What Are Journal, Ledger, and Trial Balance in Accounting?

The accounting cycle is the process accountants follow to record, classify, and summarise financial transactions. It ensures accuracy and consistency when preparing financial statements. The accounting cycle turns everyday business transactions into understandable and trustworthy financial reports.

Here are the accounting cycle steps you must know:

1. Identifying Transactions – Recognising every financial activity.
2. Journal Entries – Recording transactions chronologically.
3. Posting to Ledger – Sorting the data into accounts.
4. Trial Balance Preparation – Checking if debit = credit.
5. Adjustments – Accounting for accruals and deferrals.
6. Adjusted Trial Balance – Double-check before final statements.
7. Financial Statements – Creating balance sheets, P&Ls, etc.
8. Closing the Books – Resetting for the next cycle.

RELATIONSHIP BETWEEN JOURNAL, LEDGER, AND TRIAL BALANCE

The journal, ledger, and trial balance are all integral parts of the accounting cycle. Here's how they relate

JOURNAL

This is the first step in the accounting cycle. Each transaction is recorded with the date, account affected, amount, and a brief description. This is often called the book of original entries. All business transactions are initially recorded using the double-entry accounting method.

LEDGER

After recording everything in the journal, you transfer the entries to the ledger—this step is generally called posting. In the ledger, you group all related entries. This helps you track balances easily. It is also known as the principal book of accounts

TRIAL BALANCE

A Trial Balance is a statement that reports the final debit or credit balances of all ledger accounts in an organisation. It's prepared to check the mathematical accuracy of the ledger. The total debits should equal the total credits. A company prepares their Trial Balance at the end of the financial year. It is used to prepare financial statements like the Balance Sheet and the Profit & Loss Account. It helps to ascertain the mathematical accuracy of the financial transactions recorded in the ledger accounts of a business.

WHAT IS A JOURNAL IN ACCOUNTING?

• A journal is a detailed record of all transactions done by a business, used to reconcile accounts.
• Entries are usually recorded using a double-entry method.
• Entries identify the account affected with a debit or credit—the totals of which must be equal.
• Single-entry bookkeeping is rarely used.

TYPES OF JOURNAL ENTRIES

The following are the key journal entries that are used in accounting, all of which highlight a company's health and well-being.

• Opening entry: This entry carries over the closing balance from the previous accounting period and becomes the opening balance.
• Adjusting entry: This entry adjusts any errors or makes changes to any entries that weren't previously accounted for, and are inputted into the general ledger at the end of the accounting period.
• Reversing entry: This type of entry is done at the beginning of the accounting period and makes adjustments to adjusting entries made in the last period.
• Compound entry: A compound entry documents multiple transactions with debits and credits. The rule of thumb is that the debit column must equal the credit column.

HOW JOURNAL ENTRIES ARE RECORDED: RULES AND STRUCTURE

Different elements are included while recording a transaction using the journal entry method. They are as follows:

• A journal entry requires a reference number that is used to index as well as retrieve the entry whenever required. This number is unique for each transaction.
• A header denoting the date of the transaction.
• The particulars, or account column, comprises account names with which the transaction occurred.
• Two columns for debit and credit amounts. The debit column shows the account from which the money has been paid, and the credit column shows to which account the money has been paid. 
• An explanation of the journal entry. You must give a short but proper description of the transaction entry so that it can be referred back and understood properly if required in future.

Journal Entries Rules

While recording your financial transactions using the journal entry process following rules need to be followed:

• Personal Account
• The personal account belongs to an individual, organisation or company.
• Rule: debit the receiver and credit the giver 
• Nominal Account
• This account is related to incomes, gains, losses and expenses. 
• Rule: For all expenses and losses, you need to debit the amount, and for all gains and income, credit the amount.
• Real Account
• This account mainly deals with intangible and tangible assets, including plant and machinery, furniture, bank and cash accounts. 
• Rule: the value that comes into the business is entered in the debit column, and the one going out is entered in the credit column.

WHAT IS LEDGER?

• A ledger in accounting refers to a book that contains different accounts where records of transactions about a specific account are stored. 
• It is also known as the book of final entry or the principal book of accounts. 
• Transactions are recorded in the ledger in different accounts as debits and credits
• A ledger contains summarized information from the journals and is recorded as debits and credits.
• The ledger is used to prepare financial statements and contains a list of all the accounts, referred to as the chart of accounts, that are active.
• The ledger is impacted by normal business activity and can be documented by hand or electronic record.

TYPES OF LEDGER

• There are primarily two types of ledgers: the general ledger and subsidiary ledgers.
• As the top-level accounting ledger, a general ledger consolidates and summarizes data from subsidiary ledgers (lower-level accounting ledgers). Subsidiary ledgers provide detailed information about specific types of transactions, such as accounts receivable or accounts payable.

