CHAPTER 5

Completing ledger accounts

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 XCREDIT Account name X Narrative to explain the transaction

Example: Journal entries

1 January Put in cash of $2,000 as capitalDEBIT Cash 2,000CREDIT Paul Brown – capital account 2,000Initial capital introduced

Purchased brushes and combs for cash of $50DEBIT Brushes and combs account 50CREDIT Cash 50The purchase for cash of brushes and combs as non-current assets

Purchased hair driers from Z on credit for $150DEBIT Hair dryer account 150CREDIT Sundry payables account * 150The 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) 600

Cash takings 31 January

Gave Mrs X a perm, highlights etc on credit $80.

DEBIT Receivables account 80

CREDIT Sales account (or takings account) 80

The provision of a hair-do on credit

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 as $11,279)

Errors in detail

Errors of transposition

Two digits in an amount are accidentally recorded the wrong way round

Detect: the difference can be divided exactly by 9

Errors of omission Fail to record a

transaction at all Making a debit or

credit entry, but not the corresponding double entry

Compensating errorsErrors which are, coincidentally, equal

and opposite to one another

Errors in detail

Errors of principle Accounting entry

breaks the 'rules' of an accounting principle or concept

E.g.: Capital expenditure

treated as revenue expenditure

Drawings treated as expenses

Errors of commission Bookkeeper makes

a mistake E.g.:

Putting a debit entry or a credit entry in the wrong account

Errors of casting (adding up)

Correction of errors

Journal 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 - JE

Suppose 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 entriesDEBIT Business rates account $200CREDIT Gas account $200To 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 raise journals to deal with the errors discovered above.

Solution

Set 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 90Credit Suspense account 90(b) Salaries need to be posted to the salaries account.Debit Salaries 5,250Credit 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 920Credit 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 account

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?(b) Show the journal which clears the balance

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 - TB

Mr 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 $2,0002 Purchased goods on credit from Staple $6504 Sold goods on credit to Clip $7009 Purchased goods on credit from Green $30011 Sold goods on credit to Hill $58013 Cash sales paid intact into bank $20016 Received cheque from Clip in settlement of his account17 Purchased goods on credit from Kaye $800

Example – TB (con’t)

18 Sold goods on credit to Nailor $36019 Sent cheque to Staple in settlement of his account20 Paid rent by cheque $20021 Paid delivery expenses by cheque $5024 Received from Hill $200 on account30 Drew cheques for personal expenses $200 and assistant's wages

$32031 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 non-

current 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 No further action is required

Accounting packages

Advantages(a) The packages can

be used by non-specialists.

(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 system.

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 9

A credit balance of $917 brought down on Y Co's account in the books of X Co means that

A X owes Y $917B Y owes X $917C X has paid Y $917D X is owed $917 by Y

Answer: A

QB 10

Rent 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 $1,200B $1,600C $1,300D $1,500

Answer: C

QB 11

11 An error of commission is one whereA A transaction has not been recordedB On side of a transaction has been recorded in

the wrong class of account, such as noncurrent assets posted to inventory

C An error has been made in posting a transactionD The digits in a number are recorded the wrong

way round

Answer: C

QB 12

Where a transaction is entered into the correct ledger accounts, but the wrong amount is used, the error is known as an error of

A OmissionB Original entryC CommissionD Principle

Answer: B

QB 23

When a trial balance was prepared, two ledger accounts were omitted:

Discounts received $6,150Discounts allowed $7,500To make the trial balance balance, a suspense account was

opened. What was the balance on the suspense account?A Debit $1,350B Credit $1,350C Debit $13,650D Credit $13,650

Answer: A