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CHAPTER 5

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

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) 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
Errors in detail
Errors 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 detail
Errors of principle Errors of commission
 Accounting entry  Bookkeeper makes

breaks the 'rules' of a mistake


an accounting  E.g.:
principle or concept  Putting a debit entry
 E.g.: or a credit entry in
 Capital expenditure the wrong account
treated as revenue  Errors of casting
expenditure (adding up)
 Drawings treated as
expenses
Correction of errors
Journal entries Suspense account
 Requires a debit  Why have?

and an equal A trial balance is


credit entry drawn up which
 Total debits equal does not balance
 Knows where to
total credits before
a journal entry is post the credit side
of a transaction,
made but does not know
 They will still be where to post the
equal after the debit (or vice
journal entry is versa)
made
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 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
account
A 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
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 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
account
A 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 - 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 $2,000
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 (con’t)
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 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
Accounting packages
Advantages Disadvantages
(a) The packages can be (a) Initial time and costs
used by non- involved
specialists. (b) Need for security
(b) A large amount of checks
data can be processed (c) The necessity to
very quickly. develop a system of
(c) More accurate than coding (see below)
manual and checking.
(d) Handling and (d) Lack of 'audit trail'. It
processing large is not always easy to
volumes of data. see where a mistake
has been made.
(e) Possible resistance
on the part of staff to
the introduction of the
Modules
 Program which  Invoicing
deals with one  Inventory
particular part of a
business accounting
 Receivables ledger
system  Payables ledger
 Modules may be  Nominal ledger
integrated with the  Payroll
others  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 $917
B Y owes X $917
C X has paid Y $917
D 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 $1,200
B $1,600
C $1,300
D $1,500

Answer: C
QB 11
11 An error of commission is one where
A A transaction has not been recorded
B 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
transaction
D 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 Omission
B Original entry
C Commission
D Principle

Answer: B
QB 23
When a trial balance was prepared, two ledger accounts
were omitted:
Discounts received $6,150
Discounts allowed $7,500
To make the trial balance balance, a suspense account
was opened. What was the balance on the suspense
account?
A Debit $1,350
B Credit $1,350
C Debit $13,650
D Credit $13,650

Answer: A

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