Financial and Management Accounting Unit 5

Unit 5 Secondary Books

Structure:
5.1 Introduction
5.2 Types
5.3 Posting technique in the ledger

5.1 Introduction
Journal is the book of original entry and all transactions are recorded first in
that book. We have also learnt that there are subsidiary books, which are
different types of journal and in large organizations, these subsidiary books
are maintained as books of original entry. However there is a book called
Journal Proper, which is also a type of journal in which transactions which
can not be entered in any other subsidiary books, shall be recorded. For
instance, a loan is declared as bad and it should be written off. This is not a
cash transaction non the less a credit transaction. But it should be recorded
in some book. Similarly depreciation on assets has to be provided; rent paid
in advance ; taxes paid in advance, outstanding expenses payable and so
many such transactions have to be recorded for a fair calculation of profit or
loss. To facilitate recording of such transactions, a separate book called
journal proper is maintained. It is only after all transactions are entered into
various books, ledger accounts are prepared entirely in a different book
namely ledger. The process of recording the transactions in the ledger is
known as posting. Since ledger is prepared basing on journal, it is known as
secondary book.

Learning Objectives:
After studying this unit, you should be able to understand the following:
1. To know what secondary books are.
2. To know what Journal proper is and its purpose.

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3. To know what a ledger and ledger account mean.

4. To understand the posting of transactions from General Journal
5. To know the technique of posting transactions from subsidiary books

5.2 Types
There are three types of ledger, namely debtor’s ledger, creditor’s ledger
and general ledger. Debtor’s ledger contains accounts of debtors to whom
goods are sold on credit. Creditor’s ledger contains accounts of creditors
from whom goods are purchased on credit. General ledger contains real
accounts, nominal accounts and all personal accounts, other than debtor’s
and creditor’s accounts.
Before understanding about posting transactions to ledger, it is useful to
understand about journal proper.
Journal proper contains the following aspects:
a) Opening journal entries
b) Closing journal entries
c) Adjusting entries
d) Rectification entries
e) Transferring entries
f) Credit purchase of assets and sale of assets
g) Withdrawal of goods by the proprietor for his personal use
h) Loss of goods due to natural causes
Self Assessment Questions 1:
1. Ledger is also known as _____________.
2. Journal proper contains ______________.
3. Is Ledger an account or a book ?
4. The three types of secondary books are _____, _______ and _______.
5. Furniture of the office used by the proprietor in his house. where do you
find an entry for this transaction in business books?
6. What ever is recorded in journal proper is also posted to ledger. ( state
whether it is True /False).

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5.2 a. Opening Journal entries:

In the case of running business, all the assets and liabilities of the previous
year should be brought down to the current year and therefore an entry is
drawn debiting all assets account and crediting liabilities account and the
difference being credited to capital account. In a business on 31st Dec,
2004, the following assets and liabilities were there: Cash at bank Rs50000;
Furniture Rs.48000; Plant and machinery Rs200000; Debtors Rs.100000;
Stock in trade Rs.20000; Creditors Rs.50000; Bank loan Rs.45000. On 1st of
January, 2005the assets and liabilities have to be brought in and so in
Journal Proper the following entry is recorded.

Date Particulars Ledger Folio Debit Rs Credit Rs

1-1-05 Cash at Bank A/c Dr 50000
Furniture A/c Dr 48000
P and M A/c Dr 200000
Debtor’s A/c Dr 100000
Stock In trade A/c Dr 20000
To Creditors A/c 50000
To Bank Loan A/c 45000
To Capital A/c (Diff) 323000
(Being assets and liabilities of
the previous year brought in)

Similarly, a newly set up business may commence its activities with some
assets and liabilities. Then the assets are debited and liabilities are credited
and the difference is transferred to capital account.

Self Assessment Questions 2:

1. Opening journal entries are drawn at the commencement of accounting
period. (state whether it is True / False).
2. When all assets are debited and all liabilities are credited, the difference
is transferred to ___________ account.
3. If opening liabilities including capital are more than assets, to what
account the difference is transferred ?

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5.2 b. Closing entries

Closing entries are drawn at the end of accounting period and the purpose
is to close down several account balances for the current period. The
accounts of assets and liabilities will not be closed because they continue to
exist further. All expenses and income accounts are closed by 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 & L account and crediting Salaries
account, so that the salaries account of the current year does not again
appear in the next year. More details about closing entries will be dealt with
in Unit 7.

