GROUP - I PAPER - 1 ACCOUNTING V1 CHAPTER 8

8 SELF BALANCING LEDGERS Learning Objectives After studying this chapter, you will be able to: ♦ Define and understand the significance of self-balancing ledger system. ♦ Be familiar with the three ledgers generally maintained in a self-balancing ledger system. ♦ Learn the technique of maintaining total debtors and total creditors accounts to make the ledger system self-balancing. Observe that in self balancing system total debtors and total creditors accounts kept in the General Ledger are called Sales Ledger Adjustment Account and Bought Ledger Adjustment Account respectively. ♦ Note the technique of recording transactions involving transfer from Sales Ledger to Bought Ledger and vice-versa. 1. Introduction Self Balancing Ledger System implies a system of ledger keeping which classifies ledgers as per nature of transactions, namely, Sales ledger, Bought ledger, General ledger, etc. and also makes them to balance independently. With rise in the number of transactions the size of the ledger becomes hefty due to large number of accounts. This creates problem in detection of errors. To overcome this, the system of multiple ledgers is deployed. It involves splitting of single ledger. Generally three ledgers, namely debtor ledger, creditor ledger and main ledger (containing remaining accounts) are prepared. In this Unit we shall discuss the self balancing ledger system and its advantages. Also we shall illustrate system. 2. Advantages of Self Balancing System When a number of ledgers are kept by a concern and if their balances do not tally, the accountant would have to face great difficulty in tracing book-keeping errors, responsible for the non-agreement of the Trial Balance. In order to reduce to a minimum the trouble and time involved in locating the errors, sometimes the system of self-balancing or sectional balancing of ledger is employed. Quite often the debit and credit entries relating to a transaction are posted in different ledgers e.g. when goods are sold on credit, the Sales Account will be credited in the General Ledger © The Institute of Chartered Accountants of India Accounting but the corresponding debit will be made in the customer's account in the Personal Ledger. In such a case for ascertaining the correctness of the posting in either of the ledgers it will be necessary to take out balances in both the ledgers; thus a mistake in one ledger will require checking of the balances in the others as well. Such a position would be avoided if every ledger is made independent of the other by the converse aspect of entries in each ledger being posted in totals to the Control Account set up in the ledger itself. If this is done the correctness of individual balances in each ledger would be verified extracting its balances and agreeing them with the balances of the Control Account. A ledger that has a Control Account set up in it, is referred to as a self balancing ledger. It connotes that it is capable of being balanced independently, the balance in the Control Account being equal to that of the individual balance. The advantages of this system are: (i) It fixes the responsibility of the ledger keeper, as to the balancing of the ledger or ledger under his/her charge and the person responsible for the mistake can be called upon to work overtime to locate it. Errors are localised. (ii) It enables preparation of interim accounts without personal ledgers having to be balanced. (iii) The figures of total debtors or creditors is readily available. (iv) It is instrumental in strengthening the internal check. (v) Where it is not desired to reveal the content of the private ledger to the clerical staff the balances on this ledger can be incorporated in total in the trail balance. 