Accounting Process — Ledgers, Trial Balance, Subsidiary Books, Cash Book & Rectification of Errors

Figure 1: The accounting process involves recording, classifying, summarising, and rectifying transactions.

Unit 2: Ledgers

2.1 Introduction

After recording the original transactions in the journal, recorded entries are classified and grouped into by preparation of accounts.
The book which contains all set of accounts (viz. personal, real and nominal accounts), is known as Ledger.
It is known as principal books of account in which account-wise balance of each account is determined.

2.2 Specimen of Ledger Accounts

LEDGER ACCOUNT

Dr.				Cr.
Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)

2.3 Posting

The process of transferring the debit and credit items from journal to classified accounts in the ledger is known as posting.

2.3.1 Rules regarding Posting of Entries in the Ledger

1. Separate account is opened in ledger book for each distinct account and entries from Journal are posted to respective account accordingly.
2. It is a practice to use words 'To' and 'By' while posting transactions in the ledger.
3. The concerned account debited in the journal should also be debited in the ledger but reference should be of the respective credit account.

2.4 Balancing an Account

At the end of each month or year or any particular reporting period, it may be necessary to ascertain the balance in an account.
To ascertain the balance in any account, both the sides of the account is totalled and smaller amount is deducted from the bigger amount to ascertain the difference.
If the credit side is bigger than the debit side, it is a credit balance and vice versa.
The credit balance is written on the debit side as, "To Balance c/d" (carried down).
Then the credit balance is written on the credit side as "By balance b/d" (brought down).
Nominal accounts are not balanced; the balance in the end are transferred to the profit and loss account.
Only personal and real accounts balances are ultimately shown in the balance sheet.

KEY POINTS — LEDGERS

Ledger: Principal book of accounts
Posting: Transferring entries from journal to ledger
Balancing: Ascertaining the difference between debit and credit sides
Nominal Accounts: Not balanced — transferred to P&L
Personal & Real Accounts: Balanced — shown in Balance Sheet

Unit 3: Trial Balance

3.1 Introduction

Preparation of trial balance is the third phase in the accounting process.
After posting the accounts in the ledger, a statement is prepared to show separately the debit and credit balances. Such a statement is known as the trial balance.
The totals of the two columns should agree. An agreement indicates arithmetic accuracy of the accounting work.
Trial balance is a statement and not an account.

3.2 Objectives of Preparing the Trial Balance

(i) Trial balance enables one to establish whether the posting and other accounting processes have been carried out without committing arithmetical errors.
(ii) Financial statements are normally prepared on the basis of agreed trial balance.
(iii) The trial balance serves as a summary of what is contained in the ledger.

FORM OF TRIAL BALANCE

S. No.	Ledger Accounts	Dr. Amount (₹)	Cr. Amount (₹)

3.3 Limitations of Trial Balance

The agreement of Trial Balance is not a conclusive proof of accuracy.
Errors may remain even if trial balance agrees:
- Transaction has not been entered at all in the journal.
- A wrong amount has been written in both columns of the journal.
- A wrong account has been mentioned in the journal.
- An entry has not at all been posted in the ledger.
- Entry is posted twice in the ledger.

3.4 Methods of Preparation of Trial Balance

1. Total Method: Every ledger account is totalled and that total amount (both of debit side and credit side) is transferred to trial balance.
2. Balance Method: Every ledger account is balanced and those balances only are carried forward to the trial balance. This method is used commonly.
3. Total and Balance Method: Combines the above two methods.

3.5 Adjusted Trial Balance (through Suspense Account)

If the trial balance does not agree after transferring the balance of all ledger accounts, then the trial balance is tallied by transferring the difference to an account known as suspense account.
This is a temporary account opened to proceed further and to prepare the financial statements timely.

3.6 Rules of Preparing the Trial Balance

The balances of all (i) assets accounts (ii) expenses accounts (iii) losses (iv) drawings are placed in the debit column.
The balances of all (i) liabilities accounts (ii) income accounts (iii) gains (iv) capital are placed in the credit column.

RULES FOR TRIAL BALANCE — QUICK REFERENCE

Debit Column: Assets, Expenses, Losses, Drawings
Credit Column: Liabilities, Income, Gains, Capital

Unit 4: Subsidiary Books

4.1 Introduction

In a business, most of the transactions generally relate to receipts and payments of cash, sale of goods and their purchase.
It is convenient to keep a separate register for each such class of transactions. A register of this type is called a book of original entry or of prime entry.
These books of original or prime entry are also called subsidiary books since ledger accounts are prepared on their basis.

