Journal Entry to Final Balance Sheet

Finance | March 12, 2013 at 12:10 am


Even through the entire accounting system is now totally IT based, the basics followed are the same.  Many accounting packages have come out with sophisticated features to manage the entire financial accounts of a company.  Accounting packages like Tally, or any other software is designed with basic accounting principles of debit and credit, journal entry, ledger posting, and final profit and loss account and balance sheet.

Journal EntriesFinancial accounting and other finance details start with the initial journal entries which follow the common rule of debit and credit where receiver account is debited and outgoing account is credited.  For example if you make a credit purchase from a trader, the purchase account is debited and the party’s account is credited.  After purchase, the process of production takes place and then you sell the product.  This time, the customer’s account is debited and your sales account is credited as the product is going out.

When you make payment by check to the party, the party account in journal books this time is debited and your bank account is credited.  While, when you receive payment from the customer for the sales, your bank account is debited and the customer’s account is credited as the customer is giving out the payment.

Balance Sheet FinancingOnce the journal entry is made, the ledgers of respective accounts are updated with the relevant debits and credits.  In above case purchase account shows a debit balance, sales account shows a credit balance, in your profit and loss account.  The balance in your party’s account is the amount payable to them which is normally a credit balance.  The balance reflecting in your customer’s account reflects amount receivable from your client which is normally a debit balance.

Once the ledger books are prepared, the effect is reflected in trading, profit and loss account and balance sheets too.

Subsequently, all the bank, cash, and income and expenses accounts are also updated automatically and you can take reports as and when you want to for any period of time.

Finally, the profit and loss account reflects whether the company is making a profit or running a loss.

The balance sheet finally shows all the assets, and liabilities.  The assets are mainly your office premises, furniture, vehicles, and bank accounts.  Your liabilities are mainly your outstanding payments at the end of financial year.

Accounting software incorporates all these fundamental principles and gives you a total accounting solution for your business.

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