All around the world, this is the standard procedure for maintaining financial records.
In the method of accounting known as double entry, each transaction is recorded with a debit entry and a credit entry in equal measure. When just two accounts are impacted, the total amounts of the debit and credit transactions will cancel each other out. When more than two accounts are affected, the total number of debit entries and the total number of credit entries have to be equal to one another.
All debits and credits must balance for each journal entry.
Ledger
Journal entries are used to record transactions that occur within an organization, and the ledger is where this information is processed and stored. When you do this, you'll have a crucial financial archive for whenever you need it. Its primary function is in the preparation of financial statements.
The entries are utilized in the process of developing the trial balance, income statement, and balance sheet for a corporation. This secondary book of accounts is broken down into its respective sections, which include equity, assets, liabilities, revenue, and expenses. Therefore, the second book of entry presents in an orderly fashion all of the transactional information that is connected to a certain account.
In accounting, journal entries are recorded in chronological order in the ledger. These entries come from various accounts. It is kept in a format denoted by the letter T. At the end of the accounting period, it reveals whether the closing amount is in the form of a debit or a credit.
Ledgers include important data. Date, Particulars, Reference Number, and Amount are the four columns that may be found in the second book of the entry. There are four columns on the debit side and four columns on the credit side.
Common characteristics shared by many accounting ledgers and vouchers
- Purchase: Entries having Purchase A/c Debited like Purchase A/c Dr. To Party Purchase A/c Dr To Cash
- Sales: Entries having Sales Account Credited like Party Dr To Sales Cash Dr To Sales
- Receipt: When Cash or bank is Debited like Bank Dr To Party Cash Dr To Party
- Payment: When Cash or bank is Credited like Party Dr To Bank Party Dr To Cash
- Contra: When both Cash and bank are Debited and Credited like Bank Dr . To Cash/ Cash Dr To Bank. Bank 1 Dr To Bank 2
- Journal : When there is no Purchase/Sales/Bank/Cash like Exp Dr To Party.Asset Dr To Income.Party Dr To Income Etc..
| Assets and Expenses | |
|---|---|
| Dr. | Cr. |
| + | - |
| Increases | Decreases |
| Liabilities, Capital & Income | |
| Dr. | Cr. |
| - | + |
| Decreases | Increase |
Basis of Accounting
There is an additional accounting base to take into consideration. Deferral Accounting is a type of accounting.
| Sr No. | Type | Cash Basis Accounting | Accrual Basis Accounting |
|---|---|---|---|
| 1 | Meaning | This method only records transactions when there is money flow or money transfer between parties | Accounting method where the activity/ transactions are recorded & when happen |
| 1 | Revenue Recognition | When Revenue is received | When Revenue is earned |
| 2 | Expense Recognition | When Expenses get paid | When Expenses get Billed |
| 3 | Recording of Transactions | Cash transactions are recorded | Both cash and credit transactions are recorded |
| 4 | Beneficial | Beneficial in terms of tracking how much cash the business actually has at any given time | Gives a more realistic idea of income and expenses during a period of time, therefore providing a long-term picture of the business that cash accounting can't provide |
| 5 | No. of Accounts Maintained | 1. Cash A/c 2. Nominal A/c | 1. Accounts Receivables or Accounts Payables A/c 2. Nominal A/c 2. Cash A/c |
| 6 | Credit Account | No accounts receivable, or accounts payable | Includes receivables and payables |
| 7 | Taxation | Not paid for cash that hasn't been received | Paid on money still owed |
| 8 | Profit or Loss | Correct profit or loss is not ascertained because it records only cash transactions | Correct profit or loss is ascertained because it records both cash and credit transactions |
| 9 | Technical Knowledge | It does not require much technical knowledge as is required for the Accrual basis of Accounting | The Accrual basis of Accounting requires technical knowledge as many adjustments like prepaid, outstanding, capital, and revenue are required to be made. |
| 10 | Accuracy | Can exceed the financial wealth of a business | Provides accurate representation of the profitability |
| 11 | Easiness in use | Simple and straightforward, but isn’t as popular | A bit complex but more widely used |
| 12 | Used by | Small service based businesses, non-profit organizations | Public companies, corporations, and businesses filing audited financial statements. |
A deferral often refers to an amount that has been paid or received, but the amount cannot be shown on the current income statement since it will be an expense or revenue of a future accounting period.
Deferrals can be used in a variety of situations. In other words, the future amount is put into an account on the balance sheet where it will remain until a later accounting period, at which point it will be transferred to the income statement.
Difference between Accrual and Deferral
| Sr No. | Accrual | Deferral |
|---|---|---|
| 1 | Accruals are the items that occur before the actual payment and receipt | Deferral occurs after the payment or the receipt of revenue |
| 2 | Accrual Expenses are expenses that are incurred but are yet to be paid | Deferral Expenses are expenses that are paid, but yet to incur the expense |
| 3 | Accrual Revenue is revenue which is earned but yet not received | Deferral revenue is revenue that is received but yet not incurred |
| 4 | Eg: Accounts Payable and Accounts Receivable | Eg: Prepaid Expenses and unearned Revenues |
| 5 | There is no payment of cash in case of accrual | In case of deferral, there is an advance payment of cash |
| 6 | There is a decrease in cost and an increase in revenue | There is an increase in expense and a decrease in revenue |
| 7 | Eg: Goods/ Services received but not paid | Eg: cash received but goods/service not delivered/given, Prepaid Exp, Advance received from the customer |
Difference between Accrual Revenue and Deferral Revenue
| **Accrued Revenue ** | Deferred Revenue |
|---|---|
| Accrued Revenue (Dr) | Revenue (Dr) |
| Revenue A/c (Cr) | *Deferred Revenue (*Cr) |
| Accrued Expenses | Deferred Expenses |
| Expense (Dr) | Accrued Expense (Dr) |
| Accrued Expense (Cr) | Expense (Cr) |
General Rules
| Particulars | Now | Later |
|---|---|---|
| Accrued Expense | Expense is recognized | cash is paid |
| Accrued Revenue | Revenue is recognized | cash is received** |
| Deferred Expense | Cash is Paid | Expense is recognized |
| Deferred Revenue | Cash is received | Revenue is recognized |
Example
| Assets | Liabilities |
|---|---|
| Accrued Revenue | Accrued Expense |
| Interest on Investment | Salaries & wages Payable |
| Accounts Receivable | Interest Payable |
| ** ** | Accounts Payable |
| Deferred Expense | Deferred Revenue |
| The customer has used the service | The customer pays for the subscription |
| Prepaid Expense | Amazon, Flipkart, myntra and etc.. ( Ecommerce service ) |