GENERAL LEDGER

• The general ledger is the foundation of a company’s accounting system. 
• It contains summary details of all the accounts used to record transactions relating to the company’s assets, liabilities, equity, revenue, and expenses. 
• Every financial transaction flows from the journal to the general ledger. 
• The general ledger provides a complete record of financial transactions over the life of the company and is used to prepare the primary financial statements: the balance sheet, income statement, and cash flow statement.
• Here are the primary general ledger accounts:
• Asset accounts, such as cash, accounts receivable, fixed assets, etc
• Liability accounts, such as debt, accounts payable, notes payable, etc
• Stockholders’ equity accounts
• Revenue accounts
• Expense accounts
• Revenue and loss accounts, such as interest, investment and disposal of an asset

SUBSIDIARY LEDGER

• Subsidiary ledgers, also known as subledgers or subaccounts, are lower-level accounting ledgers containing the details that support a general ledger control account. 
• For instance, if the general ledger has an account receivable control account, the subsidiary ledger for accounts receivable would list individual transactions with customers.
• Subsidiary ledgers help in tracking detailed information about specific accounts, making it easier to review and manage them without cluttering the general ledger with too much detail.

HOW TRANSACTIONS MOVE FROM JOURNAL TO LEDGER?

The process of transferring entries from a journal to the respective ledger accounts is known as ledger posting. For this process, first, the entries are recorded in journals and then transferred to their respective ledger accounts.

WHAT IS TRIAL BALANCE?

• A trial balance refers to a part of a financial statement that records the final balances of the ledger accounts of a company. 
• This statement comprises two columns: debit and credit. 
• An organisation prepares a trial balance at the end of the accounting year to ensure all entries in the bookkeeping system are accurate.
• A trial balance ensures that the total debits equal the total credits in a company's accounting system, serving as a checkpoint for mathematical accuracy.
• The term 'Trial Balance' is derived from the perspective that it acts as a test for fundamental entries in the bookkeeping, but does not perform a full audit. 
• It is the first step in checking or auditing business finances, as it helps accountants to be sure that no mathematical error happens before proceeding with other complex financial statements.
• While balanced debits and credits indicate no arithmetic errors, a trial balance cannot detect improperly classified or missing transactions.

HOW TO PREPARE TRIAL BALANCE STEP BY STEP

Here is the process to prepare trial balances in your business:

• Firstly, close all general ledger accounts to get their closing balance at the end of the financial year.
• Prepare the worksheet of the trial balance as per the format. It must comprise the columns of account names and debit and credit amounts.
• Fill in the trial balance worksheet as per the balances of the accounts. Any assets or expenses of the business are considered in the debit column, and any revenue or business liabilities are recorded in the credit column.
• Add values accurately in each column.
• Lastly, close the trial balance worksheet. 
• If the total amount of debit balance matches the total credit balance, then the recordings in the trial balance have been done accurately. 
• Differences in totals suggest either a mathematical error or an input error in the balances.

While preparing a trial balance, there is a set of rules you need to follow. They are as follows:

• Assets of the business must be put down in the debit column.
• All business expenses must be written down in the debit amount column.
• Every liability of the company must be recorded in the credit column.
• All revenue and business gains will be recorded in the credit column.

COMMON ERRORS FOUND IN TRIAL BALANCE AND HOW THEY OCCUR

Errors in the Trial Balance are mistakes made during the accounting process that cannot always be detected by the trial balance. These errors are classified under two heads:

1. Errors disclosed by a trial balance: If the trial balance does not tally, it shows that the accountant has committed certain mistakes while recording the transactions. 

2. Errors not disclosed by a trial balance: The agreement of the trial balance does not always necessarily show an accuracy check. There may be several errors that cannot be disclosed by the trial balance, as the debit and credit side shows equal value. Such errors are known as limitations of the Trial Balance.

TYPES OF ERRORS NOT DISCLOSED BY A TRIAL BALANCE:

1. Errors of Omission: 

Errors of Omission occur when a transaction is fully skipped. This means that the transaction has not been recorded either in the Journal or in Subsidiary Books. Under such a situation, the agreement of trial balance remains unaffected, as the transaction has neither been entered in the debit side nor the credit side of any account.

2. Errors of Commission:

Errors of Commission occur when a wrong amount has been recorded either in the Journal or in Subsidiary Books. The trial balance, despite such errors, still continues to tally because the same wrong amount has been recorded on both sides of the accounts.

3. Errors of Principle: 

Errors of Principle occur when Accounting Principles are not applied or are violated while recording a transaction. These errors are of two types:

• When capital expenditure is treated as revenue expenditure.
• When a revenue expenditure is treated as capital expenditure.

4. Compensating Errors: 

When the wrong amount is posted in one account is compensated by the wrong posting of the same amount in another account is called Compensating Errors.

WHY JOURNAL, LEDGER, AND TRIAL BALANCE MATTER IN FINANCIAL REPORTING?

The journal, ledger, and trial balance are crucial for financial reporting. They ensure accuracy, completeness and reliability of financial data. They provide a systematic process for recording, organizing, and verifying financial transactions, which forms the foundation for accurate financial statements. The journal records transactions chronologically, the ledger classifies and summarizes them into accounts, and the trial balance verifies the mathematical accuracy of the ledger to ensure debits equal credits, making the process reliable and error-checked. 

These three components form the foundation of financial reporting, facilitating compliance, decision-making, and business growth.