Self Assessment Questions 3:

1. All revenue accounts are closed at the end accounting period. (state
whether it is True / False).
2. All trade expenses are closed by debiting trading account and crediting
_____ accounts.
3. _______ account are closed by transferring them to P & L account.
4. Are assets and liabilities accounts closed at the end of the accounting
year ? (state whether it is Yes / No).

5.2 c. Adjusting entries

After the closure of accounting year, there might be a few more transactions
left over and which are not incorporated into journal or ledger, owing to
omission and practical difficulties. For example, closing stock should be
valued on the last day of the accounting period. If the stock is so large
containing several items, it is possible that the calculation is not made along
with physical verification. In such a case, an adjusting entry is made to bring
that item into account. Similarly, with regard to rent paid in advance,
expenses outstanding, incomes received in advance etc adjusting entries

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are made in Journal proper. If they are not considered, the profit or loss
reflected by the final accounts will not give the correct picture for the
accounting period. More details about adjusting entries will be discussed in
Unit 7.

Self Assessment Questions 4:

1. Transaction which are out of trial balance have to be adjusted for proper
calculation of profit / loss.( state whether it is True / False ).
2. What is the adjusting entry in the following cases
a. Depreciation of Building
b. Closing stock
c. Pre-paid Insurance
d. Outstanding salaries
e. Stock used for personal purposes

5.2 d. Rectification entries

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. They have
to be identified and rectification entries have to be recorded. For example,
wages which are paid for construction of a building are wrongly debited to
wages account. By doing so, the expenses are 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 debited to building
account. Therefore to rectify this error, building account should be debited
and wages account should be credited so that building account gets
enhanced and wages account gets reduced. Such rectification entries are
drawn in Journal proper. More details are available in Unit 6.

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Self Assessment Questions 5:

1. Errors occur in the course of accounting and they influence the profit
calculation of the business concern (State whether it is True or False ).
2. What are the teo broad categories of errors ?
3. Rectification entries are drawn in _____________.

5.2 e. Transferring entries

When the balance of one account is transferred to another account,
transferring entry is made. 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 (because capital is reduced as a result of drawings). This is a
transferring entry and it is recorded in Journal proper.

Self Assessment Questions 6:

1. When an account showing debit balance, when transferred, should be
_______ and vice versa.
2. The cost of stock destroy in fire should be transferred to which account?
what is the entry for that ?
3. When drawing are transferred to capital. What is the entry?

5.2 f. Credit purchase of assets and sale of assets

Normally, purchase of goods either on cash or credit, get recorded in cash
account or purchases account respectively. Cash purchase of assets, like
furniture or plant or machinery also get recorded in cash account. But credit
purchase of assets, as mentioned above, can not be entered in purchase
account or cash account because they are not goods. Hence such entries
are recorded in Journal proper, by debiting asset account and crediting the
personal account of the supplier of the assets. Similarly, when these assets
are sold, an entry is made debiting cash account or personal account of the
buyer as the case may be and crediting the concerned asset account. For
example, an asset of Rs.5000 is sold for Rs.3000 to Shaym & Bros, who
promised to pay the amount later. Then Shyam & Bros account is debited

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with Rs3000, Loss on sale of asset account is also debited by Rs.2000 and
the concerned asset account is credited with the book value Rs5000. The
loss sustained in the process is transferred to Profit and Loss account later.

5.2 g. Withdrawal of goods by proprietor for his personal purpose

If a proprietor uses the goods of his business for his personal purpose, this
should also be recorded. Since this transaction is not a sale, it can not be
transferred to sales account. But it should be regarded as drawings account
and it should be debited and the goods which are going out of business
should be credited.

5.2 h. Loss of goods and assets due to natural causes

Goods may be lost on fire or as a result of any natural calamity. The cost of
such goods should be reduced out of the stock of goods. Goods which
insured may also be lost. A part of the value of the cost may be recovered.
The part not recovered is transferred to P & L A/c. The cost of goods lost is
debited and the stock account is credited. Owing to natural causes, wear
and tear is 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 concerned asset account is
credited. Such implied loses are recorded in journal proper.

