FinancialandManagementAccounting

Unit5

Unit5
Structure

SecondaryBooks

5.1 Introduction Objectives 5.2 Types SelfAssessmentQuestions1to7 5.3 Postingtechniqueintheledger SelfAssessmentQuestions8 TerminalQuestions AnswertoSAQsandTQs

5.1Introduction
Journalisthebookoforiginalentryandalltransactionsarerecordedfirstinthatbook.Wehave also learnt that there are subsidiary books, which are different types of journal and in large organizations,thesesubsidiarybooksaremaintainedasbooksoforiginalentry.Howeverthereis abookcalledJournalProper,whichisalsoatypeofjournalinwhichtransactionswhichcannot beenteredinanyothersubsidiarybooks,shallberecorded.Forinstance,aloanisdeclaredas badanditshouldbewrittenoff.Thisisnotacashtransactionnonthelessacredittransaction. Butitshouldberecordedinsomebook.Similarlydepreciationonassetshastobeprovidedrent paid in advance taxes paid in advance, outstanding expenses payable and so many such transactionshavetoberecordedforafaircalculationofprofitorloss.Tofacilitate recordingof such transactions, a separate book called journal proper is maintained. It is only after all transactionsareenteredintovariousbooks,ledgeraccountsarepreparedentirelyinadifferent booknamelyledger.Theprocessofrecordingthetransactionsintheledgerisknownasposting. Sinceledgerispreparedbasingonjournal,itisknownassecondarybook. LearningObjectives: Afterstudyingthisunit,youshouldbeabletounderstandthefollowing 1. Toknowwhatsecondarybooksare. 2. ToknowwhatJournalproperisanditspurpose. 3. Toknowwhataledgerandledgeraccountmean. 4. TounderstandthepostingoftransactionsfromGeneralJournal 5. Toknowthetechniqueofpostingtransactionsfromsubsidiarybooks
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5.2Types
There are three types of ledger, namely debtors ledger, creditors ledger and general ledger. Debtorsledgercontainsaccountsofdebtorstowhomgoodsaresoldoncredit.Creditorsledger contains accounts of creditors from whom goods are purchased on credit. General ledger contains real accounts, nominal accounts and all personal accounts, other than debtors and creditors accounts. Before understanding about posting transactions to ledger, it is useful to understandaboutjournalproper. Journalpropercontainsthefollowingaspects: a) Openingjournalentries b) Closingjournalentries c) Adjustingentries d) Rectificationentries e) Transferringentries f) Creditpurchaseofassetsandsaleofassets g) Withdrawalofgoodsbytheproprietorforhispersonaluse h) Lossofgoodsduetonaturalcauses SelfAssessmentQuestions1: 1. Ledgerisalsoknownas_____________. 2. Journalpropercontains______________. 3. IsLedgeranaccountorabook? 4. Thethreetypesofsecondarybooksare_____,______and______________. 5. Furnitureoftheofficeusedbytheproprietorinhishouse.wheredoyoufindanentryfor thistransactioninbusinessbooks? 6. Whateverisrecordedinjournalproperisalsopostedtoledger.(statewhetheritisTrue/ False). 5.2a.OpeningJournalentries: In the case of running business, all the assets and liabilities of the previous year should be broughtdowntothecurrentyearandthereforeanentryisdrawndebitingallassetsaccountand creditingliabilitiesaccountandthedifferencebeingcreditedtocapitalaccount.Inabusinesson
st 31 Dec,2004,thefollowingassetsandliabilities werethere:CashatbankRs50000Furniture

Rs.48000 Plant and machinery Rs200000 Debtors Rs.100000 Stock in trade Rs.20000
st CreditorsRs.50000BankloanRs.45000.On1 ofJanuary,2005theassetsandliabilitieshave

tobebroughtinandsoinJournalProperthefollowingentryisrecorded.
Date 1105 Particulars CashatBankA/cDr LedgerFolio DebitRs 50000 CreditRs

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FinancialandManagementAccounting FurnitureA/cDr PandMA/cDr DebtorsA/cDr StockIntradeA/cDr ToCreditorsA/c ToBankLoanA/c ToCapitalA/c(Diff) (Being assets and liabilities of the previousyearbroughtin) 48000 200000 100000 20000

