Paid
10,000
Cash Sales
30,000		 Equipment Purchase
15,000
Total: 50,000 Total: 25,000
Balance c/d
25,000

Answer: Closing balance of Cash Account is INR 25,000 (Debit).

Example 4: Preparing a Trial Balance Medium
Prepare a trial balance from the following ledger balances as of 30th June 2024:
- Cash Account: Debit INR 25,000
- Purchase Account: Debit INR 50,000
- Supplier Account: Credit INR 50,000
- Sales Account: Credit INR 30,000
- Rent Expense: Debit INR 10,000

Step 1: List all accounts with their debit or credit balances.

Account Name Debit (INR) Credit (INR)
Cash Account 25,000
Purchase Account 50,000
Supplier Account 50,000
Sales Account 30,000
Rent Expense 10,000

Step 2: Calculate totals:

  • Total Debit = 25,000 + 50,000 + 10,000 = 85,000
  • Total Credit = 50,000 + 30,000 = 80,000

Step 3: Check equality:

Debit total (85,000) ≠ Credit total (80,000)

Since totals are not equal, there is an error that needs to be investigated.

Answer: Trial balance is not balanced; further error checking is required.

Example 5: Rectifying an Error Detected in Trial Balance Hard
During trial balance preparation, it was found that a debit entry of INR 5,000 to the Rent Expense account was mistakenly recorded as a credit. Show how to identify and correct this error.

Step 1: Understand the error:

The Rent Expense account should have been debited by INR 5,000 but was credited instead. This means:

  • Debit side is understated by INR 5,000
  • Credit side is overstated by INR 5,000

Step 2: Effect on trial balance:

This error causes the trial balance to be out of balance by INR 10,000 (5,000 missing debit + 5,000 extra credit).

Step 3: Rectification entry:

To correct, debit Rent Expense account by INR 5,000 and credit the account which was wrongly credited (or Suspense Account if unknown) by INR 5,000.

Journal entry for rectification:

Date Particulars L.F. Debit (INR) Credit (INR)
30-06-2024 Rent Expense Dr.
    To Suspense Account		 40 / 50 5,000 5,000

Step 4: Post rectification to ledger accounts and prepare trial balance again.

Answer: The error is corrected by reversing the wrong credit and recording the correct debit, restoring the trial balance equality.

Tips & Tricks

Tip: Always remember "Debit the receiver, Credit the giver" for personal accounts.

When to use: When recording transactions involving persons or entities.

Tip: Use the Golden Rules of Accounting to quickly decide debit and credit entries.

When to use: While making journal entries to avoid confusion.

Tip: Cross-check totals after posting to ledger to ensure accuracy before preparing trial balance.

When to use: After ledger posting and before trial balance preparation.

Tip: Use mnemonic devices like DEAD CLIC (Debit Expenses, Assets, Drawings; Credit Liabilities, Income, Capital) to remember account types.

When to use: When classifying accounts for journal entries.

Tip: Always write the ledger folio number in the journal and vice versa to track postings easily.

When to use: During journalizing and ledger posting for better referencing.

Common Mistakes to Avoid

❌ Recording only one side of the transaction (either debit or credit).
✓ Always record both debit and credit entries for every transaction.
Why: Students often forget the dual aspect, leading to imbalance.
❌ Confusing debit and credit sides in ledger accounts.
✓ Remember the nature of accounts and apply the golden rules to assign debit and credit correctly.
Why: Misunderstanding account types causes incorrect postings.
❌ Not balancing ledger accounts before preparing trial balance.
✓ Always calculate the balance of each ledger account to ensure accurate trial balance totals.
Why: Unbalanced ledger accounts lead to errors in trial balance.
❌ Ignoring the ledger folio column while posting.
✓ Fill in ledger folio numbers in journal and ledger to maintain cross-referencing.
Why: Omitting folio numbers causes difficulty in tracking entries.
❌ Mixing up personal, real, and nominal accounts when applying debit and credit rules.
✓ Classify accounts correctly before applying debit and credit rules.
Why: Misclassification leads to wrong entries and confusion.

Formula Bank

Accounting Equation
\[ \text{Assets} = \text{Liabilities} + \text{Owner's Equity} \]
where: Assets = Resources owned; Liabilities = Obligations owed; Owner's Equity = Owner's claim on assets
Key Concept

Double Entry System & Accounting Cycle

Every transaction affects two accounts with equal debit and credit amounts, ensuring the accounting equation stays balanced. Transactions are first recorded in the journal, then posted to ledger accounts, and finally summarized in the trial balance to verify accuracy.

Curated videos per subtopic
Top YouTube explainers, AI-ranked for your exam and language. Unlocks with subscription.
Unlock

Try Practice next.

Progress tracking is paywalled — subscribe to mark subtopics as understood and save your streak.

Go to practice →
Ask a doubt
Double entry system journal ledger · 10 free messages
Ask me anything about this subtopic. You have 10 free messages this session — chat history isn't saved in preview.