3. Sectional Balancing A really simple way to prove the accuracy of say, the Sales Ledger would be to maintain a Total Debtors account in the General Ledger. It would mean that whereas accounts of Individual customer would be maintained in the Sales Ledger, in the General Ledger the Total Debtors account would be posted by the (monthly) totals of various transactions with total credit sales, total amount received from credit customers, total discount allowed to them, total returns inwards, total bills receivable received; etc. The balance in the Total Debtors Account should be equal to the total of balances shown by the accounts of individual customers. If it is so, the Total Debtors Account as well as individual customers' account may be taken as correct. A difference would show that there is some error somewhere. In the same way, the accuracy of individual supplier account may be checked by comparing total of their balances with the balance in the Total Creditors Account. The double entry would be complete in the General Ledger itself. For instance, for credit sales– Total Debtors Account would be debited and Sales Account credited. For goods returned to suppliers– Total Creditors Account would be debited and Return Outward Account credited. The "total accounts" are also known as adjustment accounts or control accounts since they prove the accuracy of the subsidiary (Sales or Bought) ledgers. 8.2 © The Institute of Chartered Accountants of India Self Balancing Ledgers 4. Various Ledgers to be Maintained in Self-balancing Ledger System In the Sales or Bought ledgers double entry is not completed as in the system outlined above, a separate trial balance cannot be taken out from these ledgers. If these ledgers are maintained in such a way as to offer separate trial balances, the system would be known as "Self-balancing". In such a case "General Ledger Adjustment Account" is prepared in each of the subsidiary ledgers. The General ledger would have: (i) Bought Ledger Adjustment Account (in reality, Total Creditors Account) and (ii) Sales Ledger Adjustment Account (in reality, Total Debtors Account) These accounts are known as Control Accounts. The system on which entries are made in the adjustment account is described below: 4.1 Bought Ledger For recording a purchase it will be observed that the initial entry made is to the debit of the Purchases Account in the General Ledger and to credit the Supplier's Account in the Bought Ledger. If it is desired to make the General and Bought Ledger self-balancing a further entry would be made debiting the General Ledger Adjustment account in the Bought Ledger, and crediting the Bought Ledger Adjustment Account in the General Ledger with the total of purchases. Again, if part of the materials purchased is returned and the balance due is paid the entries made would be; debit the personal account of the Supplier in the Bought Ledger with the value of goods returned as well as the amount paid and credit Return Outwards Account in the General Ledger with the value of goods returned and Bank Account with the amount paid. Further, in consonance with the system of self-balancing an additional entry should be made crediting the General Ledger Adjustment Account in the Bought Ledger and debiting the Bought Ledger Adjustment Account in the General Ledger with the aforementioned amount. Similarly entries can be made in case of bills payable, discount in price etc. It should be particularly noted that the balance in the Bought Ledger Adjustment Account in the General Ledger will be equal to that in the General Ledger Adjustment Account in the Bought Ledger but on the opposite side. Also, the Bought Ledger Adjustment Account shall self-balance the General Ledger. If there are several Bought Ledgers in use each such ledger will have a General Ledger Adjustment Account and, in the General Ledger there will be Bought Ledger Adjustment Account separately for each of these ledgers. For the sake of economy of effort and facility of postings the additional entries for making ledgers self-balancing are made only periodically, at the end of each month or week from the totals of transactions, recorded in the subsidiary books kept for the purpose. 