business and accounting - 02
TRANSCRIPT
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2. The Ledger and the Trial Balance
Following themes are discussed in this chapter
2.1 Posting transactions to the ledger
2.2 Balancing off ledger accounts
2.3 Preparation of the trial balance
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Your attention is drawn on the following basic terms in this chapter.
_Assets accounts _Income accounts
_Expenditure accounts _Equity accounts
_Liability accounts _Blancing off ledger accounts
_Ledger _Trial balance
Introduction
The transactions which were recorded in prime entry books using source documents
are posted to the ledger accounts under the double entry system. The collection of
these accounts can be identified as the ledger. It includes various types of accounts. As
the changes of transactions are recorded in the ledger accounts we can see a summary
of such transactions in a ledger account. Using the balances of ledger accounts for a
specific day, the trial balance is prepared to ensure the arithmetic accuracy of transactions
recorded under the double entry system. The trial balance is very useful for the
preparation of remaining accounting records in a business.
Accordingly, the preparation of accounts and the trial balance will be discussed in this
chapter.
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2.1 Posting Transactions to the Ledger
You have already studied that the source documents (such as receipts, vouchers,
invoices, debit notes, credit notes) provide us the information of transactions in a
business. Based on these source documents, prime entry books are prepared. Now
let us study the next step of the accounting process.
After recording transactions in the prime entry books they should be entered in the
accounts according to double entry system. The basis of the double entry system is a
dual economic effect of a transaction. It means that each transaction has a dual effect
and it is recorded as debit and credit according to the principle of the double entry
system. An account is an accepted format that summarizes the data of transactions of
a certain period of time.
The place where all the accounts are included is called the ledger. There are a number
of accounts to record transactions in the business and it is clear that there are various
kinds of accounts in the ledger.
These accounts can be classified as follows.
Assets accounts
Expenditure accounts
Liability accounts
Income accounts Capital / Equity accounts
Assets accounts
Income accounts
Expenditure accounts
The way of forming the ledger
Liability accounts Ledger
Capital account
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Assets Accounts
The resources of a business can simply be identified as assets. The changes in assets
are recorded in assets accounts.
Examples : building account
debtors account
cash account
Asset account has a debitbalance
Expenditure Accounts
Expenses should be incurred to generate the income of the business. The accounts in
which the day to day expenses are recorded can be defined as expenditure accounts.
Expenditure account has a debit balance.
Examples : insurance account
salaries account
electricity account
Liabilities Accounts
The obligations for out side parties are known as liabilities. The changes in such
liabilities are recorded in liability accounts. Liability account has a credit balance.
Examples : creditors account
bank loan account
Income Accounts
Income accounts are used to record the details of income earned by the business from
various sources. Specially, the income generated from selling goods and providing
services to the customers are recorded in this account and it has a credit balance.
Examples : sales Account
interest received account
rent received account
discount received account
Capital Accounts
The accounts which show the values of the resources that belong to owners of the
business can be identified as capital accounts. Capital account has a credit balance.
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Accordingly, you have already realized that a ledger has various types of accounts.
and the transactions recorded in prime entry books are posted to the ledger under
double entry system.
Revise your knowledge on how the transactions recorded in prime entry books are
posted to the ledger.
As the cash book and petty cash book act as a ledger accounts, only one
effect is recorded in the ledger accounts out of the transactions recorded in
cash book and petty cash book.
The dual effect of transactions recorded in other prime entry books are
recorded in ledger accounts.
Let us study the following example to revise your knowledge on double entry systemwhich you have studied in Grade 10.
Date
01'01.xx
12.01.xx
14.01.xx
Description
Capital account
Sales account
Bank loan
account
Amount
Rs.
75"000
9"700
15"000
Date
04.01.xx
05.01.xx
07.01.xx
Amount
Rs.
8"000
1"500
24"000
L
F Description
Office equipment Ac.
