Financial and Management Accounting Notes 5

7/28/2019 Financial and Management Accounting Notes 5

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Financial and Management Accounting Unit 5

Sikkim Manipal University 71

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.


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.


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.


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 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.


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.


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


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


January 2004

To balance c/d 26,000

January 2004

By Purchases 26,000

February 2004

By bal b/d26,000

Bs Account


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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January 2004

To balance c/d10,000

January 2004

By Purchases

!0,000

Feb, 2004

By bal b/d10,000

Purchases Account


January 2004

To Sundries 56,000

January 2004

By balance c/d 56,000

Feb, 2004

To balance b/d 56,000


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


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.


1. True

2. Capital

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

balance

3. 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


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3. True

4. Yes

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.

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.

Financial and Management Accounting Notes 5

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