8.3 © The Institute of Chartered Accountants of India Accounting 4.2 Sales Ledger For recording a credit sale, it will be observed that the original entry made is to debit the customer's account in the Sales Ledger and to credit the Sales Account in the General Ledger. But to self-balance the General and Sales Ledgers a further entry is made, debiting the Sales Ledgers Adjustment A/c in the General Ledger and crediting the General Ledger Adjustment Account in the Sales Ledger with the total of sales. Again, when a part of the goods sold is received back and the balance realised, the entries made are to debit the Sales Return account with the value of goods returned as well as Bank Account with the amount collected, and credit their total to personal account of the customer in the Sales Ledger. Further to self-balance the ledgers an additional entry is made to debit the General Ledger Adjustment Account in the Sales Ledger and credit the Sales Ledger Adjustment Account in the General Ledger with the aforementioned amounts. Similarly entries can be made in case of bills receivable, dishonoured bills etc. 4.3 General Ledger As stated above, each time an entry is made in the Bought and Sales Ledger for self-balancing, the contra effect of the entries is shown in the Bought Ledger or Sales Ledger Adjustment Account set up in the General Ledger. The accounts represent the Total Debtors and Creditors Accounts in a summarised form and thus serve to self-balance the General Ledger. As a result no additional entries are required to make the General Ledger self-balancing. It may be mentioned that in regard to several other accounts, which do not relate either to customers or suppliers, no additional entry is necessary under the self-balancing scheme since, both aspects of every transaction already exist in one or other of the accounts contained in the General Ledger such as cash sales, discounting of bills, recovery of bad debts written off, creating provision for bad debts etc. Illustration 1 Dinesh & Co. have three ledgers in use viz, a Debtors Ledger, a Creditors Ledger and a Normal Ledger which are all kept on the system of self-balancing. From the following particulars prepare the adjustments account that would appear in each of these ledgers. 2011 ` Jan. 1 Balance of Sundry Debtors 16,000 Balance of Sundry Creditors 18,500 Jan. 31 Credit Purchases 4,500 Credit Sales 9,800 Cash Sales 1,500 Paid to Creditors 9,875 Discount allowed by them 325 Cash received from debtors 7,800 8.4 © The Institute of Chartered Accountants of India Self Balancing Ledgers Allowed them discount 200 Bills payable accepted 1,500 Bills receivable received 3,000 Returns inwards 875 Returns outwards 600 Rebates allowed to debtors 275 Rebates allowed to creditors 150 Provision for Doubtful Debts 320 Bad Debts 450 Bills Receivable dishonoured 375 Solution In the Debtors Ledger General Ledger Adjustment Account Dr. Cr. 2011 ` 2011 ` Jan. 31 To Debtors Ledger Jan. 1 By Balance b/d 16,000 Adjustment Account : Jan. 31 Debtor Ledger Bank 7,800 Adjustment A/c: Discount 200 Sales 9,800 Bills 3,000 Bills Receivable Receivable dishonoured 375 Returns 875 Inwards Allowances 275 Bad Debts 450 To Balance c/d 13,575 26,175 26,175 Feb. 1 By Balance b/d 13,575 Entries for cash sales and provision for doubtful debts will not affect Debtors Ledger. In the Creditors Ledger General Ledger Adjustment Account 2011 ` 2011 ` Jan. 1 To Balance b/d 18,500 Jan. 31 By Creditors Ledger Jan. 31 To Creditors Adjustment Ledger Account: Adjustment Bank 9,875 8.5 © The Institute of Chartered Accountants of India Accounting Account: Discount 325 Purchases 4,500 Bills Payable 1,500 Return outwards 600 Allowances 150 By Balance c/d 10,550 23,000 23,000 Feb. 1 To Balance b/d 10,550 In General Ledger Debtors Ledger Adjustment Account 2011 ` 2011 ` Jan. 1 To Balance b/d 16,000 Jan. 31 By Nominal Ledger Jan. 31 To Nominal Ledger Adjustment Account: Adjustment A/c: Bank 7,800 Sales 9,800 Discount 200 Bills Receivable Bills Receivable 3,000 dishonoured 375 Returns inwards 875 Allowances 275 Bad Debts 450 By Balance c/d 13,575 26,175 26,175 Feb. 1 To Balance b/d 13,575 Creditors Ledger Adjustment Account 2011 ` 2011 ` Jan. 31 To Nominal Ledger Jan. 1 By Balance b/d 18,500 Adjustment A/c: Jan. 31 By Nominal Ledger Bank 9,875 Adjustment A/c: Discount 325 Purchases 4,500 Bills Payable 1,500 Return Outwards 600 Allowances 150 To Balance c/d 10,550 23,000 23,000 Transfer from one ledger to another: Whenever a balance is transferred from an account in one ledger to that in another e.g., from the Bought Ledger to the Sales Ledger, the entry is recorded through the Journal. Also an additional entry is made in the Control Accounts for recording the corresponding effect. 