Preparation of accounts is an important task for any business in Pakistan. Here’s how a teacher would explain the process:
- Record transactions: Keep a record of all financial transactions of the business, including sales, purchases, payments, and receipts. This can be done manually in a ledger book or using accounting software.
- Classify transactions: Classify the transactions recorded into different categories, such as income, expenses, assets, liabilities, etc. This helps in preparing the financial statements of the business.
- Journalize transactions: Transfer the classified transactions into the journal, which is a chronological record of financial transactions. This helps to maintain a clear and organized record of transactions.
- Post transactions to ledger accounts: After journalizing the transactions, post them to the relevant ledger accounts. A ledger account is a record of all transactions of a specific type, such as cash, accounts receivable, etc.
- Prepare trial balance: A trial balance is a statement that lists the total of all debit and credit balances in the ledger. This statement is prepared to check if the debit and credit balances are equal, indicating that the ledger accounts are balanced.
Example: Suppose a business has recorded the following transactions in January:
- Sold goods worth PKR 50,000 to a customer on credit
- Purchased goods worth PKR 30,000 on credit from a supplier
- Paid PKR 10,000 in rent
- Received PKR 15,000 as cash from a customer
To prepare the accounts, we would first classify these transactions:
- Sales (income) – PKR 50,000
- Purchases (expense) – PKR 30,000
- Rent (expense) – PKR 10,000
- Cash received (income) – PKR 15,000
Next, we would journalize these transactions:
Debit Credit
Accounts Receivable PKR 50,000 Sales PKR 50,000
Debit Credit
Purchases PKR 30,000 Accounts Payable PKR 30,000
Debit Credit
Rent Expense PKR 10,000 Cash PKR 10,000
Debit Credit
Cash PKR 15,000 Accounts Receivable PKR 15,000
Finally, we would post these transactions to the relevant ledger accounts and prepare a trial balance.
A trial balance is a statement that lists the total of all debit and credit balances in the ledger accounts. Here’s how a teacher would explain the process of preparing a trial balance:
- List all ledger accounts: Make a list of all ledger accounts, including asset accounts (such as cash, accounts receivable, etc.), liability accounts (such as accounts payable, loans, etc.), income accounts (such as sales, rental income, etc.), and expense accounts (such as rent, utilities, etc.).
- Total debit balances: Total all debit balances for each ledger account and record the totals in the trial balance.
- Total credit balances: Total all credit balances for each ledger account and record the totals in the trial balance.
- Compare totals: Compare the total of all debit balances with the total of all credit balances. If the totals are equal, it indicates that the ledger accounts are balanced, and no errors have been made in recording transactions.
Example: Suppose a business has the following ledger accounts:
Ledger Account Debit Balance Credit Balance
Cash PKR 10,000 PKR 0
Accounts Receivable PKR 20,000 PKR 15,000
Rent Expense PKR 5,000 PKR 5,000
To prepare a trial balance, we would list the above ledger accounts and calculate the total of all debit and credit balances:
Ledger Account Debit Balance Credit Balance
Cash PKR 10,000 PKR 0
Accounts Receivable PKR 20,000 PKR 15,000
Rent Expense PKR 5,000 PKR 5,000
Total PKR 35,000 PKR 20,000
As we can see, the total of all debit balances (PKR 35,000) is equal to the total of all credit balances (PKR 20,000), indicating that the ledger accounts are balanced, and no errors have been made in recording transactions.
It is important to prepare a trial balance regularly, as it helps to detect any errors or discrepancies in the ledger accounts and ensures that the financial statements prepared from the ledger accounts are accurate.