Unit5

50000 45000 323000

Similarly,anewlysetupbusinessmaycommenceitsactivitieswithsomeassetsandliabilities. Thentheassetsaredebitedandliabilitiesarecreditedandthedifferenceistransferredtocapital account. SelfAssessmentQuestions2 1. Openingjournalentriesaredrawnatthecommencementofaccountingperiod.(statewhether itisTrue/False). 2. When all assets are debited and all liabilities are credited, the difference is transferred to ___________account. 3. Ifopeningliabilitiesincludingcapitalaremorethan assets,towhataccountthedifferenceis transferred? 5.2b.Closingentries Closing entries are drawn at the end of accounting period and the purpose is to close down severalaccountbalancesforthecurrentperiod.Theaccountsofassetsandliabilitieswillnotbe closedbecausetheycontinuetoexistfurther.Allexpensesandincomeaccountsareclosedby transferring them to the respective revenue accounts such as Trading account and Profit and Loss account. For example, salaries paid during the year are closed by transferring to P & L account,debiting P & Laccountand creditingSalariesaccount,sothatthe salariesaccountof thecurrentyeardoesnotagainappearinthenextyear.Moredetailsaboutclosingentrieswillbe dealtwithinUnit7. SelfAssessmentQuestions3 1. All revenue accounts are closed at the end accounting period. ( state whether it is True / False). 2. Alltradeexpensesareclosedbydebitingtradingaccountandcrediting_____accounts. 3. _______accountareclosedbytransferringthemtoP&Laccount.

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4. Areassetsandliabilitiesaccountsclosedattheendoftheaccountingyear?(statewhetherit isYes/No). 5.2c.Adjustingentries Aftertheclosureofaccountingyear,theremightbeafewmoretransactionsleftoverandwhich are not incorporated into journal or ledger, owing to omission and practical difficulties. For example,closingstockshouldbevaluedonthelastdayoftheaccountingperiod.Ifthestockis so large containing several items, it is possible that the calculation is not made along with physicalverification.In suchacase,anadjustingentryismadetobringthatitem intoaccount. Similarly, with regard to rent paid in advance, expenses outstanding, incomes received in advanceetcadjustingentriesaremadeinJournalproper.Iftheyarenotconsidered,theprofitor lossreflectedbythefinalaccountswillnotgivethecorrectpicturefortheaccountingperiod.More detailsaboutadjustingentrieswillbediscussedinUnit7. SelfAssessmentQuestions4 1. Transactionwhichareoutoftrialbalancehavetobeadjustedforpropercalculationofprofit/ loss.(statewhetheritisTrue/False). 2. Whatistheadjustingentryinthefollowingcases a. DepreciationofBuilding b. Closingstock c. PrepaidInsurance d. Outstandingsalaries e. Stockusedforpersonalpurposes 5.2d.Rectificationentries Errors are natural and rectification is a must to arrive at exact position of profit or loss and balance sheet. These errors may or may not be disclosed by trail balance. Casting errors, omissions, commissions, principle errors, compensatory errors etc can occur in the process of accounting.Theyhavetobeidentifiedandrectificationentrieshavetoberecorded.Forexample, wages which are paid for construction of a building are wrongly debited to wages account. By doing so, the expensesare increased and the resultant profit is reduced. Really speaking, the wages paid for construction, being a part and parcel of building account, should have been debitedtobuildingaccount.Thereforetorectifythiserror,buildingaccountshouldbedebitedand wages account should be credited so that building accountgets enhanced and wages account getsreduced.SuchrectificationentriesaredrawninJournalproper.Moredetailsareavailablein Unit6.

