Books of Accounts

Books of Accounts

In accounting there are only two main books of accounts i.e. Journal and Ledger. In this article these books of accounts have been explained in details. Books of accounts are used to record the financial transactions. 

It is important to note that trial balance & financial statement are reports generated from the books of accounts and thus not part form of books of accounts. However, we have also explained these reports in this article.

Manual & Computerized Books of Accounts

In manual system, Books of accounts are maintained manually by accountant, While in computerized environment books of accounts are automatically maintained or updated by accounting software. In computerized environment books of accounts are automatically updated by accounting software . In computerized environment   Accountant works is only to enter accurate amount in accurate heads of accounts and remaining tasks are performed by the accounting software.

1.   General Journal:

In first place the transactions are recorded in the General Journal. In Journal transactions are recorded in chronological order (Date wise). Transactions are recorded with the help of debit & credit rules. There are two basic rules for double entry system i.e. Every transaction  have two aspects i.e. (Debit & Credit) and debit aspect is always equal to credit aspect. Some important characteristics of General journal are listed below

1.    Journal is a primary book or book of original entry.

2.    Two aspects of a transaction is recorded i.e. Debit & Credit.

3.    Entries are recorded in chronological order.

4.   Special journal are used for high volume of transactions in large organizations. 

Special journal have been explained in my other article.

2.   General Ledger:

A register or book which contains all accounts is known as General Ledger. It is important note that, when there is no special journal, then all account are maintained in General ledger, and there is no need of total account.

However, when special journal are maintained, then individual account of creditor and customer are not part of general ledger, instead the total accounts for debtors and creditor, purchases, sales are maintained and individual accounts of debtor and creditors are maintained as memorandum account.

3.   Trial Balance:

Closing balance of General ledger is extracted in the form of trial balance. Trial  balance being a report can be extracted any time from the general ledger . Trial balance provides a foundation for the preparation of financial statement. It is to be noted that trial balance extracted from General ledger may require some adjustment for doubtful debt, prepaid expenses, accruals , depreciation and accounts are prepared from the adjusted trial balance.

1.    Trial balance extracted from General Ledger.

2.    Trial balance is summary of closing balances of General Ledger.

3.    Trial balance is a report, which is extracted from General Ledger.

4.    Trial balance may required  adjustment  (Depreciation ,accruals etc)
5.  Financial statements are prepared from adjusted trial balance.

4.   Financial Statements:

Financial statement is prepared from the trial balance extracted from the General ledger. Like trial balance, financial statements are also reports and can be prepared any time; however, financial statement are prepared at least once in the financial year. Financial statements contain statement of financial position, statement of comprehensive income, statement of cash flows, and statement of changes in equity and notes to the financial statements.