8.6 © The Institute of Chartered Accountants of India Self Balancing Ledgers 5. Rectification of Errors under Sectional Balancing System 5.1 Rectification of errors before opening Suspense Account If the error affects the accounts of Debtors or Creditors without affecting their total, it is rectified by adjusting the accounts of Debtors or Creditors itself. However, if it affects the totals of Debtors or Creditors, the additional entries are to be made in the main ledger through Total Debtors and Total Creditors Account. The same is discussed with the following examples: 1. If goods sold to X and wrongly posted in the account of Y, The trial balance of main ledger will tally. This error can be rectified in Debtors’ ledgers by debiting X’s account and crediting Y’s account. 2. If goods sold to X are not recorded in the Sales Book, it means under reporting of Sales. It means sectional balancing entry will be passed with lower amount of sales and Total debtors. The error can be rectified by debiting the total debtors account and crediting the sales account in the main ledger. 3. If goods sold to X are omitted to be recorded in his account only in the debtors ledger, main ledger will tally. This error is rectified by debiting X’s account by writing “to error in omitting to record sales”. 4. If goods sold to X are recorded in the debtors ledger and sales account is properly credited at the end of the period, but omitted to debit the total debtors account. The error can be rectified by writing in debit side of total debtors account “To error in omitting to record sales”. 5.2 Rectification of errors under Self Balancing system The rectification of errors will be done in the usual manner as in single ledger system but there is one difference that is, whenever the totals of Debtors or Creditors are affected, rectification will be done by making additional self balancing entries. In this case, rectification of errors in the above examples will be done as follows: 1. For rectification of errors in Debtors ledger - X’s account will be debited and Y’s account will be credited. 2. The rectification of error will be made by crediting sales account by writing ‘By error in omitting the sales’ and additional entry of self balancing with the same amount will be made, namely, Debtor Ledger Adjustment A/c Dr (In main ledger) To General Ledger Adjustment A/c (In debtors ledger) 3. The error is rectified by debiting X’s account by writing ‘To error in omitting to record sales.’ 8.7 © The Institute of Chartered Accountants of India Accounting 4 This can be rectified by self balancing entry with the same amount, namely, Debtor Ledger Adjustment A/c Dr (In main ledger) To General Ledger Adjustment A/c (In debtors ledger) 5.3 Rectification of errors after opening suspense account The method of rectification of error will be same under sectional and self balancing system, with the exception that the entries which were corrected unilaterally will be corrected through suspense account. In the above examples rectification of error will be done as follows : Under Sectional Balancing System- 1. Same as above 2. Same as above 3. Same as above 4. Total Debtors A/c Dr. (In main ledger) To Suspense A/c (In main ledger) Under Self Balancing system- 1. Same as above 2. (a) Suspense A/c Dr. (In Debtors ledger) To Sales A/c (b) Debtors ledger Adjustment A/c Dr. (In main ledger) To General Ledger Adjustment A/c (In Debtors Ledger) 3. X’s A/c Dr. (In Debtors Ledger) To Suspense A/c (In Debtors Ledger) 4. (a) Debtors ledger Adjustment A/c Dr. (In main ledger) To Suspense A/c (In main ledger) (b) Suspense A/c Dr. (In Debtors ledger) To General Ledger Adjustment A/c (In Debtors Ledger) Illustration 2 Prepare journal entries in the books of Exe. Ltd. for the following: (a) The Sales Book was found under cast by ` 1,000. (b) Discount allowed to Rao ` 50 correctly, entered in the Cash Book was not posted to his account. (c) Credit balance of ` 310 in Murty's account in the Purchase Ledger was to be transferred to his account in Sales Ledger. Give Journal entries both under the self-balancing system and the sectional balancing system. 