Chapter 5 - Completing Ledger Accounts

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CHAPTER 5Completing ledger

Contents

The journal The trial balance Methods of coding data Manual and computerized systems Batch processing and control totals Accounting systems Accounting modules

The journal

One of the books of prime entry Record of (not arise from the other books of prime entry) unusual movement between accounts

Date $ $ DEBIT Account name X CREDIT Account name X Narrative to explain the transaction

Example: Journal entries

1 JanuaryPut in cash of $2,000 as capital DEBIT Cash 2,000 CREDIT Paul Brown capital account Initial capital introduced 2,000

Purchased brushes and combs for cash of $50 DEBIT Brushes and combs account 50 CREDIT Cash 50 The purchase for cash of brushes and combs as non-current assets Purchased hair driers from Z on credit for $150 DEBIT Hair dryer account 150 CREDIT Sundry payables account * 150 The purchase on credit of hair driers as non-current assets

Example: Journal entries

30 January Paid three months rent to 31 March of $300 DEBIT Rent account 300 CREDIT Cash 300 The payment of rent to 31 March Collected and paid in takings of $600 DEBIT Cash 600 CREDIT Sales (or takings account) Cash takings 31 January Gave Mrs X a perm, highlights etc on credit $80. DEBIT Receivables account 80 CREDIT Sales account (or takings account) The provision of a hair-do on credit

600

80

The trial balance

List of ledger balances shown in debit and credit columns The debit should equal credit balances

Illustration TB

TB not balance Why(a) The complete omission of a transaction, because neither a debit nor a credit is made (b) Posting a debit or credit to the correct side of the ledger, but to a wrong account (an error of commission) (c) Compensating errors (eg debit error of $100 is exactly cancelled by credit $100 error elsewhere) (d) Errors of principle (eg cash received from customers being debited to the total receivables account and credited to cash instead of the other way round) (e) Errors of transposition (eg $11,729 written

Errors in detailErrors of Errors of omission transposition Fail to record a Two digits in an transaction at all amount are Making a debit or accidentally credit entry, but recorded the not the wrong way round corresponding Detect: the double entry difference can be Compensating errors divided exactly by Errors which are, coincidentally, equal 9 and opposite to one another

Errors in detailErrors of principle Accounting entry breaks the 'rules' of an accounting principle or concept E.g.: Capital

Errors of commission Bookkeeper makes a mistake E.g.: Putting

expenditure treated as revenue expenditure Drawings treated as expenses

a debit entry or a credit entry in the wrong account Errors of casting (adding up)

Correction of errorsJournal entries Requires a debit and an equal credit entry Total debits equal total credits before a journal entry is made They will still be equal after the journal entry is made Suspense account Why have?A

trial balance is drawn up which does not balance Knows where to post the credit side of a transaction, but does not know where to post the debit (or vice versa)

Example - JESuppose a bookkeeper accidentally posts a bill for $200 to the gas account instead of to the business rates account. A trial balance is drawn up, and total debits are $100,000 and total credits are $100,000. Journal entries DEBIT Business rates account $200 CREDIT Gas account $200 To correct a misposting of $200 from the rates account to electricity account.

Example Suspense accountA business extracts a trial balance and finds that credits exceed debits by $4,420. Subsequently the following errors are discovered: (a) The bookkeeper made a transposition error in recording sales. Instead of entering $37,453, he entered $37,543. However receivables were posted correctly. (b) The monthly salaries of $5,250 were correctly entered in the cash book but the other half of the double entry was not made. (c) A customer paid $460. This was correctly recorded in the cash book but was debited to the sales ledger control account. You are required to set up the suspense account and then

SolutionSet up a suspense account showing a debit balance of $4,420 (a) Sales should be $37,453. So the sales are overstated by $90. Debit Sales 90 Credit Suspense account 90 (b) Salaries need to be posted to the salaries account. Debit Salaries 5,250 Credit Suspense account 5,250 (c) The amount of $460 should be credited to the sales ledger control account. We need to credit $460 twice (once to reverse the original debit entry and once to record the transaction). Debit Suspense account 920 Credit Sales ledger control account 920

Solution

Exam focus How to deal with suspense account What should we do? What did we do? How to correct the error? Corresponding entries to the suspense

Example Suspense accountA trial balance does not balance and the bookkeeper posts the difference to a suspense account. He then finds the following errors which clear the suspense account when they are corrected. (i) Opening inventory had been understated by $10,000 (ii) A credit note for $200 had been posted to sales returns but not to the receivables control account Tasks (a) What was the balance on the suspense account before these errors were corrected?