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SelfAssessmentQuestions5 1. Errors occur in the course of accounting and they influence the profit calculation of the businessconcern(StatewhetheritisTrueorFalse). 2. Whatarethebroadcategoriesoferrors? 3. Rectificationentriesaredrawnin_____________. 5.2e.Transferringentries Whenthebalanceofoneaccountistransferredtoanotheraccount,transferringentryismade. For instance, drawings made by proprietor should be reduced from his capital account. To facilitate this, drawings account, which shows debit balance, is credited and capital account is debited(becausecapitalisreducedasaresultofdrawings).Thisisatransferringentryanditis recordedinJournalproper. SelfAssessmentQuestions6 1. When an account showing debit balance, when transferred, should be _______ and vice versa. 2. Thecostofstockdestroyinfireshouldbetransferredtowhichaccount?whatistheentryfor that? 3. Whendrawingaretransferredtocapital.Whatistheentry? 5.2f.Creditpurchaseofassetsandsaleofassets Normally,purchaseofgoodseitheroncashorcredit,getrecordedincashaccountorpurchases account respectively. Cash purchase of assets, like furniture or plant or machinery also get recordedincashaccount.Butcreditpurchaseofassets,asmentionedabove,cannotbeentered in purchase account or cash account because they are not goods. Hence such entries are recordedinJournalproper,bydebitingassetaccountand creditingthepersonalaccountofthe supplier of the assets. Similarly, when these assets are sold, an entry is made debiting cash accountorpersonalaccountofthebuyerasthecasemaybeandcreditingtheconcernedasset account.Forexample,anassetofRs.5000issoldforRs.3000toShaym&Bros,whopromised to pay the amount later. Then Shyam & Brosaccount is debited with Rs3000, Loss on sale of assetaccountisalsodebitedbyRs.2000andtheconcernedassetaccountiscredited withthe bookvalueRs5000.ThelosssustainedintheprocessistransferredtoProfitandLossaccount later. 5.2g.Withdrawalofgoodsbyproprietorforhispersonalpurpose If a proprietor uses the goods of his business for his personal purpose, this should also be recorded. Since this transaction isnot a sale,it can not be transferred to sales account. But it

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shouldberegardedasdrawingsaccountanditshouldbedebitedandthegoodswhicharegoing outofbusinessshouldbecredited. 5.2h.Lossofgoodsandassetsduetonaturalcauses Goodsmaybelostonfireorasaresultofanynaturalcalamity.Thecostofsuchgoodsshould bereducedoutofthestockofgoods.Goodswhichinsuredmayalsobelost.Apartofthevalue of the cost may be recovered. The part not recovered is transferred to P & L A/c. The cost of goodslostisdebitedandthestockaccountiscredited.Owingtonaturalcauses,wearandtearis caused to assets. Even if the assets are not used, there is obsolescence and as a result, depreciation has to be provided. This is a loss and therefore depreciation is debited and the concernedassetaccountiscredited.Suchimpliedlosesarerecordedinjournalproper. SelfAssessmentQuestions7 1. Credit purchase of assets is not included in purchases account because assets are not goods.(statewhetheritisTrueorFalse). 2. Theprofitorlossinthesaleofassetsshouldbetransferredto________account. 3. Officecashifusedbytheproprietoristreatedaspersonaldrawings(statewhetheritisTrue/ False) 4. A part of the business premises being used by the proprietor for his residence. The rent payableforthatportionisdrawings.(statewhetheritisYes/No). 5. Lossofassetasaresultofwearandteariscalled_______. 6. Lossofgoodsasaresultoffireaccidentistransferredto____account.

5.3PostingTechniquetoLedgerFormofaledgeraccount
Having understood the journal and journal proper, the next important stage of accounting is preparation of ledger accounts in a book called ledger. The book contains the summary of transactions concerning to various heads of accounts for a given period. Posting is made to ledgeraccountsfromjournalentriesandattheendoftheaccountingperiod,eachledgeraccount is balanced. For each ledger account, afew items appear on the debit side and a few on the credit side. While balancing the account, amount on the debit side may be more than that of creditside,andviceversa.Theexcessofdebitovercreditiscalleddebitbalancecarrieddownto credit side of the account. Similarly, excess of credit over debit is known as credit balance broughtdowntodebitsideoftheaccount.Forexample,observethefollowingaccountofRama, acustomer.