8.8 © The Institute of Chartered Accountants of India Self Balancing Ledgers Solution Journal of Exe. Ltd. Self-Balancing System: (a) Sales Ledger Adjustment Account (In General Ledger) Dr. 1,000 To General Ledger Adjustment Account 1,000 (In Sales Ledger) (The error because of the under-casting of Sales Books, rectified) Suspense Account (In General Ledger) Dr. 1,000 To Sales Account 1,000 (Rectification of the error resulting from under casting of the Sales Book) (b) Suspense Account (In Sales Ledger) Dr. 50 To Rao (In Sales Ledger) 50 (Rectification of the error by which Rao was not credited, accounts in the general ledger are not affected) (c) Murty (In Purchase Ledger) Dr. 310 To Murty (In Sales Ledger) 310 (Transfer of Murty's credit balance in the Purchase Ledger to his account in the Sales Ledger) Bought Ledger Adjustment Account (In General Ledger) Dr. 310 To General Ledger Adjustment A/c 310 (In Bought Ledger) (Correction of the adjustment accounts relating to the Bought Ledger because of the transfer of Murty's account, in the Purchase Ledger) General Ledger Adjustment Account (In Sales Ledger) Dr. 310 To Sales Ledger Adjustment A/c (In General Ledger) 310 (Correction of the adjustment account relating to the Sales Ledger because of the transfer of Murty's account) Note : It is assumed that if a ledger is not balanced, a Suspense Account has been opened. Sectional Balancing System (a) Total Debtors Account Dr. 1,000 To Sales Account 1,000 (Rectification of the consequence of the under- casting the Sales Book) 8.9 © The Institute of Chartered Accountants of India Accounting (b) Credit Rao with ` 50 (In Sales Ledger) (c) 1. Murty (In Purchase Ledge) Dr. 310 To Murty (In Sales Ledger) 310 (Transfer of Murty's credit balance ` 310 in the Purchase Ledger to his account in the Sales Ledger) 2. Total Creditors A/c Dr. 310 To Total Debtors A/c 310 (Adjustment of total accounts because of the transfer of Murty's account, in the Purchase Ledger to the Sales Ledger) Illustration 3 From the following particulars as extracted from the books of Messrs Kulkarni Brothers, who keep a Debtors' Ledger, a Creditors Ledger and a General Ledger on the self-balancing system, show how the General Ledger Adjustment Account will appear in the Debtor's Ledger and the creditors' Ledger. ` Debtors' Balance on 1st January, 2010 91,500 Creditors, Balance on 1st January, 2010 1,09,800 Transactions for the year 2010 : Credit purchases 41,000 Credit sales 45,400 Returns Inwards 800 Returns Outwards 1,200 Cash received from customers 51,000 Discount allowed to customers 900 Cash paid to creditors 61,400 Discount received 1,340 Acceptances received 17,000 Acceptances given 24,000 Bills Receivable dishonoured 2,400 Bills Payable dishonoured 6,000 Bad debts written off 5,000 Sundry charges debited to customers 690 Allowances from creditors 550 Transfer from Debtors Ledger 1,290 8.10 © The Institute of Chartered Accountants of India Self Balancing Ledgers Solution General Ledger Adjustment A/c (in Sales Ledger) 2010 ` 2010 ` Jan. to Jan. to Dec. 31 To Sales Ledger Dec. 31 By Balance b/d 91,500 Adjustment A/c in By Sales Ledger General Ledger: Adjustment A/c Return Inward 800 in General Leger Bank 51,000 Sales 45,400 Discount 900 B/R Dishonoured 2,400 Bills Receivable 17,000 Sundry Charges 690 Bad Debts 5,000 Transfer 1,290 Dec. 31 To Balance c/d 64,000 1,39,990 1,39,990 2011 Jan. 1 By Balance b/d 64,000 General Ledger Adjustment A/c (in Purchases Ledger) 2010 ` 2010 ` Jan. 1 to Jan. 1 to Dec. 31 To Balance b/d 1,09,800 Dec. 31 By Purchases Ledger To Purchases Ledger Adjustment A/c in Adjustment A/c in General Ledger: General Ledger : Bank 61,400 Purchases 41,000 Bills Payable 24,000 Bills Payable Return Outward 1,200 cancelled 6,000 Discount 1,340 Allowance 550 Transfer 1,290 Dec. 31 By Balance c/d 67,020 1,56,800 1,56,800 2011 Jan. 1 To Balance b/d 67,020 8.11 © The Institute of Chartered Accountants of India Accounting 6. Ruling of Subsidiary Books Whenever there are several Bought or Sales Ledgers in use, various books of original entry, e.g., Purchases Books, Sales Books, Cash Book and Journal are suitably ruled in a manner that they readily show the monthly total of the transactions posted in various ledgers, on the basis of which the self-balancing entries, can be recorded. 