UNIT STRUCTURE1. Learning Objectives2. Introduction3. Meaning Books of Account4. Meaning of Journal5. Journalising6. Meaning of Ledger7. Ledger Posting8. Balancing Of an Account9. Meaning of Trial Balance10.Preparation of Trial Balance11.Errors Detected Through Trial Balance12.Let Us Sum Up13.Answers to Check Your Progress14.Possible Questions LEARNING OBJECTIVES After going through this unit you will be able to : Explain the meaning of Books of Account
Explain the meaning of „Journals‟ Journalise the transactions Explain the meaning of „Ledger‟ Prepare ledger INTRODUCTIONIn the earlier unit, we have discussed about account and the rules of debit and credit. We have discussed the doubleentry system of book- keeping. In this unit, we are going to discuss the steps of recording business transactionswhich starts with journal, then posting of transactions into ledger and preparation of Trial Balance from the ledgeraccounts. Meaning of Books of AccountsThe book, which contains accounts, is known as the Books of Accounts. In other words, it means the khataor books in which the businessman keeps the records of business transactions. Recording of transactions inbooks of account is a process of entering the transactions in the proper books of accounts in a systematicmanner. It means putting into black and white the transaction that takes place in course of businessactivities.Normally transactions are recorded in two sets of books step by step. Transactions are first recorded inJournal, which is also known as „book of original entry‟ or „Primary Books‟.. The next step of recording oftransactions is in Ledger, which is also known as „book of final entry‟ or „Secondary Books‟. These Books ofaccounts are specially printed and ruled books where the accounts of a firm can be written up.
Meaning of JournalThe word „Journal‟ has been derived from the French word „JOUR‟ means daily records. Journal is a book of originalentry in which transactions are recorded as and when they occur in chronological order (in order of date) from sourcedocuments. Recording in journal is made showing the accounts to be debited and credited in a systematic manner.Thus, the journal provides a date-wise record of all the transactions with details of the accounts and amounts debitedand credited for each transaction with a short explanation, which is known as narration.Firms having limited number of transactions record those in journal and from there post these to the concerned ledgeraccounts. Firms having large number of transactions, maintain some special purpose journals such as, PurchaseBook, Sales Books, Returns books, Bills Book, Cash Book, Journal proper etc.Format of Journal:The following is the format of Journal.Format of Journal Amount Date Particulars L.F Debit Credit Rs. Rs. (ii) (iii) (iv) (i)The format of Journal is sub-divided into five columns. These five columns are (i) Date (ii) Particulars (iii) Ledger Folio(L/F) (iv) Debit amount and Credit amount. Ledger Folio (L.F): Journal is the original record of the business transactions. All entries from the journal areposted in the ledger accounts. The page number or folio number of the ledger account where the posting hasbeen made from the journal is recorded in the L.F column of the Journal. Each entry in the journal must be explainedin brief. This brief explanation of the entry is called Narration. Thus, Narration gives a brief explanation of thetransaction for which the entry has been passed is given. It enables the persons going through the journal entry tohave an idea about the transaction.
Journalising Journalising is the process of recording the aspects of the transactions in Journal. In other words, recording of entries in the „journal‟ is known as journalising. Process of Journalising: The process of journalising means the steps to be followed for ascertaining the account heads to be debited/credited for a particular transaction. There are three steps involved in the process of journalising a transaction. Step 1: Identification of accounts or „account heads‟ affected by the transaction. Step 2: Classification of accounts or accounts heads. Step 3: Application of Rules for Debit and Credit Types of journal Entries: Entries recorded in the journal may be of two types.1. Simple Journal Entry and2. Compound Journal Entry Simple Journal Entry: When a transaction affects only one aspect/account in the debit and one aspect/account in the credit. It is known as Simple Journal Entry. Compound Journal Entry: When a transaction affects more than two accounts at a time – one or more accounts being debited/ one or more accounts being credited, such entry is known as Compound Journal Entry. CHECK YOUR PROGRESS Explain the meaning of Journal.
