Accounting Process for CA Foundation
How transactions travel from a source document to the journal, the ledger and the trial balance, and how errors are found and corrected.
AccountingPaper 114 MCQs2 lessons2 flashcards3 memory tricks
Practise Accounting Process free
What you'll learn
- Journal, ledger and the golden rules
Pass journal entries using the golden rules and post them to the ledger. - Subsidiary books, trial balance and errors
Choose the right book of original entry, and classify and rectify errors.
Concepts explained
Golden rules of debit and credit
Every transaction has a debit and an equal credit. The golden rules decide which account is debited and which is credited, based on the type of account.
What it means
- Personal accounts (people, firms, banks, capital): debit the receiver, credit the giver.
- Real accounts (assets): debit what comes in, credit what goes out.
- Nominal accounts (expenses, losses, incomes, gains): debit expenses and losses, credit incomes and gains.
- Accounting equation view: assets and expenses rise on the debit side; liabilities, capital and incomes rise on the credit side.
- Owner takes goods costing ₹5,000
- Drawings (personal, owner receives) Dr; Purchases Cr
Answer: Drawings A/c Dr 5,000; To Purchases A/c 5,000
- ₹1,000 commission received in cash
- Cash comes in (real, Dr); commission is income (nominal, Cr)
Answer: Cash A/c Dr 1,000; To Commission A/c 1,000
Related terms
- Compound entry: more than one debit or credit in one entry
- Narration: short explanation written below each journal entry
Exam tip: Classify the account first (personal, real or nominal), then apply its rule.
Trial balance, errors and suspense account
A trial balance lists all ledger balances; equal totals show arithmetical accuracy but not the absence of errors. Errors are classified and rectified with journal entries.
What it means
- Errors not affecting the trial balance: complete omission, commission (same side, same amount), principle, compensating.
- Errors affecting it: one-sided posting, wrong side, wrong amount in one account, wrong totalling or balancing.
- A difference is parked in a suspense account until found.
- Rectify one-sided errors through the suspense account; two-sided errors without it.
- ₹300 discount allowed posted to the credit of Discount A/c
- Should be debit; correct with double the amount
Answer: Discount A/c Dr 600; To Suspense A/c 600
- Furniture ₹10,000 debited to Purchases
- Two-sided error: no suspense
Answer: Furniture A/c Dr 10,000; To Purchases A/c 10,000
Related terms
- Casting: totalling a book or account
- Posting: transferring entries from the journal to the ledger
Exam tip: Ask 'has only one side gone wrong?' If yes, the suspense account is involved.
Subsidiary books and the cash book
Similar transactions are recorded in special books of original entry; whatever doesn't fit goes in the journal proper.
What it means
- Purchases book: credit purchases of goods for resale. Sales book: credit sales of goods.
- Returns outward (to suppliers, with a debit note) and returns inward (from customers, with a credit note).
- Cash book: both journal and ledger; a double-column cash book has cash and bank columns, with contra entries marked C.
- Trade discount is deducted on the invoice and not recorded; cash discount is recorded.
- Credit purchase of a computer for office use
Answer: Journal proper (it's an asset, not goods for resale)
- ₹10,000 withdrawn from bank for office use
Answer: Cash column Dr, bank column Cr: a contra entry
Related terms
- Petty cash book: small payments under the imprest system
- Ledger folio (L.F.): page number of the ledger account posted to
Exam tip: Purchases and sales books only take goods and only credit transactions.
Memory tricks
Personal: debit receiver, credit giver; Real: debit what comes in, credit what goes out; Nominal: debit expenses/losses, credit incomes/gains.
Complete omission, commission, principle and compensating errors don't affect the trial balance.
Purchases book = credit purchases of goods for resale only.
Try 3 CA Foundation-style questions
Q1. Which discount is NOT recorded in the books of account?
- Cash discount allowed
- Trade discount
- Cash discount received
- Discount on issue of debentures
Show answer
Answer: (2) Trade discount
Trade discount is deducted from the list price on the invoice itself; only the net amount is recorded.
Q2. The capital account normally shows a
- debit balance
- nil balance
- credit balance
- either balance, at random
Show answer
Answer: (3) credit balance
Capital is the amount owed by the business to its owner, a liability-like balance on the credit side.
Q3. A credit sale of ₹500 to Mohan was posted to Sohan's account. This is
- an error of principle
- an error of omission
- a compensating error
- an error of commission
Show answer
Answer: (4) an error of commission
The amount and side are right but the wrong personal account was used: an error of commission. It doesn't affect the trial balance.
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