Self Assessment Questions 7:

1. Credit purchase of assets is not included in purchases account because
assets are not goods. ( state whether it is True or False ).
2. The profit or loss in the sale of assets should be transferred to
________account.
3. Office cash if used by the proprietor is treated as personal drawings
( state whether it is True / False )
4. A part of the business premises being used by the proprietor for his
residence. The rent payable for that portion is drawings. (state whether it
is Yes / No ).

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5. Loss of asset as a result of wear and tear is called _______.

6. Loss of goods as a result of fire accident is transferred to ____ account.

5.3 Posting Technique to Ledger – Form of a ledger account

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 ledger accounts from journal
entries and at the end of the accounting period, each ledger account is
balanced. For each ledger account, a few 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 credit side, and vice versa. The excess
of debit over credit is called debit balance carried down to credit side of the
account. Similarly, excess of credit over debit is known as credit balance
brought down to debit side of the account. For example, observe the
following account of Rama, a customer.
Debit Rama’s Account Credit
Date Particulars JF Amount Date Particulars JF Amount
2-2-02 To balance b/d 5,000 8-2-02 By Cash 6,000
4-2-02 To sales 27,000 9-2-02 By Sales returns 4,000
12-2-02 To Sales 30,000 15-2-02 By Bank 25,000
25-2-02 To Sales 6,000 28-2-02 By Cash 20,000
26-2-02 To Sales 4,000 28-2-02 By Discount 2,000
28-2-02 To Sales 13,000 28-2-02 By balance c/d 28,000

To balance b/d 85,000 85,000

1-3-02
28,000

Note:
1. Every account has four columns on debit side and four columns on the
credit side.

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2. At the end of period, total of debit side is Rs.85000 and the credit
amount is Rs.57000. The balance of Rs.28000 is in excess of debit over
credit and is stated on credit side in order to balance the account to an
equal amount of Rs85000
3. The closing balance of the account for February month becomes
opening balance for the month of March.
4. JF stands for journal folio, where from the transaction is obtained.
5. For closing balance, it is called balance carried down and for opening
balance, it is balance brought down.

Posting technique
Posting is done either from journal or any subsidiary book.
For example, there is a transaction that goods are sold to Krishna for cash
Rs5,000. The journal entry in the journal is Cash account is debited and
goods account is credited with an equal amount. In the ledger, on the debit
side of cash account, we write ‘To goods’ Rs.5000 and in the goods
account, we write ‘By cash Rs.5000. It is shown here below:

Journal entry Cash account Dr Rs. 5000

To Goods account Rs. 5000
(Being goods sold to Krishna on cash)

Ledger in the books of business

CASH ACCOUNT
Particulars Amount (Rs) Particulars Amount (Rs)
To goods 5,000

GOODS ACCOUNT
Particulars Amount (Rs) Particulars Amount (Rs)
By cash 5,000

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From the entries in the subsidiary book also, ledger accounts can be
prepared. For example, the total of purchases book 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 ledger as shown
below.
A’s Account
Particulars Amount (Rs) Particulars Amount (Rs)
January 2004 January 2004
To balance c/d 26,000 By Purchases 26,000
February 2004
By bal b/d 26,000

B’s Account
Particulars Amount (Rs) Particulars Amount (Rs)
January 2004 January 2004
To balance c/d 20,0000 By Purchases 20,000
Feb, 2004
By balance b/d 20,000

C’s Account
Particulars Amount (Rs) Particulars Amount (Rs)
January 2004 January 2004
To balance c/d 10,000 By Purchases !0,000
Feb, 2004
By bal b/d 10,000

Purchases Account
Particulars Amount Particulars Amount (Rs)
(Rs)
January 2004 January 2004
To Sundries 56,000 By balance c/d 56,000
Feb, 2004
To balance b/d 56,000

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Self Assessment Questions 8:

1. Ledger is regarded as _______________________ book.
2. Transactions that are not recorded in other journals, are incorporated
in _______
3. What is a closing entry?
4. Rent account is closed by debiting P & L account and crediting
______account.
5. If assets brought in by proprietor are Rs400000 and liabilities are
Rs150000, what opening entry, do you draw in journal proper?
6. Out of salaries paid for the year 2005, Rs.6000 is related to the year
2006. How do you adjust this gap? And what entry do you pass?
7. What is balancing of ledger account?
8. Can we draw journal entries from ledger?
9. If Rama has sold goods to Krishna Rs4000 on credit, draw journal
entries in the books of Rama and Krishna.
10. State any two differences between journal and ledger.
11. Cash account and cash book look alike. Is it a ledger account or mere
subsidiary book?
Illustration
Journalise the following transactions and open only the personal accounts in
the ledger.
2001-July 1 Govind Singh started business with the following Amount
assets: Rs.
Cash 20,000
Goods 10,000
Furniture 5,000
July 5 Sold goods to Raghavan 5,000
Sold goods for cash 3,000
July 9 Received from Raghavan on account 3,000
July 12 Purchased goods from Mukundan 9,000
July 15 Paid Mukundan 5,000
July 20 Paid interest to Mukundan 100
July 30 Paid stationery charges 600
Paid Salaries 250
Paid rent 160

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Solution

Journal entries in the books of Govind Singh

Date Particulars LF Debit Credit
(Rs) (Rs)
2001 July 1 Cash account Dr 20,000
Stock account Dr 10,000
Furniture account Dr 5,000
To Capital account 35,000
(Being assets brought in as capital)
July 5 Raghavan account Dr 5,000
Cash account Dr 3,000
To Sales account 8,000
(Being sales made in cash and on
credit to Raghavan)
July 9 Cash account Dr 3,000
To Raghavan account 3,000
(Being cash received from
Raghavan)
July 12 Purchases account Dr 9,000
To Mukundan’s account 9,000
(Being goods purchased on credit
from Mukundan)
July 15 Mukundan’s account Dr 5,000
To Cash account 5,000
(Being cash paid to Mukundan on
account)
July 20 Interest account Dr 100
To Cash account 100
(Being interest paid to Mukundan)
July 30 Stationery account Dr 600
Salaries account Dr 250
Rent account Dr 160
1,010
To cash account
(Being the above expenses paid
out)

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In this problem, there are 12 ledger accounts affected, namely Cash,

furniture, stock, Raghavan, sales, purchases, Mukundan, interest,
stationery, salaries, rent accounts. However, the personal accounts are
Raghvan’s account and Mukundan’s account. These ledger accounts
appear in the following manner in the ledger.

Dr Raghavan’s Account in the books of Govind Singh Cr

Particulars Amount Particulars Amount
(Rs) ( Rs)
July, 5 To Sales 5,000 July 9 By Cash 3,000
July 31 By Balance c/d 2,000
5,000 5,000
August, 1 To balance b/d 2,000

The above account shows that Raghavan is owing to Govind Singh Rs.2000
as on 31st July and this is the opening balance for August.

Dr Mukundan’s Account in the books of Govind Singh Cr

Particulars Amount Particulars Amount
(Rs) (Rs)
July 15 To cash 5,000 July 12 By purchases 9,000
July 31 To balance c/d 4,000
9,000 9,000

August 1st By balance b/d 4,000

This means that Mukundan is owing to Govind Singh Rs.4000 as on 31st

July and this is the opening balance for August 1st .

Summary
Ledger accounts are prepared from General journal and other subsidiary
books including Journal proper. All transactions are posted to ledger
accounts and some of them show debit balance and some other credit

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balance. For convenience of the students, the following table gives a fair
idea of what account usually shows what balance.

Name of the account Debit / credit

balance
Capital Credit
Personal Drawings Debit
Creditors Credit
Bills Payable Credit
Bank overdraft Credit
Loans from others Credit
Outstanding expenses Credit
Pre received incomes Credit
Reserves for future expenses or losses Credit
All items of incomes Credit
Cash in hand or at bank Debit
Assets such as furniture, buildings, plant, machinery,
tools, stock of goods, etc Debit
Debtors, Bills receivable Debit
Loans given to others Debit
Investments made Debit
All expenses such as wages, carriage, insurance,
salaries, printing and stationery, advertising, Debit
commission paid, interest paid, etc

Prepaid insurance, rent or any prepaid expenses Debit

Outstanding incomes Debit
Losses like depreciation, loss in the revaluation of Debit
assets or sale of assets,
Any other asset Debit

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Terminal Questions
1. A company is engaged in the following transactions in June. You are
required to record transactions in general journal.
1. Received cash from customers Rs.14000
2. Returned goods to suppliers Rs.4000
6. Paid for type writer purchased on credit on May 4, Rs. 6000
10. Received cash for services provided Rs. 2300
13. Paid for supplies purchased Rs. 5600
18. Paid telephone bill for the month Rs. 8400
20. Provided professional services for Rs.9000 to the customer who paid
advance of Rs. 2000
30. Paid salaries for the month of June Rs. 3400