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FinancialandManagementAccounting Debit Date 2202 4202 12202 25202 26202 28202 1302 ParticularsJF Tobalanceb/d Tosales ToSales ToSales ToSales ToSales Tobalanceb/d 28,000 RamasAccount Amount Date 5,000 8202 27,000 9202 30,000 15202 6,000 28202 4,000 28202 13,000 28202 85,000 ParticularsJF ByCash BySalesreturns ByBank ByCash ByDiscount Bybalancec/d

Unit5 Credit Amount 6,000 4,000 25,000 20,000 2,000 28,000 85,000

Note: 1. Everyaccounthasfourcolumnsondebitsideandfourcolumnsonthecreditside. 2. Attheendofperiod,totalofdebitsideisRs.85000andthecreditamountisRs.57000.The balanceofRs.28000isinexcessofdebitovercreditandisstatedoncreditsideinorderto balancetheaccounttoanequalamountofRs85000 3. The closing balance of the account for February month becomes opening balance for the monthofMarch. 4. JFstandsforjournalfolio,wherefromthetransactionisobtained. 5. Forclosingbalance,itiscalledbalancecarrieddownandforopeningbalance,itisbalance broughtdown. Postingtechnique Postingisdoneeitherfromjournaloranysubsidiarybook. Forexample,thereisatransactionthatgoodsaresoldtoKrishnaforcashRs5,000.Thejournal entry in the journal is Cash account is debited and goods account is credited with an equal amount.Intheledger,onthedebitsideofcashaccount,wewriteTogoodsRs.5000andinthe goodsaccount,wewriteBycashRs.5000.Itisshownherebelow: Journalentry Cashaccount DrRs.5000 ToGoodsaccount Rs.5000

(BeinggoodssoldtoKrishnaoncash)

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Ledgerinthebooksofbusiness CASHACCOUNT Particulars Togoods Amount(Rs) Particulars 5,000 Amount(Rs)

GOODSACCOUNT Particulars Amount(Rs) Particulars Bycash Amount(Rs) 5,000

Fromtheentriesinthesubsidiarybookalso,ledgeraccountscanbeprepared.Forexample,the total of purchasesbook for the month of January 2004 is Rs.56000. The purchases are made from supplier A Rs.26,000 B 20000 and from C Rs.10000.We can find the entries in the ledgerasshownbelow. AsAccount Particulars January2004 Tobalancec/d 26,000 Amount(Rs) Particulars January2004 ByPurchases February2004 Bybalb/d BsAccount Particulars January2004 Tobalancec/d 20,0000 Amount(Rs) Particulars January2004 ByPurchases Feb,2004 Bybalanceb/d CsAccount 20,000 20,000 Amount(Rs) 26,000 26,000 Amount(Rs)

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Particulars January2004 Tobalancec/d

Amount(Rs) Particulars January2004 10,000 ByPurchases Feb,2004 Bybalb/d PurchasesAccount

Amount(Rs)

!0,000

10,000

Particulars January2004 ToSundries Feb,2004 Tobalanceb/d

Amount(Rs) Particulars January2004 56,000 Bybalancec/d

Amount(Rs)

56,000

56,000

SelfAssessmentQuestions8 1. Ledgerisregardedas_______________________book. 2. Transactionsthatarenotrecordedinotherjournals,areincorporatedin_______ 3. Whatisaclosingentry? 4. RentaccountisclosedbydebitingP&Laccountandcrediting________account. 5. IfassetsbroughtinbyproprietorareRs400000andliabilitiesareRs150000,whatopening entry,doyoudrawinjournalproper? 6. Out of salaries paid for the year 2005, Rs.6000 is related to the year 2006. How do you adjustthisgap?Andwhatentrydoyoupass? 7. Whatisbalancingofledgeraccount? 8. Canwedrawjournalentriesfromledger? 9. IfRamahassoldgoodstoKrishnaRs4000oncredit,drawjournalentriesinthebooksof RamaandKrishna. 10. Stateanytwodifferencesbetweenjournalandledger. 11. Cashaccountandcashbooklookalike.Isitaledgeraccountormeresubsidiarybook? Illustration Journalisethefollowingtransactionsandopenonlythepersonalaccountsintheledger.

