A Summary Of Book-Keeping To The Trial Balance

A Summary Of Book-Keeping To The Trial Balance

The book-keeping upto the Trail Balance involves the following five stages, (the summary of which is given below)

Stage 1

Transactions With Organic Documents:

Every business transaction that takes place, whether it is a purchase, a sale, a return, a payment, a receipt, or some other type of transaction, has an 'Original Document'. These documents are called Invoices, Credit Notes, Payment Voucher, Receipts or Petty Cash vouchers. Transactions are recorded on the basis of these documents.

Stage 2

The  Original Entry:

When we have a document we first record it in a Book of Original Entry.These books may be special Journals (subsidiary Books i.e. Purchases Book, Sales Books, Returns Inwards Book, Return Outward Books, Cash Books, like the three column book or the Petty Cash ) or Journal Proper. We may also have Bill Books(Bill Receivable Book and Bill Payable Book) to record Bill of Exchange. In these books, all business transactions are originally recorded with the help of original documents.

Stage 3

Posting The Books Of Original Entry:

When we have recorded the transaction in the special journal and Journal Proper with the help of the original documents, we then post the transaction into the Ledger, which is the main book of account. Every transaction will appear twice, because one account will be debited and another will be credited. Equal debit will be made one account and equal credit entry will be made in some other account. Hundreds even thousand and one accounts may be involved, but if we do our double entry carefully the total entries on the debit side will exactly balance the total entries on the credit side. This is the way we check the books of accounts, by taking out a Trial Balance.

Stage 4

Taking Out trial Balance:

This is the what is name indicates, an attempt to discover whether the books of accounts really do balance. If they do not, we know that someone has made a mistake somewhere, and we must discover and rectify it.

     We usually make a Trial Balance at least once a month, bringing all the debit balances into a list of debit a balances, and all the credit balances into a list of credit balances. These two columns of balances or list of balances should come exactly equal, and we may conclude that we have done our Book-Keeping fairly well.

      Book-Keeping to the Trial Balance level is the first stage of accounting knowledge. The second and rather more difficult, stage of book-keeping is called "Final Accounts Level". This is explained in further three stages.

Stage 5 (a) 

Final Accounts - The Trading Account:

We are now in a very good position to find out whether our business is profitable or running at a loss. For this purpose we prepare a simple Trading Account. The Trading Account shows whether we are selling our goods or services at profit. In this account, we make a comparison between our sales and purchases including other direct expenses. We take our sales figures fro our Purchase Account the Trial Balance. After taking into consideration some other items like opening stock, closing stock and direct expanses (the expenses connected with purchases) we find out the cost of goods sold. Then sales minus cost of goods sold gives us overall profit - which is called in book-keeping the "Gross Profit". 

        Gross Profit =  sales - cost of goods sold

Stage 5 (b)

Final Accounts -The Profit and Loss Account:

In this second half of our Final Account we start with the Gross Profit, resulting from Trading Account, and deducts from it all overhead expenses (Indirect expenses). We add some items of revenue which are not part of the normal trading, such as commision received, interest received etc. to the Gross Profit. This gives us the clear profit or clean profit which is called in book-keeping "Net Profit". This net profit is the reward of the businessman for his efforts, and is added to his Capital Account.

Stage 5 (c)

Final Account - The Balance Sheet:

We have discussed in stage 5a and 5b that Trading Account and Profit and Loss Account are prepared by making a comparison between Revenues and expenses and the result it profit or loss. The profit is added to the owner's Capital Account (or perhaps loss which is deducted from owner's Capital Account). Now all we need to do is to summarize the final position of the business by drawing up a "Balance Sheet" which shows the assets and liabilities of the business. Balance sheet is a statement having two sides, the Assets side and the Liabilities side. It is usually prepared on the last day of the accounting period and this is the stage where Accounting cycle comes to an end.

     We have discussed the general pattern of the double entry book-keeping up-to the completion of accounting cycle.