Solution(a) The balance on the suspense account is DR $9,800. Opening inventory is a missing debit entry and a sales return is a missing credit entry to the receivables control account. (b) The following journal will clear the suspense account: DR CR Opening inventory 10,000 Receivables control account 200 Suspense account 9,800 10,000 10,000

Example - TBMr Ringo Binder commenced trading as a wholesale stationer on 1 May 20X7 with a capital of $5,000 with which he opened a bank account for his business. During May the following transactions took place. 1 Bought shop fittings and fixtures for cash from Folder Fitments for $2,000 2 Purchased goods on credit from Staple $650 4 Sold goods on credit to Clip $700 9 Purchased goods on credit from Green $300 11 Sold goods on credit to Hill $580 13 Cash sales paid intact into bank $200 16 Received cheque from Clip in settlement of his account 17 Purchased goods on credit from Kaye $800

Example TB (cont)18 Sold goods on credit to Nailor $360 19 Sent cheque to Staple in settlement of his account 20 Paid rent by cheque $200 21 Paid delivery expenses by cheque $50 24 Received from Hill $200 on account 30 Drew cheques for personal expenses $200 and assistant's wages $320 31 Settled the account of Green Tasks (a) Journalize: prepare journal entries (b) Post the entries to the ledger accounts (c) Balance the ledger accounts where necessary (d) Extract a trial balance at 31 May 20X7

Solution

Solution

Solution

Solution

Methods of coding data

Each account has a unique code for posting Why need? Used

to identify the correct account for a posting Saves time Saves storage space

Example

A nominal ledger has the following codes.

State

what type of code this is. Explain your answer

Solution

This is a significant digit code. The digits are part of the description of the item being coded. '1' in 100000 clearly represents noncurrent assets '2' in 100200 represents plant and machinery etc.

Computerized systems

Perform the same tasks as manual systems Differences: How

information is stored How tasks are performed How some package do things 'automatically'

Computerized systems

Input: Entering data from original documents Processing: Entering up books and ledgers and generally sorting the input information Output: Producing any report desired by the managers of the business, including financial statements

Batch processing and control totals

Batch processing

Similar transactions are gathered into batches, and then each batch is sorted and processed by the computer

Control totals

Used to make sure that there have been no errors when the batch is input Make sure that the total value of transactions input is the same as that previously calculated

E.g.

A batch of 30 sales invoices with total value of $42,378.47. When the batch is input, the computer adds up the total value of the invoices input and produces a total of $42,378.47. The control totals agree

Accounting packagesAdvantages(a) The packages can be used by nonspecialists. (b) A large amount of data can be processed very quickly. (c) More accurate than manual (d) Handling and processing large volumes of data.

Disadvantages(a) Initial time and costs involved (b) Need for security checks (c) The necessity to develop a system of coding (see below) and checking. (d) Lack of 'audit trail'. It is not always easy to see where a mistake has been made. (e) Possible resistance on the part of staff to the introduction of the

Modules

Program which deals with one particular part of a business accounting system Modules may be integrated with the others

Invoicing Inventory Receivables ledger Payables ledger Nominal ledger Payroll Cash book Job costing Non-current asset register Report generator

QB 9A credit balance of $917 brought down on Y Co's account in the books of X Co means that A X owes Y $917 B Y owes X $917 C X has paid Y $917 D X is owed $917 by Y Answer: A

QB 10Rent paid on 1 October 20X2 for the year to September 20X3 was $1,200, and rent paid on 1 October 20X3 for the year to 30 September 20X4 was $1,600. Rent payable, as shown in the income statement for the year ended 31 December 20X3, would be A $1,200 B $1,600 C $1,300 D $1,500 Answer: C

QB 1111 An e