financial and management accounting notes 5
TRANSCRIPT
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Financial and Management Accounting Unit 5
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Unit 5 Secondary Books
Structure
5.1 Introduction
Objectives
5.2 Types
Self Assessment Questions 1 to 7
5.3 Posting technique in the ledger
Self Assessment Questions 8
Terminal Questions
Answer to SAQs and TQs
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 rentpaid 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.
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
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5.2 Types
There are three types of ledger, namely debtors ledger, creditors ledger and general ledger.
Debtors ledger contains accounts of debtors to whom goods are sold on credit. Creditors ledger
contains accounts of creditors from whom goods are purchased on credit. General ledgercontains 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
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 entriesf) 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).
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 Credi t Rs
1-1-05 Cash at Bank A/c Dr 50000
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Furniture A/c Dr
P and M A/c Dr
Debtors A/c Dr
Stock In trade A/c Dr
To Creditors A/c
To Bank Loan A/c
To Capital A/c (Diff)
(Being assets and liabilities of theprevious year brought in)
48000
200000
100000
20000
50000
45000
323000
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 ?
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.
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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 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 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 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
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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 ).
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.
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Debit Ramas Account Credit
Date Particulars JF Amount Date Particulars JF Amount
2-2-02
4-2-02
12-2-02
25-2-02
26-2-02
28-2-02
1-3-02
To balance b/d
To sales
To Sales
To Sales
To Sales
To Sales
To balance b/d
5,000
27,000
30,000
6,000
4,00013,000
85,000
28,000
8-2-02
9-2-02
15-2-02
28-2-02
28-2-02
28-2-02
By Cash
By Sales returns
By Bank
By Cash
By Discount
By balance c/d
6,000
4,000
25,000
20,000
2,000
28,000
85,000
Note:
1. Every account has four columns on debit side and four columns on the credit side.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)
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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
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.
As Account
Particulars Amount (Rs) Particulars Amount (Rs)
January 2004
To balance c/d 26,000
January 2004
By Purchases 26,000
February 2004
By bal b/d26,000
Bs Account
Particulars Amount (Rs) Particulars Amount (Rs)
January 2004
To balance c/d20,0000
January 2004
By Purchases20,000
Feb, 2004
By balance b/d20,000
Cs Account
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Particulars Amount (Rs) Particulars Amount (Rs)
January 2004
To balance c/d10,000
January 2004
By Purchases
!0,000
Feb, 2004
By bal b/d10,000
Purchases Account
Particulars Amount (Rs) Particulars Amount (Rs)
January 2004
To Sundries 56,000
January 2004
By balance c/d 56,000
Feb, 2004
To balance b/d 56,000
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.
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2001-
July 1
Govind Singh started business with the following
assets:
Cash
Goods
Furniture
Amount
Rs.
20,000
10,000
5,000
July 5 Sold goods to Raghavan
Sold goods for cash
5,000
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
Paid Salaries
Paid rent
600
250
160
Solution
Journal entries in the books of Govind Singh
Date Particulars LF Debit (Rs) Credit (Rs)
2001 July 1 Cash account Dr
Stock account Dr
Furniture account Dr
To Capital account
(Being assets brought in as capital)
20,000
10,000
5,000
35,000
July 5 Raghavan account Dr
Cash account Dr
To Sales account
(Being sales made in cash and on credit
to Raghavan)
5,000
3,000
8,000
July 9 Cash account Dr
To Raghavan account
3,000
3,000
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(Being cash received from Raghavan)
July 12 Purchases account Dr
To Mukundans account
(Being goods purchased on credit from
Mukundan)
9,000
9,000
July 15 Mukundans account Dr
To Cash account
(Being cash paid to Mukundan on
account)
5,000
5,000
July 20 Interest account Dr
To Cash account
(Being interest paid to Mukundan)
100
100
July 30 Stationery account Dr
Salaries account Dr
Rent account Dr
To cash account
(Being the above expenses paid out)
600
250
160
1,010
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 Raghvans account and Mukundans account. These ledger accounts appear in thefollowing manner in the ledger.
Dr Raghavans Account in the books of Govind Singh Cr
Particulars Amount
(Rs)
Particulars Amount
( Rs)
July, 5 To Sales 5,000 July 9 By Cash
July 31 By Balance c/d
3,000
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 31 st July and
this is the opening balance for August.
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Dr Mukundans Account in the books of Govind Singh Cr
Particulars Amount
(Rs)
Particulars Amount
(Rs)
July 15 To cash
July 31 To balance c/d
5,000
4,000
July 12 By purchases 9,000
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 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
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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, commission paid, interest
paid, etc
Debit
Prepaid insurance, rent or any prepaid expenses Debit
Outstanding incomes Debit
Losses like depreciation, loss in the revaluation of assets or sale
of assets,
Debit
Any other asset Debit
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.Rs.2300
13. Paid for supplies purchased Rs5600
18. Paid telephone bill for the month Rs.8400
20. Provided professional services for Rs.9000 to the customer who paid advance
Of Rs2000
30. Paid salaries for the month of June Rs3400
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 Rs60000 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
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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.9500i) 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
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.
Answer for Self Assessment Questions
Self Assessment Questions 1
1. Secondary book
2. All such transactions which are not entered in any other journal
Date Particulars Amount
Rs.
1998
September 1
4
4
15
18
October 1
3
21
31
Sold goods to Ravindranath
Received from Ravindranath
Allowed him a discount
Ravindranath bought goods
Received from Ravindranath cash on account
Balance from last month
Sold goods to Ravindranath
Received from Ravindranath cash
Allowed him discount
Received cash in full settlement of account
54250
51538
2712
60000
20000
?
10000
3960
40
?
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3. Book.
4. Journal proper and Ledger.
2. Journal proper
3. True.
Self Assessment Questions 2
1. True
2. Capital
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
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3. True
4. Yes
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: Krishnas A/c Dr
To sales account.
Books of Krishna : Purchases A/c Dr
To Ramas 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.
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.
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Closing balance Oct 31 Balance Nil.
Amount paid in full settlement is Rs 46,000.