Meaning of LedgerAlthough Journal is chronological record of all business transactions, yet it cannot provide all information regarding aparticular account at one place. The journal cannot show the net effect of various transactions affecting a particularperson, assets, revenue and expense. For example, if a trader wants to know the amount due to a particular supplieror the amount due from a particular customer, he will have to go through the whole journal. It would be a tedious andtime consuming process. To overcome this difficulty, another book of account, in addition to Journal/special purposebooks, is maintained. This book is called „Ledger‟.Ledger is a book of account which contains a condensed and classified record of all transactions of the businessposted from the journal. It is also called the book of final entry. In other words, the book, which contains accounts, isknown as the ledger, also called the Principal Book. Ledger provides necessary information regarding variousaccounts. Personal accounts in ledger show how much money firm owes to the creditors and the amount it canrecover from its debtors. The real accounts show the value of properties and also the value of stock. Nominalaccounts reflect the sources of income and also the amount spent on various items.In accounting all transactions are ultimately recorded in the ledger. In this book, separate accounts are opened foreach „account head‟ and all transactions relating to a particular „account head‟ will be posted in the concernedaccount. An account for each person, each type of revenue, expense, assets and liability is opened in the ledger. Forexample, all transactions relating to a particular supplier; say Vivek will be posted to the account of Vivek. This helpsin ascertaining the amount due to Vivek.Ledger is generally maintained in the form of a bound register. First few pages of the ledger has ordinary horizontalruling for indexing. Remaining pages area ruled like an account and is consecutively numbered. The index pages areused for writing the names of accounts and the Folio No. (Page No.) where a particular account has been opened foreasy location. The ledger may also be maintained in loose-leaf form instead of one bound bookLedger is the „King of all the books of accounts‟Ledger is called the king of all the books of account, because it is the book which alone can exhibit the position ofeach „account head‟ in a convenient form. It can supply all the useful information such as the net result of varioustransactions involving an asset, a liability, capital, revenue and an expense.Ledger is the ultimate destination of all transactions because posting is made from the journal to the ledger. Theinformation available in the ledger in classified and summarised form also facilitates the preparation of a Trading andProfit and Loss Account and a Balance Sheet. Thus, Ledger is called the King of all books because no other book ofaccount can supply all the information like ledger.Utility/Importance/ Advantages:The utility/importance of „Ledger‟ can be summarised as follows:(a) Consideration of Scattered Information: The ledger brings out the scattered information from the „Journal‟. Itshows the condensed information under each account head.(b) Full information at a glance: As the ledger records both the debit and credit aspects in two different sides, thecomplete position of an account can be ascertained at a glance.(c) Balance: At the end of a specified period, the net effect of transactions on a particular „account head‟ can beascertained by finding out the balance of that account. For example, how much is due from a customer or how muchis payable to a creditor or what is the total amount of purchases or what has been the expenditure on different
heads? All these information can be ascertained by balancing the accounts appearing in the ledger. (d) Trial Balance: As both the aspects are recorded, the net debit effect and the net credit on the accounts must be equal on a particular date. This is verified by preparing a statement called Trial Balance. This is possible only if the ledger accounts are maintained. (e) Preparation of final accounts: Ledger is the „store-house‟ of all information relating to the transactions. It facilitates the preparation of a „Profit and Loss Account‟ from the balances of revenue and expenses accounts. It also, facilitates the preparation of a „Balance Sheet‟ from the balances of assets, liabilities and capital accounts. Purpose of Ledger: A businessman requires various information to ascertain the net results, financial position and progress of the business. Ledger can provide various information, which are given below. (a) Information regarding Debtors: A trader can know the amount of money receivable from various customers and others who are known as debtors. (b) Information regarding Creditors: A trader can know the amount of money payable to various suppliers and others who are known as creditors. (c) Information regarding Purchases and Sales: The total purchase of goods and the total sale of goods during a specific period can be known by preparing Purchase A/c and Sales A/c. (d) Information regarding Revenue and Expenses: The amount of revenue earned from different sources and the amount of expenses incurred on different accounts heads for a particular period may be known from the ledger. (e) Information regarding Assets and Liabilities: The amount of various types of assets such as Land, Building, Machinery, cash in hand, cash at bank, etc. and the amount of various liabilities can be obtained from ledger. Sub-divisions of Ledger: Ledgers may be sub-divided in the following manner:A. Personal Ledger (i) Debtors‟ ledger or Sales Ledger and (ii) Creditors‟ ledger or Bought Ledger.B. General or Nominal Ledger. These are explained below: A. Personal Ledger: The ledger which contains the accounts of persons, firms or organisations to whom goods are sold on credit or from which goods are bought on credit, is known as personal ledger. Generally personal ledgers are sub-divided into (i) Debtors‟ ledger or Sales Ledger and (ii) Creditors‟ ledger or Bought Ledger. (i) Debtor‟ ledger or Sales ledger: In this ledger, the accounts of all Debtors for goods sold are maintained. Posting is made from Sales Day Book, Purchase Returns Book, Cash Book, Bills Receivable Book and Journal Proper for the transactions affecting the accounts of Debtors. (ii) Creditors‟ Ledger or Bought Ledger: In this ledger, the accounts of all Creditors for goods purchased are maintained. Posting is made from Purchases Day Book, Purchase Returns Book, Cash Book, Bill Payment Book and Journal proper for the transactions affecting the accounts of Creditors. (B) General Ledger: This ledger contains all accounts other than the accounts of Debtors and Creditors for goods. All accounts falling in the category of Assets, Liabilities (except debtors and creditors for goods), Capital, Revenue and Expense are maintained in this proper ledger. For example, if a machine is sold to Ram on credit, his account will appear in General Ledger; again, if goods are sold to him on credit, his account will appear in the Debtors‟ Ledger. General Ledger is also known as Impersonal Ledger or Nominal Ledger. Distinction between Journal and Ledger: Following are the distinctions between a Journal and a Ledger.