2. Mr. Lakshminarayana set up a finance company. The following

transactions took place in the month of January. Draw the journal entries
a) Began business by depositing Rs. 60000 in bank in the name of the
company.
b) Paid office rent for two months in advance Rs.6000
c) Purchased office supplies on credit from ‘C’ Rs.3000
d) Purchased office equipment for cash Rs.5000
e) Received cash for the services rendered Rs.10000
f) Paid security guard salary Rs.3000
g) Paid to a creditor ‘C’ on his account Rs.1200
h) Billed customers for services provided Rs.9500
i) Paid insurance premium for the month Rs.500
j) Paid advertisement charges Rs. 2000
k) Collected amounts due from customers Rs.5000
l) Purchased office supplies for cash Rs.800
m) Paid telephone expenses Rs.700
n) Paid electricity expenses Rs.200

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3. Prepare ledger accounts for the journal entries recorded for the
transactions as given in the exercise 2.

4. Record the following transactions in the personal account of Mr.

Ravindranath and balance the account at the end of each month. Find
out the closing balance for each month.

Date Particulars Amount

Rs.
1998
September 1 Sold goods to Ravindranath 54250
4 Received from Ravindranath 51538
4 Allowed him a discount 2712
15 Ravindranath bought goods 60000
18 Received from Ravindranath cash on account 20000
October 1 Balance from last month ?
3 Sold goods to Ravindranath 10000
21 Received from Ravindranath cash 3960
Allowed him discount 40
31 Received cash in full settlement of account ?

Answer for Self Assessment Questions

Self Assessment Questions 1:

1. Secondary book
2. All such transactions which are not entered in any other journal
3. Book
4. Debtors, Creditors and General
5. Journal proper
6. True

Self Assessment Questions 2:

1. True
2. Capital

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3. Goodwill

Self Assessment Questions 3:

1. True
2. Trade expenses
3. All expenses other than trade expenses
4. No.

Self Assessment Questions 4:

1. True
2. a. Depreciation is debited & building account is credited
b.. Closing stock A/c is debited and trading A/c is credited
c. Pre-paid expenses account is debited and insurance A/c is credited
d. Salaries A/c is debited and outstanding expenses account is credited.
e. Drawings A/c is debited and stock account is credited.

Self Assessment Questions 5:

1. True
2. Errors that can be disclosed by trial balance and errors that cannot be
disclosed by trial balance
3. Journal proper.

Self Assessment Questions 6:

1. Credited
2. Trading account, stock destroy of account is debited and stock account
is credited.
3. Account is debited and drawings account is credited.

Self Assessment Questions 7:

1. True
2. P & L
3. True
4. Yes

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5. Depreciation
6. P & L

Self Assessment Questions 8:

1. Secondary
2. Journal proper
3. Closing entry is an entry to close expenses, incomes (revenue items )
to the respective revenue accounts( Trading and P & L A/c ).
4. Rent
5. Assets account Dr 4,00,000
To Liabilities account 1,50,000
To Capital account 2,50,000( Difference)
6. The salary paid in advance is Rs 6,000. It should be deducted out of
salaries paid in 2005.
The entry is : Prepaid salaries A/c 6000
To Salaries A/c 6000
( Being salary paid in advance adjusted ).
7. Balancing of a ledger account means finding out excess of debit over
credit or vice versa and equating both debit and credit sides of
account.
8. Yes
9. Books of Rama: Krishna’s A/c Dr
To sales account.
Books of Krishna : Purchases A/c Dr
To Rama’s account.
10. a. Journal is a book of original entry where as ledger is a secondary
book.
b. Journal includes General journal and subsidiary books. But ledger
does not.
11. cash account is both a subsidiary book and a ledger account.

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Answer for Terminal Questions:

1. Refer to unit 5.3 illustration.
2. Refer to unit 5.3 illustration.
3. Refer to unit 5.3 illustration
4. Closing balance Sept 30 Debit balance b/d 40,000.
Closing balance Oct 31 Balance Nil.
Amount paid in full settlement is Rs 46,000.

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