SUBSIDIARY BOOKS NORMALLY USED

(i) Cash Book — to record receipts and payments of cash
(ii) Purchases Book — to record credit purchases of goods
(iii) Purchase Returns Book — to record returns of goods previously purchased
(iv) Sales Book — to record credit sales of goods
(v) Sale Returns Book — to record returns of goods by customers
(vi) Bills Receivable Book — to record receipts of promissory notes
(vii) Bills Payable Book — to record issue of promissory notes
(viii) Journal (proper) — to record transactions not covered above

Advantages of Subsidiary Books

(i) Division of work: Accounting work may be divided amongst a number of clerks.
(ii) Specialization and efficiency: When same work is allotted to a person over time, he becomes efficient.
(iii) Saving of time: Various accounting processes can be undertaken simultaneously.
(iv) Availability of information: Information relating to each class of transaction is available at one place.
(v) Facility in checking: Location of errors is facilitated by existence of separate books.

4.2 Distinction between Subsidiary Books and Principal Books

Subsidiary Books: Books in which transactions are first recorded to enable further processing.
Principal Books: The ledger and the cash book — they furnish information for preparation of the trial balance and financial statements.

4.3 Purchases Book

To record the credit purchases of goods dealt in or materials used in the business.
Cash purchases are not entered in this book — they are entered in the cash book.
Credit purchases of items other than goods or materials are journalised.

PURCHASES BOOK FORMAT

Date	Particulars	Details (₹)	Amount (₹)

4.4 Sales Book

A register specially kept to record credit sales of goods dealt in by the firm.
Cash sales are entered in the Cash Book.
Credit sales of items other than the goods dealt in are journalised.

4.5 Sales Returns Book / Returns Inward Book

Records returns of goods sold to customers.

4.6 Purchase Returns / Returns Outward Book

Records returns of goods or material purchased to the suppliers.

4.7 Importance of Journal

If there is no special book meant to record a transaction, it is recorded in the journal (proper).
Types of entries in Journal Proper:
- Opening entries
- Closing entries
- Rectification entries
- Transfer entries
- Adjusting entries
- Entries on dishonour of Bills
- Miscellaneous entries

SUBSIDIARY BOOKS — KEY POINTS

Purpose: Division of work, specialization, saving time
Purchases Book: Credit purchases of goods
Sales Book: Credit sales of goods
Journal Proper: For transactions not covered by other books

Unit 5: Cash Book

5.1 Cash Book — A Subsidiary Book and A Principal Book

Cash transactions are straightaway recorded in the Cash Book and on the basis of such a record, ledger accounts are prepared.
Therefore, the Cash Book is a subsidiary book.
But the Cash Book itself serves as the cash account and the bank account; the balances are entered in the trial balance directly.
The Cash Book, therefore, is part of the ledger also. Hence, it is also treated as the principal book.
The Cash Book is thus both a subsidiary book and a principal book.

5.2 Kinds of Cash Book

(i) Simple Cash Book — One amount column on each side
(ii) Two-column Cash Book — Cash + Discount OR Cash + Bank columns
(iii) Three-column Cash Book — Cash + Bank + Discount columns

Simple Cash Book

Appears like an ordinary account, with one amount column on each side.
The left-hand side records receipts of cash and the right-hand side the payments.
The total of receipts column is always greater than total of payments column.

Double-Column Cash Book

If along with column for "Amount" to record cash receipts and cash payments another column is added on each side to record the cash discount allowed or the discount received.
Discount columns are not balanced. They are merely totalled.
The total of discount column on the receipts side shows total discount allowed to customers and is debited to the Discount Account.
The total of the column on the payments side shows total discount received and is credited to the Discount Account.

Three-Column Cash Book

On each side, another column is added to record cash deposited at bank (on the receipt side) and payments out of the bank (on the payment side).

CONRA ENTRIES

Often cash is withdrawn from bank for use in the office. In such a case the amount is entered in the bank column on the payments side and also in the cash column on the receipts side.
In the reverse case of cash being sent to the bank, the amount is recorded in the bank column on the receipts side and in cash column on payment side.
Against such entries, the letter "C" should be written in the L.F column, to indicate that these are contra transactions and no further posting is required for them.

5.3 Posting the Cash Book Entries

From the debit side of the cash book, credit the various accounts with their respective amounts (including any discount that may have been allowed).
From the credit side of cash book, the posting will be to the debit of the accounts mentioned in the particular column with their respective amounts (including the discount which may have been received).
The total of the discount columns on the debit side is debited to the discount account.
The total of the column discount on the credit side is credited to the discount account.

5.4 Petty Cash Book

A number of small payments, such as for telegrams, taxi fare, cartage, etc., have to be made.
Firms appoint a person as 'Petty Cashier' and entrust the task of making small payments to him.