7. Secret Account At time it may be considered necessary to keep the operation of certain accounts, e.g., partners' capitals, loans, deposits etc., secret from members of the staff except the senior officials. In such a case, these accounts would be segregated into a Private Ledger and posting will be made in the ledger by a confidential clerk, under the direct supervision of the Chief Accountant. Also a General Ledger Adjustment Account will be set up in the Private Ledger and a Private Ledger Adjustment Account in the General Ledger. In this way, though the individual entries in the accounts kept in the Private Ledger will be revealed to the accounting staff, their total effect will be kept secret. In case individual accounts also are desired to be kept secret separate Cash Book and Bank Account would be maintained; this would ensure complete secrecy. When such a system is first started, the assets and other debit balances are transferred to the Private Ledger by crediting the respective accounts in the General Ledger and the Private Ledger Adjustment Account is debited with their total. The opposite are the entries made when credit balances are transferred. Also, if it is desired to transfer a part of the Bank Balance to Private Bank Account, Bank Account is credited and the Private Ledger Adjustment Account is debited. From the Private Bank Account, partners will be able to draw amounts required by them and to pay interest on deposits and loans at whatever rates they may please without the fact being disclosed to the staff. When accounts are closed at the end of the year, the revenue accounts are closed off by transfer of the Private Ledger Adjustment Account and corresponding entries are made in the Private Ledger by debit or credit to the General Ledger Adjustment Account. Afterwards all the balances so transferred, along with those already in the Private Ledger, are transferred to the Profit & Loss Account in the Private Ledger. In this way, complete secrecy is maintained regarding the operation of accounts in the Private Ledger; also the amount of profit made by the concern is not disclosed to the staff. Students may note that the procedure followed for making the Private and General Ledgers self- balancing is somewhat different from that described above in so far as entries in the Adjustment Accounts are not made at the time an expense is paid or an income is collected, but only at the end of the year. This is done only to avoid making book keeping too cumbersome. Illustration 4 M. Govind keeps self-balancing ledgers. Record the following transactions in the General Ledger Adjustment Account in the Sales Ledger : 8.12 © The Institute of Chartered Accountants of India Self Balancing Ledgers 1.4.2010 Received ` 475 from Mr. X in full settlement. He was allowed a discount of ` 25. 2.4.2010 Received ` 2,000 from Mr. Y towards his dues in full. 3.4.2010 Goods supplied to Mr. T. ` 700 and received ` 300 after adjustment of the advance of ` 400. 4.4.2010 Bad debts recovered from Mr. Q ` 1,000. 5.4.2010 Goods sold to the following : Mr. A ` 1,000 Mr. B ` 1,500 Mr. C ` 2,000 15.4.2010 Mr. P paid ` 750 towards dues. Balance thereafter due was ` 250. 25.4.2010 Amount received from the following : Mr. A ` 750 Mr. B ` 1,000 Mr. C ` 2,000 30.4.2010 Advance received from Mr. R for supply ` 2,000. Solution Sales Ledger General Ledger Adjustment Account 2010 ` 2010 ` April 1 To Balance b/d 400 April 1 By Balance b/d 3,500 April 2 To Sales Ledger April 3 By Sales Ledger Adjustment A/c 300 Adjustment A/c April 30 To " " (P, X & Y) 3,250 (Sales) 700 To " " (A, B, C) 3,750 April 30 By Sales Ledger To " " R 2,000 Adjustment A/c 4,500 April 30 To Balance c/d April 30 By Balance c/d 2,000 (A, B & P) 1,000 10,700 10,700 May 1 To Balance b/d 2,000 May 1 By Balance b/d 1,000 8.13 © The Institute of Chartered Accountants of India Accounting Working Notes : (i) Opening balance includes the following debts : ` X 500 Y 2,000 P 1,000 3,500 (ii) Opening debit balance ` 400, is advance from T. (iii) Closing debit balance represents advance from R ` 2,000. (iv) Closing balance of ` 1,000 includes the following debts : ` A 250 B 500 C 250 1,000 Illustration 5 The following information is available from the book of a trader from January 1 to March 31, 2011: (1) Total sales amounted to ` 60,000 including the sale of old furniture for ` 1,200 (book value ` 3,500). The