Purchases account
Rent account
L
F
Cash Book
Credit account
Capital account
Cash book
Cash book
Cash book
Sales account
Bank loan account
Date
01'01.xx
04.01.xx
05.01.xx
07.01.xx
12.01.xx
14.01.xx
Debit account
Cash book
Office equipment
account
Rent account
Purchases account
Cash book
Cash book
Transaction
Introduction of capital Rs. 75,000
Purchase of office equipment worth of
Rs. 8,000 paying cash
Payment of rent Rs. 1,500
Purchase of Rs. 24,000 goods under cashbasis for re-sale'
Cash sales of goods Rs. 9,700'
Bank loan obtained Rs. 15,000
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Debit Capital Account Credit
Debit Office Equipment Account Credit
Debit Rent Account Credit
Debit Purchases Account Credit
Debit Bank Loan Account Credit
L.
F.
Amount
Rs.
L.
F.
Amount
Rs.
15"000
Date Description DescriptionDate
14.01.xx Cash
Amount
Rs.
L.
F.
Amount
Rs.
75"000
Date Description Description
Cash
L.
F. Date
01.01.xx
L.
F.
Amount
Rs.
8"000
L.
F.
Amount
Rs.Date
04.01.xx
Description DescriptionDate
Cash
L.
F.Amount
Rs.
1"500
L.
F.
Amount
Rs.Date Description DescriptionDate
Cash05.01.xx
L.
F.Amount
Rs.
24"000
L.
F.
Amount
Rs.Date
07.01.xx
Description DescriptionDate
Cash
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L.
F.
Amount
Rs.
L.
F.
Amount
Rs.
13"500
9"200
Date Description Description Date
12.03.xx
24.03.xx
Purchases account
Purchases account
L.
F.
Amount
Rs.
3"200
L.
F.
Amount
Rs.Date
15.03
.xx
Description
Cash
Description Date
Debit Sales Account
Credit
2.2 Balancing off Ledger Accounts
After recording transactions in ledger accounts, the balances of credit and debit sides
of them should be calculated at the end of a certain period of time.
This process is called balancing off the ledger accounts.
Following three ledger accounts show five transactions occurred in a business during
the month of March 20XX.
Debit Stationery Account Credit
Debit Creditors Account Credit
Amount
Rs.
9"700
L.
F.
Amount
Rs.
L.
F.
Date Description Description
Cash
Date
12.01.xx
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L.
F.
L.
F.
Date Description Description Date
02'03.xx
Debit Bank Loan Account Credit
25"0002"000 CashCash
Amount
Rs.
Amount
Rs.
20'03.xx
L.
F.Date Description
Cash
Balance b/f
Date Description
Balance c/d
L.
F.
L.
F.Date
31'03.xx
Description
Balance c/d 12'03.xx24'03.xx
L.
F.
Purchase A/cPurchase A/c
L.
F.Date
20'03.xx
31'03.xx
Description
Cash
Balance c/d
Date
01'04.xx
Description
Balance b/f
L.
F.
Debit Bank Loan Account Credit
Amount
Rs.
3"200
Amount
Rs.
3"200
Amount
Rs.
13"500
9"200
22"700
22"700
Amount
Rs.
22"700
22"700
Amount
Rs.
2"000
23"000
25"000
Amount
Rs.
25"000
23"000
Date
Balance b/f
Description
01'04.xx
31'03.xx
01'04.xx
15'03.xx 3"200
3"200
3"200
Cash02'03.xx 25"000
Study how the above accounts have been balanced as they are shown below.
Debit Stationery Account Credit
Debit Creditors Account Credit
Accordingly, understand how the ledger accounts are balanced after recording the
transactions.
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Discount allowed 3,000
Debtors 15,000
Discount received 2,000
Bank loan 10,000
Bank loan interest 2,000
Commission received 6,000
Buildings 45,000
Lands 30,000
Creditors 25,000
Capital 20,000
The following trial balance has been prepared using the above balances provided by
Sepalas Business as at 31.12.20xx
Sepalas Business
Trial Balance as at 31.12.20xx
Debit
Rs.L.
P.
173"000
Credit
Rs.
173"000
Description
Purchases 20"000
Cash 5"000
Sales 110"000
Insurance 4"000
Electricity 3"000
Tax 1"000Furniture 45"000
Discount allowed 3"000
Discount received 2"000
Bank loan 10"000
Bank loan interest 2"000
Commission receiveda 6"000
Buildings 45"000
Lands 30"000
Creditors 25"000
Debtors 15"000
Capital 20"000
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Following advantages can be obtained by preparing a trial balance
The mathematical accuracy of the accounting process can be ensured.
