PROCESSING TRANSACTIONS

By Prof Sameer Lakhani

LEARNING OBJECTIVES
Describe an account and a ledger. Recognize commonly used accounts.

Describe the double-entry system and apply the rules for debit and credit.
Analyze the effect of business transactions using debits and credits. Record transactions in the journal. Post entries from the journal to the ledger. Prepare a trial balance and know its limitations

ACCOUNTS
Describe an account and a ledger: An accounting system classifies transactions into meaningful categories in order to prepare financial statements and other reports. To facilitate quick and easy retrieval of data, the company records transactions in accounts.

An account is an individual record of increases and decreases in an item, which is likely to be of interest or importance. An accounting system has separate accounts for revenue, expenses, asset, liability and equity items. Regardless of whether a company employs a manual system or a computer system for maintaining accounting records, it is essential to have a proper system of classification of transactions into various accounts. The way an enterprise records its activities is how it will appear to the world The accounting system determines what transactions and other events an organization "remembers" and "how" it remembers them.

LEDGER
In a manual accounting system, each account appears on a separate page or card. A file or loose-leaf binder holds these pages or cards together. A ledger is the file or binder that contains the entire group of accounts of a business. In a computer system, the accounts are stored on magnetic disks rather than in a ledger. The accounting principles for maintaining these accounts are the same as the ones for writing in the manual ledger.
Accounts in the ledger are usually arranged in the following order: assets, liabilities, equity, revenues, and expenses. A chart of accounts is a complete listing of the account titles used in an organization. For quick and easy reference, accounts are usually numbered. Exhibit 2.1 presents an illustrative chart of accounts. Accounts also have codes. In fact, the accounting department staff usually refer to accounts in terms of their codes rather than their titles. In the chart below, the first digit tells us whether an account is an asset, liability or equity item, and the next two digits identify the specific account. Thus, all asset accounts begin with 1, liability accounts begin with 2, and so on. Every organization should develop a chart of accounts that is most appropriate for its purposes. For example, a large company may use a 10-digit system in order to identify the division or business unit, plant, product line, and so on.

LEDGER

COMMONLY USED ACCOUNTS

The number of accounts and specific account titles used by an enterprise depend on the nature and complexity of the enterprise's business. For example. an automobile company will keep detailed accounts for its plant and equipment, whereas a bank will need meticulous information about its various deposits, investments and loans, and its cash kept in various forms. In deciding on the level of detail in the accounts, a firm should consider relevant legal provisions such as the Companies Act and the Income Tax Act. For example, the Companies Act requires disclosure of directors' remuneration; the Income Tax Act disallows many kinds of entertainment expenses. It is necessary to keep separate accounts of all such items. Asset Accounts: Assets are what an enterprise owns. Most enterprises keep separate accounts for recording increases and decreases in each major asset. Land: The Land account shows land owned by the enterprise and kept for use in its business.

COMMONLY USED ACCOUNTS

Buildings. The Buildings account records acquisition and disposal of buildings used by an enterprise to carry out its operations. An enterprise records its building and the land on which it stands in separate accounts. (Do you know why?) Also, there are separate accounts for different types of buildings such as factory buildings; warehouses, and office buildings. Equipment: A business often owns different types of equipment and records each major type of equipment in a separate account. Thus, the Plant and Machinery account shows various kinds of factory equipment. The Office Equipment account records photocopiers, fax machines and computers. The Furniture and Fittings account records chairs, tables and cupboards. Prepaid expenses. Sometimes, a business pays for services before they have been received or used. Usually, it is not possible to get a refund of the amount for the benefits not received. Rent, insurance, magazine subscriptions, and property taxes are other examples of prepayments. The Prepaid Expenses account records all such amounts, to the extent the related benefits have not expired. If a refund for the unused portion of a service is possible, the amount may appear in the Advances to Suppliers account.

COMMONLY USED ACCOUNTS

Accounts receivable: Business enterprises often sell goods and services on credit so that customers can pay after the specified period of credit. The Accounts Receivable (or Debtors) account records the amounts receivable from customers for sales on credit. In addition, there are separate accounts for individual debtors. Bills receivable: A bill receivable is a legal document containing a right to receive a certain sum of money at a specified date. It is a more formal means of extending credit than an open account. The Bills Receivable account contains the amounts due from a firm's customers on bills accepted by them. Cash.: The Cash account shows receipts and payments of cash. Cash includes coins, currency, cheques, and amounts deposited in banks in various types of accounts. Separate accounts exist for each bank with whom a business has transactions. Firms that have major overseas operations keep accounts with banks abroad in the currency of the country.