Sl Points of Journal Ledger No. Distinction Journal is a book of Ledger is a book (i) Nature primary entry of final entry. In Journal, transactions Here transaction Basis of (ii) are recorded on the are recorded Recording basis of voucher from the journal Here Here transactions are transactions are Manner of recorded in order of (iii) recorded on the Recording happening i.e. date basis of „account wise heads‟ Posting in the Every entry in the Ledger is not (iv) Narration journal is followed by a followed by any narration narration It provides Forma of It provides information information in a (v) Information in scattered form summarised and classified formFormat of a Ledger Account:There are two types of forms for writing up Ledger Accounts namely(a) Horizontal form and (b) Vertical or „T‟ form. These are discussed below.(a) Horizontal Ledger Account is ruled out as follows: “AB & Co” Account
Date Particulars J. Debit Credit Debit Balance F Amount Amount Or (Rs.) (Rs.) (Rs.) CreditIn this form of ledger, balance is ascertained after every transaction. This method is generally used in bank. Wherethe accounts are maintained in computers through the use of accounting software like Tally, accounts are alsoprepared in this from.(b) A vertical or „T‟ shaped form is ruled as under:- “AB & Co” Account Dr. Cr. J. Amount J. Amount Particulars Date Particulars F. (Rs.) F. (Rs.) Date 1 2 3 4 1 2 3 4J.F (Journal Folio): In this column, the page number of the Journal where the transaction was originally recorded ismentioned. It helps in locating the entry in the Journal. Again, in Journal the page number of the Ledger where theaccount appears is written in the Ledger Folio column.Features of Ledger accounts:In „T‟ shaped form of writing up a ledger account, balance is ascertained periodically. In this book „T‟ shaped form ofLedger Account has been used. Such Ledger Account has the following features:(a) Two sides: A Ledger Account has two sides, namely Left hand and Right hand side. Left hand side is called theDebit side while the right hand side is called the Credit side.(b) Recording of two aspects: Posting is made on the debit side of the ledger account which has been debited inthe journal and the account which has been credited in the journal is posted on the credit side of the ledger account(c) Balancing: Each account in the ledger is balanced independently. This is done by ascertaining the differencebetween the total of the Debit side and total of the Credit side.Closing and Opening BalanceThe balances of account ascertained at the end of a particular period are known as closing balances. These balancesbecome the opening balances in the next period. CHECK YOUR PROGRESS
What is the function of a ledger account? Ledger PostingLedger posting means making entries of the transactions in the ledger books from the journals. Posting is a processof transferring debit and credit aspects of the entries appearing in the journal and other books of original entry to thedebit and credit sides of the relevant accounts in the ledger. Postings are made using the word „To‟ and „By‟ as aprefix. For debit side entry „To‟ prefix is used and for credit side entry „By‟ prefix is used. The aim of posting is tomake a classified and summarised record of all business transactions under appropriate account heads.Rules generally followed while posting the transactions in the Ledger:The following basic rules are to be followed while posting the transactions in the ledger:(a) Separate accounts should be opened in the ledger for posting the different transactions recorded in the journal.(b) All the transactions pertaining to one account head should be posted to that account.(c) Two aspects of the business transaction namely – debit and credit aspects – should be posted on the debit sideand credit side of the account respectively.Basic points regarding posting:Basic points to be kept in mind before posting are:1. Opening of separate accounts: Separate accounts should be opened for different „account heads‟ in the ledgerfor posting the different transactions recorded in the journal. For example: Cash A/c, salary A/c, purchases A/c etc.2. One account for each kind of transactions: One account should be opened for each kind of transaction.Transactions taking place during an accounting period relating to that particular account should be posted to thataccount only. If more than one account is opened for one kind of transactions, the object of summarisation oftransactions of similar nature will not be achieved. For example, it may be found that in the journal, Cash A/c hasbeen debited during a week, say on six different dates and the same account has been credited on four differentdates. For recording in Cash A/c, only one Cash A/c will be opened for transactions taking place on all the days andposting of all entry relating to Cash A/c will be made in that account only.Methods of Posting:There are three methods of posting from Journal to Ledger:a. Entrywise posting: Posting of each journal entry in the affected „account heads‟ may be made before proceedingto the next entry.b. Account headwise posting: Posting may be made „account head‟ wise i.e. posting of all Debits and Creditsrelating to one particular account head may be made before taking up another account head.c. Pagewise posting: Posing may be made in all account heads appearing in one particular page of the journalbefore taking up the next page.