Financial statements can be prepared easily, as the trial balance summarizes
the ledger. (Trial balance is a summarized statement of the ledger)
The aggregate value of an item can be identified quickly.
Example : Total value of debtors
Total value of creditors
Let us prepare a trial balance with the transactions occurred in a business
Following are the transactions extracted from the books of Dayananda Lokuge
who started the business in January 20XX.
09.01 Introduction of capital Rs 125,000
10.01 Purchase of office equipment paying cash Rs 18,000
14.01 Cash purchases of goods Rs 45,000
15.01 Purchase of a motor bike paying Rs 50,000
19.01 Payment of insurance charges Rs 1,500
22.01 Cash sales of goods Rs 30,000
24.01 Bank loans obtained Rs 40,00025.01 Payment of salaries Rs 8,000
27.01 Cash sales of goods Rs 24,000
29.01 Payment of building rent Rs 3,500
30.01 Cash purchases of goods Rs 20,000
31.01 Cash drawings Rs 2,500
Following cash book, ledger accounts and trial balance have been prepared using the
above transactions extracted from the Business of Dayananda Lokuge.
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Cash Book
Debit Capital Account Credit
Debit Office Equipment Account Credit
L.
F.
125"000
30"000
219"000
70"500
L.
F.
18"000
45"000
50"000
1"500
8"000
3"500
20"000
2"500
70"500
219"000
Capital account
Sales account
Bank loan
account
27'01'20xx
40"000
24"000Sales account
Balance b/f
Motor vehicles account
Insurance charges account
Office equipment account
Purchases account
Salaries account
Building rent account
Drawings account
Balance c/d
Purchases account
Date Description Description Amount
Rs.
Amount
Rs.
09'01'20xx
22'01'20xx
24'01'20xx
01'02'20xx
Date
10'01'20xx
14'01'20xx
15'01'20xx
19'01'20xx
25'01'20xx
29'01'20xx
30'01'20xx
31'01'20xx
31'01'20xx
Amount
Rs.
125"000
125"000
L.
F.Date
31'01'20xx
Description
Balance c/d
Date
09'01'20xx
01'02'20xx
Description
Cash Book
Balance b/f
L.
F.Amount
Rs.
125"000
125"000
125"000
Date
10'01'20xx
01'02'20xx
L.
F.Description
Cash Book
Balance b/f
Date
31'01'20xx
Description
Balance c/d
L.
F.Amount
Rs.
18"000
18"000
Amount
Rs.
18"000
18"000
18"000
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Date
15'01'20xx
01'02'20xx
L.
F.Description
Cash Book
Balance b/f
Date
31'01'20xx
Description
Balance c/d
L.
F.
Amount
Rs.
50"000
50"000
Amount
Rs.
50"000
50"000
50"000
Amount
Rs.
1"500
1"500
Date
19'01'20xx
01'02'20xx
L.
F.Description
Cash Book
Balance b/f
Date
31'01'20xx
Description
Balance c/d
L.
F.
Amount
Rs.
1"500
1"500
1"500
Date
31'01'20xx
L.
F.Description
Balance c/d
Date
22'01'20xx
27'01'20xx
01'02'20xx
Description
Cash Book
Cash Book
Balance b/f
L.
F.
Amount
Rs.
30"000
24"000
54"000
54"000
Amount
Rs.
54"000
54"000
Date
14'01'20xx
30'01'20xx
01'02'20xx
L.
F.Description
Balance b/f
Date
31'01'20xx
Description
Balance c/d
L.
F.
Amount
Rs.
65"000
65"000
Amount
Rs.
45"000
20"000
65"000
65"000
Cash Book
Cash Book
Debit Motor Vehicles Account Credit
Debit Purchases Account Credit
Debit Insurance Charges Account Credit
Debit Sales Account Credit
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Debit Bank Loan Account Credit
Debit Salaries Account Credit
Date
25'01'20xx
01'02'20xx
L.