COMMONLY USED ACCOUNTS

Liability Accounts: Liabilities are what an enterprise owes. Liabilities can be shortterm or long-term. Bills payable. A bill payable is a legal document signifying an obligation to pay a certain sum of money at a specified date. The Bills Payable account contains the amounts due to a firm's suppliers on bills accepted by the firm. Creditors. The Creditors (or Accounts Payable) account shows increases and decreases in amounts owed to outsiders for the purchase of goods or services on credit. There are separate accounts for individual creditors.

Unearned revenue. This is the supplier's version of prepaid expenses. Amounts received from customers for services to be provided represent liabilities because the supplier has an obligation to provide the services. The Unearned Revenue account records these amounts. In case the enterprise has the option of refunding the amounts, it can use Advances from Customers as the account title.
Other short-term liabilities. Wages Payable, Income Tax Payable, Interest Payable, and Dividends Payable are examples of other liability accounts.

Long-term liabilities. These include a wide variety of debentures, loans from banks and other financial institutions, and long-term deposits. Equity Accounts: Equity is the difference between a firm's assets and liabilities. Transactions that affect equity include investment and withdrawal of assets by owners, earning of revenues, incurring of expenses, and payment of dividends. Firms keep separate accounts for each of these categories for the purpose of reporting to shareholders, preparing tax returns, and providing information to management for planning and controlling business operations.

COMMONLY USED ACCOUNTS

Share capital. Proprietary and partnership firms use an owner's capital account for the proprietor or separate capital for each of the partners. Companies record shareholders' contributions towards capital in the Share Capital account.
Retained earnings. The profit earned by a company less dividends paid belongs to the company's shareholders. It appears in the Retained Earnings account .Retained earnings represent the claims of the shareholders against the general assets of the company. Retained earnings increase when the company earns a net profit and decrease as a result of unprofitable operations or payment of dividends. A company records revenues, expenses, and dividends in separate accounts and later summarizes them in Retained Earnings.

COMMONLY USED ACCOUNTS

Revenues and expenses. Revenues increase equity, and expenses decrease it. When revenues exceed expenses, the business earns net profit. When expenses exceed revenues, the business incurs net loss. Firms keep separate accounts for each major revenue and expense item so that the users of financial statements can identify the sources of revenues and the nature of expenses. Some of the commonly used revenue accounts are Revenue from Services, Sales, Commission Income, Interest Income, and Professional Fees. Commonly used expense accounts include Salaries Expense, Rent Expense, Insurance Expense, Consumables Expense, and Supplies Expense. Relatively insignificant amounts are recorded in a Miscellaneous Revenue account or a Miscellaneous Expense account. Drawings. The owner of a sole proprietorship or a partner of a partnership business may withdraw cash or other assets from the business. A withdrawal results in a decrease in both assets and equity. A Drawing account records all withdrawals. You can think of this account as a negative capital account. The shareholders cannot withdraw assets from the company except when the company pays dividends or buys back the share capital.

COMMONLY USED ACCOUNTS

Dividends. Dividends are distributions of assets that reduce the retained profits of a company. The board of directors recommends dividends and the shareholders declare them as payable. Note that dividends are not an expense. In India, dividends must be paid with cash. Classification of Accounts Classify the following accounts according to their type: asset, liability, or equity: (a) Interest Expense - Equity (b) Commission Income - Equity (c) Prepaid Rent - Asset (d) Office Supplies - Asset (e) Proprietor's Drawings - Equity (f) Fines and Penalties Paid to Government - Equity (g) Advances to Suppliers - Asset (h) Unearned Insurance Premium - Liability (i) Income Tax Expense - Equity (j) Income Tax Payable - Liability (k) Dividend Paid - Equity (I) Dividend Received - Equity (m) Advances from Customers - Liability

THE DOUBLE-ENTRY SYSTEM: THE BASIS OF MODERN ACCOUNTING

Each transaction affected two columns. For example. receiving cash from customers for past invoices increases cash and decreases debtors. Thus, we record each transaction in two accounts so that the accounting equation is always in balance. Assets = Liabilities + Equity The double-entry system records every transaction with equal debits and credits. As a result, the total of debits must equal the total of credits. The T Account: The common form of an account has three parts: 1. A title that describes the name of the asset, liability, or equity account 2. A left side, or the debit side 3. A right side. or the credit side. This form of account is called a T account because it looks like the letter T, as shown below.