Procedure for posting into an account:(a) Which has been debited in the journal-Step 1: Concerned account in the ledger should be located. If no account appears in the ledger for that accounthead, a new account should be opened and the name of the new account head along with the Folio No. should berecorded in the index page.Step 2: In the „Date column‟ on the debit side, date of the transaction should be recorded.Step 3: In the „Particulars column‟ on the debit side, the name of the „account head‟ credited in the journal, should berecorded as:“To ………… (name of the account credited)…….”Step 4: In the „J.F column‟ on the debit side, the Folio (page) number of the Journal where the transaction has beenoriginally recorded should be entered. Also the Folio(page) number of the ledger in which the concerned account appears, should be entered in the „Ledger folio column‟of the Journal for cross reference.Step 5: In the „Amount column‟ on the debit side, the amount as recorded in the journal against the account where theposting has been made should be entered.(b) Which has been credited in the journal? -Step 1: Concerned account in the ledger should be located. If no account appears in the ledger for that accounthead, a new account should be opened and the name of the new account head along with the Folio No. should berecorded in the index page.Step 2: In the „Date column‟ on the Credit side, the date of the transaction should be recorded.Step 3: In the „Particular column‟ on the credit side, the name of the „account head‟ debited on the journal, should berecorded as:“By …………… (name of the account credited) ……”Step 4: In the „J.F. column‟ on the credit side, the Folio (page) number of the Journal where the transaction has beenoriginally recorded should be entered‟. Also the Folio (page) number of the ledger in which the concerned accountappears, should be entered in the „Ledger folio column‟ of the Journal for cross reference.Step 5: In the „Amount column‟ on the credit side, the amount as recorded in the journal against the account wherethe posting has been made should be entered.Note: When the debit aspect of a transaction entered in the journal is posted in the ledger, only the debit side of thataccount is affected; when the credit aspect of a transaction entered in the journal is posted in the ledger, only creditside of that account is affected. In order to have a complete record of each transaction, both the aspects will have tobe posted.Posting of simple Journal Entry:Illustration:On 1st January 2008, Srinath started business with a capital Rs. 18,000Journal of M/s Srinath Dr. L. Cr. Date Particulars Amount F. Amount (Rs.) (Rs.) 2008 Cash A/c Dr. 18,000 Jan1 To Capital A/c 18,000 (Being cash brought in as capital)
In the above entry, the accounts affected are Cash A/c and Capital A/c. Therefore, in the ledger, Cash A/c andCapital A/c will be opened. Posting in both the accounts are shown as under.Posting in cash account:M/s SrinathLedgerCash AccountDr. Cr L Amount L AmountDate Particulars Date Particulars F Rs. F Rs.2008 18,000Jan1 To Capital A/cAs the Cash A/c has been debited in the Journal, Cash account will also be debited in the Ledger. This means thatposting will be made in the debit side of the Cash A/c. On the debit side, in the „date column‟, date will be written. Inthe Journal i.e. 2008, Jan. 1, the date of the transaction, will be written. In „particulars column‟, the account which hascaused an effect in the Cash A/c will be written. As per the entry in the journal, Capital A/c will be written in the„particulars column‟ with „To‟ as prefix. In the „J.F. column‟, the Folio number (page number) where the entry appearsin journal will be written. In the „amount column‟ in the ledger, the figure stated against Cash account in the journal, asshown above, will be entered.Posting in the capital account:M/s SrinathLedgerCapital AccountDr. Cr. L Amount L Amount Date Particulars Date Particulars F Rs. F Rs. 2008 By Cash A/c 18,000 Jan 1As the Capital A/c has been credited in the journal, Capital A/c will also be credited in the Ledger. This means thatposting will be made on the credit side of the Capital A/c. On the credit side, in the „date column‟, date as written inthe Journal i.e. 2004, Jan. 1, the date of the transaction, will be written. In the „particulars column‟, the account whichhas caused an effect in the Capital A/c will be written. As per the entry in the journal, Cash A/c has caused an effectin the Capital A/c. Therefore, Cash A/c will be written in the „particulars column‟ with a prefix „By‟. In the „J.F column‟,the Folio number (page number) where, the entry appears in journal will be written. In the „amount column‟ in theledger, the figure stated against Capital A/C in the journal, as shown above, will be entered.Illustration: Purchase of furniture from Modern Furnishers Rs.12,000 on January 1,2008Journal Entry:Furniture A/C Dr. 12,000To Modern Furnishers A/C Rs. 12,000(Being furniture purchased)The amount of Rs. 12,000 will be debited to the Furniture A/C and credited to Modern furnishers A/C in the followingway –