IMPREST SYSTEM OF PETTY CASH

A definite sum of money is entrusted to the petty cashier in the beginning of a period.
Reimbursement is made for payments made at the end of the period.
Thus, he will have again the fixed amount in the beginning of the new period.
This system is known as the imprest system of petty cash.

ADVANTAGES OF PETTY CASH BOOK

(i) Saving of time of the chief cashier
(ii) Saving in labour in writing up the cash book and posting into the ledger
(iii) Control over small payments

5.5 Entries for Sale through Credit/Debit Cards

From the seller's point of view, this type of sale is equivalent to a cash sale.
Commission charged by the bank will be treated as selling expenses.

CASH BOOK — KEY POINTS

Cash Book: Both subsidiary and principal book
Simple Cash Book: Only cash column
Two-Column: Cash + Discount OR Cash + Bank
Three-Column: Cash + Bank + Discount
Contra Entries: Cash ↔ Bank
Petty Cash Book: Imprest system — small payments

Unit 6: Rectification of Errors

6.1 Introduction

Unintentional omission or commission of amounts and accounts in the process of recording the transactions are commonly known as errors.
To check the arithmetic accuracy of the journal and ledger accounts, trial balance is prepared.
Some errors may affect the Trial Balance and some of these do not have any impact on the Trial Balance.

6.2 Stages of Errors

At the stage of recording the transactions in Journal: Errors of principle, omission, commission
At the stage of posting the entries in Ledger: Errors of omission (partial/complete), commission (wrong account, wrong side, wrong amount)
At the stage of balancing the Ledger accounts: Wrong totalling, wrong balancing
At the stage of preparing the Trial Balance: Errors of omission, commission (wrong account, wrong amount, wrong side)

6.3 Types of Errors

(a) Errors of Principle: When a transaction is recorded in contravention of accounting principles. No effect on trial balance.
(b) Clerical Errors:
- (i) Errors of Omission: Transaction completely or partially omitted.
- (ii) Errors of Commission: Amount posted in wrong account, wrong side, wrong totals.
- (iii) Compensating Errors: Effect of errors cancel out. Trial balance agrees.

CLASSIFICATION OF ERRORS

Errors of Principle
Errors of Omission
Errors of Commission
Compensating Errors

6.4 Steps to Locate Errors

(i) The two columns of the trial balance should be totalled again.
(ii) It should be seen that the cash and bank balances have been written in the trial balance.
(iii) The exact difference in the trial balance should be established.
(iv) The ledger accounts should be balanced again.
(v) The casting of subsidiary books should be checked again.
(vi) If the difference is very big, the balance in various accounts should be compared with the corresponding accounts in the previous period.
(vii) Postings of the amounts equal to the difference or half the difference should be checked.
(viii) If there is still a difference, a complete checking will be necessary.

6.5 Rectification of Errors

Errors should never be corrected by overwriting.
The correction should be made by making another suitable entry, called as rectification entry.

RECTIFICATION — STAGES

Before preparation of Trial Balance: Rectification statement in appropriate side(s) of concerned account(s)
After Trial Balance but before Final Accounts: Complete journal entry using Suspense Account
After Final Accounts (next accounting period): Using 'Profit and Loss Adjustment Account' for nominal accounts

6.5.1 Before preparation of Trial Balance

Errors affecting one side of an account or more than one account where complete rectification entry is not possible.
Rectification is done by making rectification statement in the appropriate side(s) of concerned account(s).

6.5.2 After Trial Balance but before Final Accounts

Each error detected at this stage can only be corrected by a complete journal entry.
Those errors for which journal entries were not possible at the earlier stage will now be rectified by a journal entry(s), the difference being taken care of by suspense account.

6.5.3 Correction in the next Accounting Period

Correction of all amounts concerning nominal accounts (expenses and incomes) should be through a special account styled as "Prior Period Items" or "Profit and Loss Adjustment Account".
'Prior Period items' are material income or expenses which arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods.

GOLDEN RULES FOR RECTIFICATION

Errors of Principle: No effect on trial balance
Errors of Omission: Complete omission — no effect; Partial omission — effect on trial balance
Errors of Commission: May or may not affect trial balance
Compensating Errors: No effect on trial balance
Suspense Account: Used when trial balance does not agree

Summary

Ledger: Principal book of accounts containing all sets of accounts.
Trial Balance: Statement showing debit and credit balances — third phase of accounting process.
Subsidiary Books: Books of original entry for specific types of transactions — Purchases Book, Sales Book, etc.
Cash Book: Both subsidiary and principal book — records cash and bank transactions.
Rectification of Errors: Correction of errors depends on the stage of detection — before/after trial balance, or in next period.

