financial accounting part 5

8/7/2019 Financial Accounting part 5

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Financial and Management Accounting Unit 5

Page No.: 90

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 Journal5. To know the technique of posting transactions from subsidiary books

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 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

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 youfind 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 previousyear 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

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 ofthe previous year brought in)

50000

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.


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 purposeis 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 within Unit 7.


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 alongwith 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 theaccounting period. More details about adjusting entries will be discussed in

Unit 7.


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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1. Errors occur in the course of accounting and they influence the profitcalculation 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.


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 thebuyer 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. Theloss 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 causesGoods 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.


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 hisresidence. 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 Ramas Account Credit

Date Particulars JF Amount Date Particulars JF Amount2-2-02

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

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

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 overcredit 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 ACCOUNTParticulars 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 January2004 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


January 2004

To balance c/d 26,000

January 2004

By Purchases 26,000

February 2004

By bal b/d 26,000

Bs Account


January 2004


January 2004

By Purchases 20,000

Feb, 2004

By balance b/d 20,000

Cs Account


January 2004


January 2004

By Purchases !0,000

Feb, 2004

By bal b/d 10,000

Purchases Account

Particulars Amount(Rs)

Particulars Amount (Rs)

January 2004To Sundries 56,000

January 2004By balance c/d 56,000

Feb, 2004

To balance b/d 56,000


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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 followingassets:CashGoodsFurniture

AmountRs.

20,00010,0005,000

July 5 Sold goods to RaghavanSold goods for cash

5,0003,000

July 9 Received from Raghavan on account 3,000

July 12 Purchased goods from Mukundan 9,000July 15 Paid Mukundan 5,000

July 20 Paid interest to Mukundan 100July 30 Paid stationery charges

Paid SalariesPaid rent

600250160


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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 oncredit to Raghavan)

5,000

3,000

8,000

July 9 Cash account Dr

To Raghavan account

(Being cash received fromRaghavan)

3,0003,000

July 12 Purchases account Dr

To Mukundans account

(Being goods purchased on credit

from Mukundan)

9,0009,000

July 15 Mukundans account Dr

To Cash account

(Being cash paid to Mukundan onaccount)

5,000

5,000

July 20 Interest account Dr

To Cash account

(Being interest paid to Mukundan)

100100

July 30 Stationery account Dr

Salaries account Dr

Rent account DrTo cash account

(Being the above expenses paidout)

600

250

1601,010


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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

Raghvans account and Mukundans account. These ledger accounts

appear in the following 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

2,0005,000 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 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


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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 / creditbalance

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 DebitAll 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 ofassets or sale of assets,

Debit

Any other asset Debit


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Terminal Questions

1. A company is engaged in the following transactions in June. You arerequired 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 paidadvance 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.

Answer for Self Assessment Questions


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


1. True

2. Capital

Date Particulars AmountRs.

1998

September 14

4

15

18

October 1

3

21

31

Sold goods to RavindranathReceived 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

5425051538

2712

60000

20000

?

10000

3960

40

?


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3. Goodwill


1. True

2. Trade expenses

3. All expenses other than trade expenses

4. No.


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.


1. True

2. Errors that can be disclosed by trial balance and errors that cannot be

disclosed by trial balance3. Journal proper.


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.


1. True

2. P & L

3. True

4. Yes


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5. Depreciation

6. P & L


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.


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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.

financial accounting part 5

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