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2001 July1

Govind Singh started business with the following assets: Cash Goods Furniture

Amount Rs. 20,000 10,000 5,000 5,000 3,000 3,000 9,000 5,000 100 600 250 160

July5 SoldgoodstoRaghavan Soldgoodsforcash July 9 ReceivedfromRaghavanonaccount July12 PurchasedgoodsfromMukundan July15 PaidMukundan July20 PaidinteresttoMukundan July30 Paidstationerycharges PaidSalaries Paidrent

Solution JournalentriesinthebooksofGovindSingh Date 2001July1 Particulars CashaccountDr StockaccountDr FurnitureaccountDr ToCapitalaccount (Beingassetsbroughtinascapital) July5 RaghavanaccountDr CashaccountDr ToSalesaccount (Being sales madein cash and on credit toRaghavan) July9 CashaccountDr ToRaghavanaccount 3,000 3,000 5,000 3,000 8,000 LF Debit(Rs) 20,000 10,000 5,000 35,000 Credit(Rs)

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(BeingcashreceivedfromRaghavan) July12 PurchasesaccountDr ToMukundansaccount (Being goods purchased on credit from Mukundan) July15 MukundansaccountDr ToCashaccount (Being cash paid to Mukundan on account) July20 InterestaccountDr ToCashaccount (BeinginterestpaidtoMukundan) July30 StationeryaccountDr SalariesaccountDr RentaccountDr Tocashaccount (Beingtheaboveexpensespaidout) Inthisproblem,thereare12ledgeraccountsaffected,namelyCash,furniture,stock,Raghavan, sales,purchases,Mukundan,interest,stationery,salaries,rentaccounts.However,thepersonal accountsareRaghvansaccountandMukundansaccount.Theseledgeraccountsappearinthe followingmannerintheledger. Dr Particulars RaghavansAccountinthebooksofGovindSinghCr Amount Particulars (Rs) July,5ToSales 5,000 July9 ByCash July31ByBalancec/d 5,000 August,1Tobalanceb/d 2,000 Amount (Rs) 3,000 2,000 5,000 600 250 160 1,010 100 100 5,000 5,000 9,000 9,000

st TheaboveaccountshowsthatRaghavanisowingtoGovindSinghRs.2000ason31 Julyand

thisistheopeningbalanceforAugust.

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Dr Particulars

MukundansAccountinthebooksofGovindSinghCr Amount Particulars (Rs) Amount (Rs) 9,000

July15Tocash July31Tobalancec/d

5,000 July12Bypurchases 4,000 9,000

9,000
st August1 Bybalanceb/d4,000

st This means that Mukundan is owing to Govind Singh Rs.4000 as on 31 July and this is the st openingbalanceforAugust1 .

Summary LedgeraccountsarepreparedfromGeneraljournalandothersubsidiarybooksincludingJournal proper.Alltransactionsarepostedtoledgeraccountsandsomeofthemshowdebitbalanceand someothercreditbalance.Forconvenienceofthestudents,thefollowingtablegivesafairidea ofwhataccountusuallyshowswhatbalance.

Nameoftheaccount Capital PersonalDrawings Creditors BillsPayable Bankoverdraft Loansfromothers Outstandingexpenses Prereceivedincomes Reservesforfutureexpensesorlosses Allitemsofincomes Cashinhandoratbank Assetssuchasfurniture,buildings,plant, machinery,tools,stock

Debit/creditbalance Credit Debit Credit Credit Credit Credit Credit Credit Credit Credit Debit

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ofgoods,etc Debtors,Billsreceivable Loansgiventoothers Investmentsmade All expenses such as wages, carriage, insurance, salaries, printing and stationery, advertising, commission paid, interest paid,etc Prepaidinsurance,rentoranyprepaidexpenses Outstandingincomes Losseslikedepreciation,lossintherevaluationofassetsorsale ofassets, Anyotherasset

Debit Debit Debit Debit

Debit

Debit Debit Debit

Debit

TerminalQuestions 1. A company is engaged in the following transactions in June. You are required to record transactionsingeneraljournal. 1. ReceivedcashfromcustomersRs.14000 2. ReturnedgoodstosuppliersRs.4000 6. PaidfortypewriterpurchasedoncreditonMay4,Rs.6000 10. ReceivedcashforservicesprovidedRs.Rs.2300 13. PaidforsuppliespurchasedRs5600 18. PaidtelephonebillforthemonthRs.8400 20. ProvidedprofessionalservicesforRs.9000tothecustomerwhopaidadvance OfRs2000 30. PaidsalariesforthemonthofJuneRs3400 2. Mr.Lakshminarayanasetupafinancecompany.Thefollowingtransactionstookplaceinthe monthofJanuary.Drawthejournalentries a) BeganbusinessbydepositingRs60000inbankinthenameofthecompany. b) PaidofficerentfortwomonthsinadvanceRs.6000 c) PurchasedofficesuppliesoncreditfromCRs.3000 d) PurchasedofficeequipmentforcashRs.5000