Test Your Knowledge

True and False

Ledgers:
1. A ledger is also known as the principal book of accounts. True
2. Cash account has a debit balance. True
3. Posting is the process of transferring the accounts from ledger to journal. False
Trial Balance:
4. Preparing trial balance is the third phase of accounting process. True
5. Agreement of trial balance is a conclusive proof of accuracy. False
6. A trial balance will tally in case of compensating errors. True
Subsidiary Books:
7. Transactions recorded in the purchase book include only purchases of goods on credit transactions. True
8. Cash sales are recorded in the sales book. False
Cash Book:
9. Cash book is a subsidiary book as well as a principal book. True
10. Discount column of cash book is never balanced. True
Rectification of Errors:
11. The method of rectification of errors depends on the stage at which the errors are detected. True
12. In case of error of complete omission, the trial balance does not tally. False
13. When purchase of an asset is treated as an expense, it is known as error of principle. True
14. Trial balance agrees in case of compensating errors. True

Multiple Choice Questions

Ledgers
1. The process of transferring the debit and credit items from a Journal to their respective accounts in the ledger is termed as	(a) Posting (b) Purchase (c) Balancing of an account
2. Ledger book is popularly known as	(a) Secondary book of accounts (b) Principal book of accounts (c) Subsidiary book of accounts
Trial Balance
3. After the preparation of ledgers, the next step is the preparation of	(a) Trading accounts (b) Trial balance (c) Profit and loss account
4. A trial balance will not balance if	(a) Correct journal entry is posted twice. (b) The purchase on credit basis is debited to purchases and credited to cash. (c) 500 cash payment to creditor is debited to Trade payables for 50 and credited to cash as 500
Subsidiary Books
5. In Purchases Book, the record is in respect of	(a) Cash purchase of goods. (b) Credit purchase of goods dealt in. (c) All purchases of goods.
6. The total of the Sales Book is posted to	(a) Credit of the Sales Account (b) Credit of the Purchases Account (c) Credit of the Capital Account
Cash Book
7. Cash book is a type of ____ but treated as a ____ of accounts.	(a) Subsidiary book, principal book (b) Principal book, subsidiary book (c) Subsidiary book, subsidiary book
8. The balance in the petty cash book is	(a) An expense (b) A profit (c) An asset
Rectification of Errors
9. If the amount is posted in the wrong account or it is written on the wrong side of the account, it is called	(a) Error of omission. (b) Error of commission. (c) Error of principle.
10. Purchase of office furniture ₹1,200 has been debited to General Expense Account. It is:	(a) A clerical error. (b) An error of principle. (c) An error of omission.
11. ₹200 received from Smith whose account was written off as a bad debt should be credited to:	(a) Bad Debts Recovered account (b) Smith's account. (c) Cash account.

High-Yield Interactive Quiz — Ledgers, Trial Balance, Subsidiary Books, Cash Book & Rectification of Errors

Q1. The process of transferring entries from journal to ledger is called:

Correct Answer: B. The process of transferring the debit and credit items from journal to classified accounts in the ledger is known as posting.

Q2. Which type of accounts are NOT balanced at the end of the accounting period?

Correct Answer: C. Nominal accounts are not balanced; the balance in the end are transferred to the profit and loss account.

Q3. Trial balance is a:

Correct Answer: C. Trial balance is a statement and not an account.

Q4. Which of the following is NOT a subsidiary book?

Correct Answer: C. Ledger is the principal book of accounts, not a subsidiary book. Subsidiary books include Purchases Book, Sales Book, Cash Book, etc.

Q5. Cash Book is both a subsidiary book and a:

Correct Answer: B. The Cash Book serves as the cash account and the bank account; the balances are entered in the trial balance directly. Therefore, it is also treated as the principal book.

Q6. In a three-column cash book, the third column is for:

Correct Answer: B. A three-column cash book has Cash, Bank, and Discount columns.

Q7. When a transaction is recorded in contravention of accounting principles, it is called:

Correct Answer: B. When a transaction is recorded in contravention of accounting principles, like treating the purchase of an asset as an expense, it is an error of principle.

Q8. Which of the following errors DOES NOT affect the trial balance?

Correct Answer: C. Omitting an entry altogether from the subsidiary book does not affect the trial balance because both debit and credit are omitted.

Q9. The imprest system is used in maintaining:

Correct Answer: B. The imprest system is used in maintaining the petty cash book, where a fixed sum is entrusted to the petty cashier and reimbursed for payments made.

Q10. A contra entry in a cash book is passed when:

Correct Answer: C. A contra entry is passed when cash is withdrawn from bank for office use or when cash is deposited into bank.

Q11. The balance in the Suspense Account is transferred to:

Correct Answer: B. If the suspense account cannot be closed, the balance is transferred to the Capital Account.

Q12. Which of the following is a clerical error?

Correct Answer: D. Errors of omission and commission are clerical errors. Error of principle is not a clerical error.

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