Ledger Furniture Account Dr. Cr L Amount L Amount Date Particulars Date Particulars F Rs. F Rs. 2008 12,000 Jan1 To Modern Furnishers Ledger Modern Furnishers Account Dr. Cr L Amount L Amount Date Particulars Date Particulars F Rs. F Rs. By 2008 Furniture 12,000 Jan1 Account Balancing of an AccountThe „balance‟ is a term used in accounting which means the difference between the two sides of an account, or thetotal of the account containing only debits and only credits. Balancing of an account is an important aspect ofaccounting. It implies the process of ascertaining the net difference of an account after totalling of both sides – viz.debit side and credit side.In simple words, balancing means the insertion (writing) of the difference between the two totals, debit side total andcredit side total, in the smaller (smaller total) side, so that the (grand) totals of the two sides become equal.Balancing is done periodically, i.e. weekly, monthly, quarterly, half-yearly or yearly, depending on the requirements ofthe business.A computerised system will usually print the balance of the account after each transaction, but in a manual system wemust calculate the balance. The balance of an account shows the position of an account on a particular day. Such
balance of an account may be „Debit balance‟ or „Credit balance‟.1. The total of both the sides of an account may be equal. In that case, the account does not show any balance.2. The total of the debit side may be more than the total of the credit side. In that case, the account shows debit balance3. The total of the credit side may be more than the total of the debit side. In that case the account shows credit balance. Nature of Ledger Account Balances: The nature of balances of different classes of ledger accounts will be as under. 1. Assets Accounts: Assets account will always show debit balance. For example, Cash Account will always show debit balance, because all cash receipts are shown on the debit side and all cash payments are shown on the credit side. Since cash payments cannot be more than the receipts, cash account will show the debit balance. When cash receipts are equal to the cash payments then the cash account will not show any balance. Thus, it never shows credit balance. 2. Liability Account: Liability accounts will be always show credit balance. For example Creditors Account, Bills Payable Account, Outstanding expense Account, Loan from Gauri Account etc. 3. Capital Account: Capital account will always show credit balance. 4. Revenue Accounts: Revenue accounts will always show credit balance. For example, Sales Account, Commission Received Account etc. 5. Expense Account: Expense account will always show debit balance. For example, Sales Account, Commission Allowed Account, wags Account etc. 6. Drawing Account: Drawings account will always show debit balance. CHECK YOUR PROGRESS What is the object of balancing an account? Meaning of Trial Balance After posting the accounts in the ledger and balancing the same, a statement is prepared to show separately the
debit and credit balances. Such a statement is known as Trial Balance. The Trial Balance is a statement which shows the closing balances, debit balances as well as credit balances of all ledger accounts. This statement is always prepared in „T‟ Shape. In the left hand side, debit balances and in the right hand side, credit balances of ledger accounts are written and both sides are totalled. The totals of the both the sides, should always be equal. This equality in the totals of debit side and credit side ensures the completion of double entry system of book-keeping. It also ensures the arithmetical accuracy of ledger accounts. Objects of Trial Balance: The following are the objectives of preparing the Trial Balance. 1. Ascertainment of arithmetical accuracy of the ledger accounts: The Trial Balance is a test of arithmetical accuracy of ledger accounts. If the totals of two sides of Trial Balance i.e. debit side and credit side are equal, it ensures the arithmetical accuracy of the ledger accounts. It means that there is no mistake in totalling the debit side and credit side of all the ledger accounts. 