F.Description
Cash Book
Balance b/f
Date
31'01'20xx
Description
Balance c/d
L.
F.Amount
Rs.
8"000
8"000
Amount
Rs.
8"000
8"000
8"000
Date
31'01'20xx
L.
F.
Description
Balance c/d
Date
24'01'20xx
01'02'20xx
Description
Cash Book
Balance b/f
L.
F.
Amount
Rs.
40"000
40"000
40"000
Amount
Rs.
40"000
40"000
Date
29'01'20xx
01'02'20xx
L.
F.Description
Cash Book
Balance b/f
Date
31'01'20xx
Description
Balance c/d
L.
F.Amount
Rs.
3"500
3"500
Amount
Rs.
3"500
3"500
3"500
Building Rent AccountDebit Credit
Date
31'01'20xx
01'02'20xx
L.
F.Description
Cash Book
Balance b/f
Date
31'01'20xx
Description
Balance c/d
L.
F.Amount
Rs.
2"500
2"500
Amount
Rs.
2"500
2"500
2"500
Drawings AccountDebit Credit
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Debit
Rs.
70"500
18"000
50"000
65"000
1"500
8"000 3"500
2"500
219"000
Description
Cash book
Capital account
Office equipment account
Motor vehicles account
Purchases account
Insurance charges account
Sales account
Bank loan account
Salaries accountBulding rent account
Drawings account
L.
P.
Credit
Rs.
125"000
54"000
40"000
219"000
Dayananda Lokuge's Business
Trial Balance as at31st.January 20XX
Activity 02
Assume, you started a business and following types of transactions occurred in the
business during a certain month of its operations. Investment of capital
Arising of liabilities
Payments for expenses
Receipts of income
Purchase of assets
Settlement of liabilities
Decrease in capital
Required :
Write down transactions with values, that can be classified under each areas
mentioned above.
Prepare the cash book and ledger accounts for the transactions
identified by you.
Balance the ledger accounts as at the last date of the month.
Prepare the trial balance based on the closing balances.
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Activity 03
Following are the transactions extracted from the books of Sirimal's Business during
the month of January 20XX.
Rs.
01'01 Introduction of capital 45"000
02'01 Cash purchases 12"000
04'01 Opened a bank current account 15"000
06'01 Obtained a bank loan 75"000
08'01 Purchase goods issuing a cheque 13"000
10'01 Cash deposited in the bank 20"00011'01 Cash purchases 16"000
13'01 Credit sales to Gunapala (Invoice No.01) 10"000
15'01Credit sales to Karunapala(Invoice No.02) 7"000
20'01 Purchase of equipment 20"000
23'01 Gunapala sent a cheque to settle his account 9"800
26'01 Cheque sent by Gunapala was deposited in the bank
29'01 Payment of bank loan interest 500
30'01 Payment of bank loan installment 2"000
31'01 Karunapala Paid Rs.3,000 discounts allowed to him was Rs.200
Required :
Using above transactions,
a. i. Prepare prime entry books
ii. Post the transactions to the ledger
iii. Prepare the trial balance as at31.01.20XX
b. Classify the ledger accounts in the trial balance prepared by you.
c. State whether there are credit or debit balances in each of the accounts classifiedby you.
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Required :
i. Identify the errors in the above trial balance.
ii. Prepare the adjusted trial balance as at 31.12.20XX.
iii. Drawings account is not an asset or expenditure account. If so, state as to why
it is recorded in the debit side of the trial balance.
Activity 04
Following is the trial balance prepared by a trainee accounts assistant of Sujeewa's
Business as at 31.12.20XX.
Description L. Debit Credit
P. Rs. Rs.
Stock 25,000
Purchases 65,000
Sales 95,000
Drawings 4,000
Discount allowed 4,000Discount received 3,000
Miscellaneous income account 16,000
Carriage outwards 18,000
Creditors 17,000
Debtors 15,000
Capital 50,000
Equipment 25,000
Furniture and fittings 35,000
Rent expense 5,000
Bank loan 25,000
Bank loan interest 1,000
Commission received 2,000
Salaries 11,000
208,000 208,000