total cash sales were 80% less than the total credit sales. (2) Cash collection from debtors amounted to 60% of the aggregate of the opening debtors and credit sales for the period. Debtors were allowed cash discount for ` 2,600. (3) Bills Receivable drawn during three months totalled ` 6,000 of which bills amounting to ` 3,000 were endorsed in favour of suppliers. Out of these endorsed B/R, a B/R for ` 600 was dishonoured for non-payment, as the party became insolvent, his estate realising nothing. (4) Purchases totalled ` 16,000 of which 10% was for cash. (5) A cheque received from a customer for ` 6,000 was dishonoured; a sum of ` 500 is irrecoverable: Bad Debts written off in the earlier years realised ` 2,500. (6) Sundry debtors, as on 1st January, 2011 stood at ` 40,000 You are required to show the Debtors' Ledger Adjustment Account in the General Ledger. 8.14 © The Institute of Chartered Accountants of India Self Balancing Ledgers Solution General Ledger Debtors' Ledger Adjustment Account Dr. Cr. ` ` To Balance b/d 40,000 By General Ledger To General Ledger Adjustment A/c: Adjustment A/c: Collection (Cash Sales 49,000 & Bank) 53,400 Sundry Creditors 600 Discount 2,600 B/R Dishonoured Bills Receivable 6,000 Bank Bad Debts 1,100 Cheque dishonoured 6,000 By Balance c/d 32,500 95,600 95,600 Note : If credit sales is ` 100, cash sales will be ` 20. Total credit sales shall be 5/6th of ` 58,800, i.e., ` 49,000. Illustration 6 From the following particulars, prepare the relevant adjustment account as would appear in the General Ledger of Mr. Vasu for the month of March, 2011: Date Particulars 1 Purchase from Mr. X ` 2,000 2 Paid ` 1,600 after adjusting the initial advance in full to Mr. X. 13 Paid ` 1,000 to Mr. R towards the purchases made in February in full. 13 Paid advance to Mr. Y ` 3,000 14 Purchased goods from Mr. A ` 4,000 25 Returned goods worth ` 500 to Mr. A. 26 Settled the balance due to A at a discount of 10 per cent. 27 Goods purchased from Mr. Y ` 2,500 against advance paid on 13th. 28 Received at bank the advance from Mr. P paid on 28 February, 2011, ` 2,000. 29 Purchased from B ` 2,000. 30 Goods returned to Q ` 750. The goods were originally purchased for cash in February. 8.15 © The Institute of Chartered Accountants of India Accounting Solution Creditors Ledger Adjustment Account 2011 ` 2011 ` March 1 To Balance (X. P.) 2,400 March 1 By Balance (R) b/d: 1,000 March 31 To General Ledger Adjustment A/c (In March 31 By G.L. Adjust A/c (in Bought Ledger) Bought Ledger) Bank (X, R, Y & A) 8,750 Returns (A&Q) 1,250 Purchases 10,500 Discount 350 Bank (Refund) 2,000 March 31 To Balance c/d (B) 2,000 March 31 By Balance c/d (Y,Q) 1,250 14,750 14,750 April 1 To Balance b/d (Y, Q) 1,250 April 1 By Balance b/d (B) 2,000 Working Notes : (1) Purchases: 1.3.2011 X 2,000 14.3.2011 A 4,000 27.3.2011 Y 2,500 30.3.2011 B 2,000 10,500 (2) Payments: 2.3.2011 X 1,600 13.2.2011 R 1,000 13.2.2011 Y 3,000 26.3.2011 A ` 3,500 - 10% 3,150 8,750 Illustration 7 From the following information prepare a Total Debtors Account as appearing in the General ledgers in the Books of M/s Shukla and Company. Debit balance as on 1.7.2010, ` 87,200; Credit balance as on 1.7.2010 in Debtors Account ` 600. Transactions during 6 months ended on 31.12.2010: Total sales were ` 94,000 including cash sales of ` 4,000. Debtors whose balances were in credit were paid off ` 600. Payments received by cheques from Debtors ` 60,000. Payments received by cash from Debtors ` 48,000. Payment received by bills receivable ` 26,000. 8.16 © The Institute of Chartered Accountants of India Self Balancing Ledgers Bills receivable received from Debtors were dishonoured for ` 6,000 and noting charges of ` 60 were paid. Cheques received from customers were dishonoured for ` 800. Out of bills receivable received and included in ` 26,000 above, bills of ` 5,000 were endorsed to suppliers. Bad debts written-off during the period were ` 1,000. Discount allowed for prompt payment were ` 700 and bad debts written off in 2009 and now recovered from debtors amounted to ` 900. Interest debited for delay in payments were ` 1,250. On 31.12.2010 provision for doubtful debts was created for ` 2,100. M/s Trial & Co.’s account appeared in Debtors Ledger and also in