2. Help in the preparation of Final Accounts: Trial Balance facilitates the preparation of Trading Account, Profit and loss Account and the Balance Sheet. Preparation of these financial statements is very clumsy. If the ledger accounts balances are collected and grouped under the two headings of Debit and Credit in the Trial Balance, it becomes easier to prepare the final accounts. 3. Providing summary information of Financial result and position: A close and intelligent observation of the Trial Balance gives us some information of the profit or loss and the financial position of the firm. 4. Help in locating errors: Some of the errors in the books of accounts can be located with the help of the Trial Balance. If the Trial Balance does not agree, an intelligent scrutiny to the items and their amounts may reveal the cause of disagreement of the Trial Balance. Thus Trial Balance discloses some of the errors in the books of accounts. 5. Completion of Double Entry: Trial Balance, if it agrees, i.e. the two sides are equal, proves the completion of double entry. Preparation of Trial Balance There are two method of constructing a Trial Balance: (a) Balance Method and (b) Total of Accounts Method: (a) Balance Method: All the closing balances of all the ledgers- personal ledgers, General Ledgers and Cash Book, Bank Book, Petty Cash Book are taken into account to prepare the Trial Balance by Balance Method. There are two types of formats to prepare Trial Balance by Balance Method.1. Horizontal Format2. „T‟ shape Format Step of construction:
1. Close the account in ledgers and cash books.2. Balance all the accounts.3. Write all the Debit balances on a sheet of paper.4. Write all the Credit balances on a separate sheet of paper.5. Now under Horizontal Format, the following format is used to prepare Trial Balance. Trial Balance As on 31-03-1995 Heads of L.F. Debit Balance Credit Balance Accounts (Rs.) (Rs.) Total: 6. Write (a) names of all accounts having a closing balance in the Heads of Account column. (b) Ledger Folio number of the ledger where the particular account is balanced, in the L.F column. (c) the amount of debit balance in Debit Balance column and (d) the amount of credit balance in credit Balance column. 7. Add the debit Balance column and credit Balance column and write these two totals at the bottom of the two columns. 8. See that totals of both debit balance and credit balance column agree or not. If we want to prepare the Trial Balance under „T‟ shape format, then the following format should be used but, the procedure of prepare it (i.e. steps of preparation) is the same. „T‟ shape Trial Balance: Trial Balance as on 31-03-2007 Heads of L.F. Debit Heads of L.F. Credit Accounts Balance Accounts Balance Rs. Rs
You should remember the following Debit balances and Credit balances:o All real accounts show debit balanceo All liabilities show credit balanceo Capital generally shows credit balanceo Drawings show debit balanceo Expenses show debit balanceo Incomes show credit balanceo Purchases A/c shows debit balanceo Purchases return (Returns outward) shows credit balanceo Sales A/c shows credit balanceo Sales Return (Return Inward) shows debit balanceo Cash book without bank column never shows a credit balanceo Bills Receivable A/c shows a debit balanceo Bills payable A/c shows a credit balanceo Debtors A/c shows debit balanceo creditors A/c shows credit balanceo All losses show debit balances. Illustration: From the following balances prepare a Tri al Balance as on 31-03-2008 Items Rs. 17. Capital 50,00018. Cash 46,70019. Furniture 11,00020. Computer 42,00021. Insurance 1,80022. Purchases 36,00023. Debtors 12,00024. Creditors 16,00025. Drawings 2,00026. Sales 86,00027. Salary 1,50028. Interest received 1,000 Solution: Trial Balance as on 31-12-94 Heads of Accounts L.F Debit Balance L.F Credit . Rs. . Balance Heads of Accounts Rs. Cash 46,700 Creditors 16,000
Furniture 11,000 Sales 86,000Computer 42,000 Capital 50,000Insurance 1,800 Interest 1,000 receivedPurchases 36,000Debtors 12,000Drawings 2,000Salary 1,500Total: 153,000 153,000 Errors detected through Trial BalanceIf a Trial Balance does not agree it means there is something wrong. When a Trial Balance does not agree, itindicates that there are some errors in the process of book-keeping work, i.e. Journalising and ledger posting. Theerrors, due to which he Trial Balance does not agree, may be of following types.Omission to post an amount into ledger from the journalDebit entry (entries) is (are) not posted at all in the ledger.Credit entry (entries) is (are) not posted at all in ledger.Either Debit or Credit entries are posted twice while the corresponding credit or debit entries are not posted at all.Wrong amount of debit is posted while the credit is posted correctly or vice versa.An amount is posted on the wrong side of a ledger account.Wrong totalling of subsidiary books.Wrong totalling of ledger accounts.Wrong balancing in the ledger accountsThe balance is wrongly written in the Trial BalanceWrong totalling in the Trial BalanceWrong totalling in the cash book
