Accounting Basics: Journal, Ledger and Trial Balance Notes for SSC

Accounting is the language of business, and it forms the first part of the SSC CGL Tier 2 Finance and Economics paper for the Assistant Audit Officer post. Questions are asked on the golden rules, the journal entries, the ledger, the trial balance and depreciation. These accounting basics notes for SSC explain the whole cycle from journal to final accounts in simple language with solved examples.

What Is Accounting?

• Accounting means recording, classifying, summarising and interpreting the financial transactions of a business.
• Luca Pacioli of Italy is called the father of accounting, and he explained the double-entry system in 1494.
• In the double-entry system, every transaction has two effects: a debit and a credit of the same amount.

Accounting Equation

Types of Accounts and Golden Rules

Accounting Cycle

1. Journal: first record of every transaction in date order.
2. Ledger: accounts are prepared from the journal by posting.
3. Trial balance: a list of all the ledger balances to check the arithmetic accuracy.
4. Final accounts: Trading Account, Profit and Loss Account and Balance Sheet.

Journal Entry Examples

Trial Balance

• The total of the debit balances must equal the total of the credit balances.
• A trial balance proves only the arithmetic accuracy; some errors, such as an entry missed completely, are not shown by it.
• Assets and expenses have debit balances, while liabilities, capital and incomes have credit balances.

Final Accounts

Depreciation

Depreciation is the fall in the value of a fixed asset because of use, passage of time or becoming old.

Example. A machine costs Rs 1,00,000, its scrap value is Rs 10,000 and its useful life is 5 years. Yearly depreciation under SLM = (1,00,000 − 10,000) / 5 = Rs 18,000.

Basic Accounting Concepts

• Business entity: the business and its owner are treated as different.
• Going concern: the business will continue for a long time.
• Accrual: income and expenses are recorded when they are earned or incurred, not when cash moves.
• Prudence (conservatism): do not record expected profits, but record expected losses.
• Consistency: use the same accounting methods from year to year.

Quick Tips

• Identify the type of account first and then apply the golden rule.
• Remember that "Dr" and "Cr" are written in the journal with "To" for the credited account.
• Use the accounting equation to check the balance sheet questions.
• Learn the SLM formula, because depreciation numericals are common.

Quick Revision Points

• Assets = Liabilities + Capital.
• Personal account: debit the receiver, credit the giver.
• Real account: debit what comes in, credit what goes out.
• Nominal account: debit expenses and losses, credit incomes and gains.
• A trial balance shows the arithmetic accuracy of the books.

Practice Questions With Answers

1. Who is called the father of accounting?
   Answer: Luca Pacioli
2. What is the accounting equation?
   Answer: Assets = Liabilities + Capital
3. Which rule applies to a personal account?
   Answer: Debit the receiver, credit the giver
4. Salary paid is which type of account?
   Answer: Nominal account
5. A machine costs Rs 60,000, scrap value Rs 6,000, life 6 years. Find SLM depreciation.
   Answer: Rs 9,000 per year
6. If assets are Rs 5,00,000 and liabilities are Rs 2,00,000, find the capital.
   Answer: Rs 3,00,000
7. What is the first book where a transaction is recorded?
   Answer: Journal
8. What does a trial balance prove?
   Answer: The arithmetic accuracy of the books
9. Which account shows the gross profit?
   Answer: Trading Account
10. Which statement shows the financial position of a business?
    Answer: Balance Sheet

How to Practise This Chapter

Practise five journal entries daily and then prepare a small trial balance. Solve timed sets from our practice papers and the previous year papers page. Read the next chapter, Inflation: Types, Causes and Effects, and see all topics on the Finance and Economics notes page. For the economy side, study the Indian Economy notes.

Frequently Asked Questions

What is accounting?

Accounting is the process of recording, classifying and summarising the financial transactions of a business and reporting the results.

What is the double-entry system?

In the double-entry system every transaction is recorded twice, once as a debit and once as a credit of the same amount.

What are the golden rules of accounting?

For a personal account, debit the receiver and credit the giver. For a real account, debit what comes in and credit what goes out. For a nominal account, debit expenses and losses and credit incomes and gains.

What is a journal?

A journal is the book where every transaction is first recorded in the order of dates, with the debit and credit accounts.

What is a ledger?

A ledger is a book of accounts in which all the entries of the journal are posted account-wise.

What is a trial balance?

A trial balance is a list of all ledger balances. If the total of debit and credit sides agree, the books are arithmetically correct.

What are final accounts?

Final accounts are the Trading Account, the Profit and Loss Account and the Balance Sheet, prepared at the end of the year.

What is depreciation?

Depreciation is the reduction in the value of a fixed asset because of use, time or old age.

What is the difference between SLM and WDV methods?

In SLM the depreciation is the same every year. In the WDV method it is charged on the reducing book value, so it falls every year.

What is the accounting equation?

It is Assets = Liabilities + Capital, and it is the base of the double-entry system.

How should I prepare accounting for the AAO paper?

Learn the rules and the equation, practise journal entries and trial balance questions daily, and revise the final accounts format.

How many questions come from accounting in SSC exams?

Finance and Accounts is one of the two parts of the Finance and Economics paper, so check the latest SSC notification for the exact number of questions.