Creditors Ledger. The balance in Creditors Ledger was ` 900 and the same was transferred to Debtors Ledger. Goods of ` 2,760 were rejected by the customers. Solution In the General Ledger of M/s.Shukla & Company Dr. Total Debtors Account Cr. Date Particulars ` Date Particulars ` 1.7.2010 To Balance b/f 87,200 1.7.2010 By Balance b/f 600 1.7.2010 to To Sales (` 94,000-` 90,000 1.7.2010 to By Bank 60,000 31.12.2010 4,000) 31.12.2010 “ To Cash 600 “ By Cash 48,000 “ To Bills Receivable 6,000 “ By Bills receivable 26,000 (dishonoured) “ To Bank (noting 60 “ By Bad debts 1,000 charges) “ To Bank (cheque 800 “ By Discount allowed 700 dishonoured) “ To Interest 1,250 “ By Total Creditors A/c-Transfer 900 “ By Sales Return 2,760 “ By Balance c/d 45,950 1,85,910 1,85,910 Notes: (1) Bad debts of 2009 recovered in 2010 will not appear in the Total Debtors Account. It should be credited to Profit and Loss Account. 8.17 © The Institute of Chartered Accountants of India Accounting (2) Bills Receivable of ` 5,000 endorsed to suppliers has nothing to do with Total Debtors Account because at the time of endorsement Suppliers Account is debited and Bills Receivable Account is credited. Illustration 8 The following particulars are obtained from books of a Self Ltd. for the year ended 31st March, 2011: ` ` Cash Sales 25,000 Bills Receivable dishonoured 2,500 Credit Purchases 2,80,000 Return Inward 8,500 Collection from Debtors 4,25,000 Payments to creditors 1,62,000 Bills Receivable drawn 20,000 Discount allowed 3,000 Discount Received 2,500 Debtors’ cheque returned 7,500 dishonoured Cash Purchases 12,000 Credit Sales 4,90,000 Bills Payable paid 6,500 Bills Receivables collected 10,000 Recovery of Bad Debts 1,500 Return outward 3,700 Bills Receivable discounted with 8,000 Bills Receivable endorsed to 7,900 Bank creditors Interest charged on overdue 1,200 Overpayments refunded by 600 Customer’s Accounts suppliers Endorsed Bills Receivable 5,500 Bad Debts 1,000 dishonoured (noting charges ` Opening Balances 75) Bills Payable accepted 16,000 Sundry Debtors 78,000 Sundry Creditors 85,000 You are required to prepare the Total Debtors Account and Total Creditors Account. Solution In the books of Self Ltd. Total Debtors Account ` ` To Balance b/d 78,000 By Cash 4,25,000 To Bank (Cheque dishonoured) 7,500 By Discount Allowed 3,000 To B/R (Dishonoured) 2,500 By B/R 20,000 8.18 © The Institute of Chartered Accountants of India Self Balancing Ledgers To Interest 1,200 By Returns Inward 8,500 To Sales 4,90,000 By Bad Debts 1,000 To Sundry Creditors (endorsed bill By Balance c/d 1,27,275 dishonoured with noting charges) 5,575 5,84,775 5,84,775 Total Creditors Account ` ` To Cash 1,62,000 By Balance b/d 85,000 To B/R (endorsed) 7,900 By Purchases 2,80,000 To Discount received 2,500 By Sundry Debtors A/c (endorsed B/R dishonoured with noting charges) 5,575 To Bills Payable 16,000 By Cash (over payments 600 refunded) To Return outward 3,700 To Balance c/d 1,79,075 3,71,175 3,71,175 Note: Transactions relating to cash sales or purchases; honour of bills receivable or payable; and discount or endorsement of bill will not be entered in Total Debtors and Total Creditors A/c. Summary • Self Balancing Ledger System implies a system of ledger keeping which classifies ledgers as per nature of transactions. • In order to reduce to a minimum the trouble and time involved in locating the errors, sometimes the system of self-balancing or sectional balancing of ledger is employed. • In this system, generally three ledgers, namely debtor ledger, creditor ledger and main ledger (containing remaining accounts) are prepared. • In such a case "General Ledger Adjustment Account" is prepared in each of the subsidiary ledgers. The General ledger would have Bought Ledger Adjustment Account (in reality, Total Creditors Account) and Sales Ledger Adjustment Account (in reality, Total Debtors Account). These accounts are known as Control Accounts • In this system, if the error affects the accounts of Debtors or Creditors without affecting their total, it is rectified by adjusting the accounts of Debtors or Creditors itself. However, if it affects the totals of Debtors or Creditors, the additional entries are to be made 8.19 © The Institute of Chartered Accountants of India