Wrong balancing in the cash book Wrong totalling in the petty cash book Wrong posting from cash book and petty cash book to the ledger accounts Difference in the amount of a transaction in the Day Books and corresponding personal ledger accounts. Why does the Trial Balance agree? In the double entry system of book-keeping, every debit has its corresponding credit of equal value. Therefore, total of debits always equals to the total of credits. In the process of journalising and ledger posting, this principle is constantly followed. So, the total of debit side is equal to the total of credit side of a Trial Balance. Location of Errors in Trial Balance When the Trial Balance does not agree, it means that there is a mistake. There may be more than one mistake also. So, the next step is to locate the errors or errors. To locate the errors, the following steps should be followed-1. Check the additions of debit and credit sides of the Trial Balance. 2. Check if there is any „transportation error‟ or „slide error‟. A transportation error is an error where the digits of an amount are misplaced. For example, an amount of Rs. 3.273 is written as Rs. 3,237. A „slide error‟ is an error where the decimal is misplaced. For example, Rs. 125.50 is written as Rs. 12.55. To locate errors, the difference is to be divided by 9. If the difference in the Trial Balance is fully divisible by 9, it may be a case of transportation or slide error. 3. Compare the closing balance of each ledger account with the amount in Trial Balance. 4. Check the opening balance of each ledger account with the amount in the previous year‟s balance Sheet. 5. Check the balance brought down or balance carried forward to the next page of each ledger account. 6. Check the totalling and balance carried down in each ledger account. 7. Divide the difference in Trial Balance by 2 and if this new figure is found in the Trial Balance, it may be a case that the amount is written in the wrong side. 8. Check the totalling in Day Books, Purchase Day Book and Sales Day Book. 9. Check the posting from the subsidiary books including the Day Books, to the ledger accounts. Measure for undetected error: After observing the above procedures to detect the reason for disagreement in the Trial Balance, if the error is not located, then the difference in the Trial Balance is transferred temporarily to an account known as „Suspense Account‟. Suspense Account: Suspense account is a temporary device to make the Trial Balance agree when its two sides shows two different figures due to some undetected error. The amount by which the Trial Balance does not agree is the amount of suspense account. This is the amount of suspense in the deficit side of the Trial Balance. If debit side is heavier than credit side, the amount of difference is written on the credit side, under the heading „suspense account‟. On the other hand, if credit side is heavier than the debit side, the amount of difference is written on the debit side under the heading „suspense account‟. Suspense account is purely a temporary device to make equal the debit and credit sides of Trial Balance. It is neither a real account, nor a personal account, nor a nominal account. It only represents the amount of error. So, effort should be made to wipe out or cancel the suspense account as early as possible. Generally, during the course of preparation of financial statements, viz. Trading account, Profit and Loss Account and Balance Sheet, errors are located and they are then corrected through suspense account. Errors may also be corrected in the process of audit work of accounts throng suspense account. When all the errors have been located and detected, the suspense accounts will automatically stand balanced or closed by means of rectifying entries in the General Purpose Journal. If there remains any error undetected and unrectified, then there remains some balance in suspense account. This balance is shown in the Balance Sheet. Debit balance is shown on the asset side and the credit balance is shown on the liability side of the Balance Sheet. On the subsequent detection and rectification of errors, suspense account is closed.