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e) ReceivedcashfortheservicesrenderedRs.10000 f) PaidsecurityguardsalaryRs.3000 g) PaidtoacreditorConhisaccountRs.1200 h) BilledcustomersforservicesprovidedRs.9500 i) PaidinsurancepremiumforthemonthRs.500 j) PaidadvertisementchargesRs.2000 k) CollectedamountsduefromcustomersRs.5000 l) PurchasedofficesuppliesforcashRs.800 m) PaidtelephoneexpensesRs.700 n) PaidelectricityexpensesRs.200 3. Prepareledgeraccountsforthejournalentriesrecordedforthetransactionsasgiveninthe exercise2. 4. Record thefollowing transactions in the personal accountof Mr. Ravindranath andbalance theaccountattheendofeachmonth.Findouttheclosingbalanceforeachmonth. Date Particulars Amount Rs. 1998 September1 4 4 15 18 October1 3 21 SoldgoodstoRavindranath ReceivedfromRavindranath Allowedhimadiscount Ravindranathboughtgoods ReceivedfromRavindranathcashonaccount Balancefromlastmonth SoldgoodstoRavindranath ReceivedfromRavindranathcash Allowedhimdiscount 31 Receivedcashinfullsettlementofaccount 54250 51538 2712 60000 20000 ? 10000 3960 40 ?

AnswerforSelfAssessmentQuestions SelfAssessmentQuestions1 1. Secondarybook 2. Allsuchtransactionswhicharenotenteredinanyotherjournal

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3. Book. 4. JournalproperandLedger. 2. Journalproper 3. True. SelfAssessmentQuestions2 1. True 2. Capital 3. Goodwill SelfAssessmentQuestions3 1. True 2. Tradeexpenses 3. Allexpensesotherthantradeexpenses 4. No. SelfAssessmentQuestions4 1. True 2. a.Depreciationisdebited&buildingaccountiscredited b.ClosingstockA/cisdebitedandtradingA/ciscredited c.PrepaidexpensesaccountisdebitedandinsuranceA/ciscredited d.SalariesA/cisdebitedandoutstandingexpensesaccountiscredited. e.DrawingsA/cisdebitedandstockaccountiscredited. SelfAssessmentQuestions5 1. True 2. Errors that can be disclosed by trial balance and errors that cannot be disclosed by trial balance 3. Journalproper. SelfAssessmentQuestions6 1. Credited 2. Tradingaccount,stockdestroyofaccountisdebitedandstockaccountiscredited. 3. Accountisdebitedanddrawingsaccountiscredited. SelfAssessmentQuestions7 1. True 2. P&L

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3. True 4. Yes 5. Depreciation 6. P&L SelfAssessmentQuestions8 1. Secondary 2. Journalproper 3. Closing entry is an entry to close expenses, incomes (revenue items ) to the respective revenueaccounts(TradingandP&LA/c). 4. Rent 5. AssetsaccountDr4,00,000 ToLiabilitiesaccount1,50,000 ToCapitalaccount2,50,000(Difference)

6. ThesalarypaidinadvanceisRs6,000.Itshouldbedeductedoutofsalariespaidin2005. Theentryis:PrepaidsalariesA/c6000 ToSalariesA/c6000 (Beingsalarypaidinadvanceadjusted). 7. Balancingofaledgeraccountmeansfindingoutexcessofdebitovercreditorviceversa andequatingbothdebitandcreditsidesofaccount. 8. Yes 9. BooksofRama:KrishnasA/cDr Tosalesaccount. BooksofKrishna:PurchasesA/cDr ToRamasaccount. 10. a.Journalisabookoforiginalentrywhereasledgerisasecondarybook. b.JournalincludesGeneraljournalandsubsidiarybooks.Butledgerdoesnot. 11.cashaccountisbothasubsidiarybookandaledgeraccount. AnswerforTerminalQuestions: 1. Refertounit5.3illustration. 2. Refertounit5.3illustration. 3. Refertounit5.3illustration 4. ClosingbalanceSept30Debitbalanceb/d40,000.

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ClosingbalanceOct31BalanceNil. AmountpaidinfullsettlementisRs46,000.

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