Errors which do not affect Trial Balance or, Errors not disclosed by Trial Balance.If a Trial Balance does not agree, i.e. debit side does not tally with the credit side, we know that there are some errorscommitted either in journalising or in ledger posting or in transferring the ledger balances to Trial Balance, or inbalancing or totalling the accounts. But there are some errors which do not affect the Trial Balance. Broadly theseerrors can be classified in two categories. – (a) Errors of Omission and (b) Errors of Commission.(a) Errors of Omission – Such errors can be committed while recording the transactions in the Journal or posting tothe ledger. An omission can be a complete or partial one.(i) Complete omission: If a transaction is completely forgotten to record in any of the books, it is a case of completeomission. Complete omission, thus, means that the transaction has not been entered in any of books, neither inJournal, nor in any ledger accounts. As there is no entry at all, so there is no question of affecting either debit orcredit. Thus, the Trial Balance is not affected and the error can not be disclosed by it.(ii) Partial Omission: If a transaction has been recorded in Journal but not posted in the ledger accounts at all, it is apartial omission. This error, too, does not affect the Trial Balance, as there has been no entry in the ledger accounts.Examples: (i) Complete omission – Credit purchase of goods from Sarma for Rs. 5,000 has not been entered inpurchase Day Book as well as in the ledgers. Purchase A/c and Sarma A/c.(ii) Partial omission – Credit sales of goods of Rs. 2,000 to Amar has been recorded in the sales Day Book but,forgotten to post in the ledger accounts - Sales A/c and Amar A/c.(b) Errors of Commission: Such errors can again be divided in to three types.(i) Errors of Principle: Errors of principle are committed when there is wrong application of accounting principles, e.g.improper distinction between capital and revenue items. If an item of nominal account is treated as real account, it isan error of principle.Example: 1) Purchase of goods (merchandise) of Rs. 3,000 is entered in the ledger account of furniture, it is an errorof principle.2. Repairs of building is charged to Building account instead of Repairs account.(ii) Comparative Errors: When two ormore errors are committed in such a manner that the debit is fully compensated by the credit effect, resulting the neteffect of these errors to nil. So one error neutralises the other. As the net effect on debitand credit is nil, so such errors can not affect the Trial Balance and are not disclosed by it.Illustration:Transaction 1: Salary paid Rs. 450 is posted in salary account as Rs. 540, thus account is over debit by Rs. 90.Transaction 2: Interest received Rs. 230 is posted in interest Received A/c as Rs. 320, thereby an over credit of Rs.90.The combine effects of these two errors are compensated by one another. So, it can not affect the agreement of TrialBalance.(iii) Errors of posting: These are committed when ledger postings from journals are made in the wrong head ofaccounts.Illustration:1. Payment of Rent of Rs. 1,000 is posted in the debit side of interest paid account.2. Cash received from Ram Rs. 5,000 is posted in Raman‟s account. (iv) Duplicating errors: It is an error which arises when a transaction is recorded twice in journal or posted twice inledger.
CHECK YOUR PROGRESS What are the various types errors not detected through a Trial Balance? LET US SUM UPIn this unit we have discussed the following points –Journal is the primary book to record business transactionsSteps involved in the process of journalisingLedger contains all the accounts and known as principal bookVarious advantages and sub- division of ledgerDifferences between journal and ledgerTransferring of journal into ledger, known as ledger postingBasic points regarding ledger posting and balancing of accountsTrial Balance is prepared on a particular date showing all ledger balancesErrors detected by Trial BalanceErrors not detected by Trial Balance
ANSWERS TO CHECK YOUR PROGRESSAnswers To Check Your Progress 1Journal is a book of original entry in which transactions are recorded as and when they occur in chronological order(in order of date) from source documents.Answers To Check Your Progress 2Functions of ledger account are to provide:(a) Information regarding Debtors: (b) Information regarding Creditors: (c) Information regarding Purchases andSales: (d) Information regarding Revenue and Expenses: (e) Information regarding Assets and Liabilities.Answers To Check Your Progress 3The object of Balancing of account is to know periodical balance of an account. Answers To Check Your Progress 4(a) Errors of Omission (i) Complete omission: (ii) Partial Omission:(b) Errors of Commission: (i) Errors of Principle (ii). Comparative Errors (iii) Errors of posting (iv) Duplicatingerrors: POSSIBLE QUESTIONS1.Describe different types of Books of Account.2. What do you mean by Ledger? What are the main purposes of ledger?3. What is Journalising? How is it done?4. Journalise the following transactions and prepare relevant accounts in the ledger.(i) Balances in the beginningCash – Rs. 5,000Machinery – Rs. 50,000Bank Loan – Rs. 1, 00,000Creditors – Rs. 10,000(ii) Purchase goods on credit from X Co. Rs. 15,000(iii)Sale of goods for cash – Rs. 1,00,000(iv) Salaries paid in Cash – Rs. 10,000(v) Amount paid to X Co. – Rs. 10,0005. Explain the objects of preparing Trial Balance.
6. What are the various types of Errors not disclosed by Trial Balance?