THE DOUBLE-ENTRY SYSTEM: THE BASIS OF MODERN ACCOUNTING

Debits and credits. Accountants use the terms debit and credit. respectively, to refer to the left side and right side of an account. To debit an account is to enter an amount on the left side of the account, and to credit an account is to enter an amount on the right side of the account. It must be noted that, in accounting, debit and credit do not have any value connotations such as bad or good and unfavorable or favorable. They are simply the accountant's terms for left and right and nothing more. Example of T Account: ABC company had several transactions involving receipt or payment of cash. When we record these transactions in the Cash account the cash receipts appear on the left or debit side of the account and the cash payments on the right or credit side as shown below:
Receipts or Debit Side Payments or Credit Side

THE DOUBLE-ENTRY SYSTEM: THE BASIS OF MODERN ACCOUNTING

The totals cash receipts Rs 82,000, and cash payments, Rs 68,700 are in bold so as to distinguish them from the transaction entries. The debit and credit totals, or footings in accounting lingo, are merely an intermediate step in determining the cash on hand at the end of the month. The difference in amounts between the total debits and the total credits in an account is the balance. If the total debits exceed the total credits, the account has a debit balance. If the total credits exceed the total debits, the account has a credit balance. The Cash account of Softomation has a debit balance of Rs 13,300 (Rs 82,000 Rs 68,700). This balance represents the cash available with Softomation on March 31.

THE DOUBLE-ENTRY SYSTEM: THE BASIS OF MODERN ACCOUNTING

Standard Form of Account: The T form of account described above is, no doubt, a convenient way to explain the effects of transactions on individual accounts. In practice, accountants draw up accounts in a form known as the standard form, similar to the one in Exhibit 2.2. The standard form shows the balance after every transaction and is, therefore, even more useful and efficient to use than the T-form. Your bank statement is an everyday example of the standard form.

You would have observed that the Cash account has the same information as that in the Cash column in Exhibit 1.4. It is just that receipts and payments appear on separate columns.

THE DOUBLE-ENTRY SYSTEM: THE BASIS OF MODERN ACCOUNTING

Debit and Credit Rules: Under the double-entry system, we enter increases in assets on the debit side of the account, and increases in liabilities and equity on the credit side. Figure 2.1 describes the recording procedure in terms of the accounting equation:

The rules for debit and credit for assets, liabilities, and equity are as follows: 1. Assets: Debit increase in asset to Asset account. Credit decrease in asset to Asset account.

2. Liabilities and Equity: Credit increase in liability or equity to Liability or Equity account. Debit decrease in liability or equity to Liability or Equity account.
Assets Debit Credit Liability Credit Debit + Equity Credit Debit

THE DOUBLE-ENTRY SYSTEM: THE BASIS OF MODERN ACCOUNTING

Expanded form of the accounting equation: Assets = Liabilities + (Capital + Revenues - Expenses - Drawings - Dividends) We can rewrite this equation as follows: Assets + Expenses + Drawings + Dividends = Liabilities + Capital + Revenues

We can now extend the rules for recording increase and decrease in equity to revenues, expenses, drawings, and dividends. Thus, we credit revenues, and debit expenses, drawings, and dividends to increase them. Exhibit 2.3 summarizes the rules for debit and credit.

Figuring Transactions from Accounts

Mahesh Pherwani started Pherwani Photoshop Ltd., a photography service. The following accounts contain eight transactions keyed together with letters. Write a short description of each transaction with the amount(s) involved.

Figuring Transactions from Accounts

Mahesh Pherwani started Pherwani Photoshop Ltd., a photography service. The following accounts contain eight transactions keyed together with letters. Write a short description of each transaction with the amount(s) involved.

Solution: The transactions are as follows: (a) Mahesh Pherwani invested cash, of Rs 3,100 and photography equipment, Rs 9,000 in Phelwani Photoshop Ltd Share capital. (b) Bought photography supplies on credit, Rs 1,400. (c) Paid rent in advance, Rs 1,600. (d) Received cash for services provided, Rs 4,700. (e) Bought photography equipment on credit, Rs 2,000. (f) Paid creditors on account, Rs 550. (g) Billed customers for services provided, Rs 8,100.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

To illustrate the procedure for recording transactions, let us take up a company that we call Fashion Concepts Company, a business that supplies new designs for dresses. In this illustration, you will learn how to record a transaction in terms of debits and credits. We have the following four steps for each transaction:

1. ANALYSIS: Analyze the transaction in terms of increase and decrease in asset. liability and equity items, and specify the relevant accounts. View the transaction from the standpoint of the business enterprise as the reporting entity.

2. RULES: State the debit and credit rules relevant to the transaction. Exhibit 2.3 has the rules
3. ENTRY: Record the transaction entry showing the accounts to debit and credit. 4. ACCOUNTS: Present the related accounts after recording the transaction entry.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 1: Rakesh invested Rs 50,000 cash in Fashion Concepts Company and received 5,000 shares of Rs10 each in the share capital of the company. ANALYSIS: Asset (Cash) increased. Equity (Share Capital) increased. RULES: Debit asset to record increase. Credit equity to record increase. ENTRY: Debit Cash. Credit Share Capital.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 2: Bought office supplies for cash, Rs 2,000. ANALYSIS: Asset (Office Supplies) increased. Asset (Cash) decreased. RULES: Debit asset to record increase. Credit asset to record decrease. ENTRY: Debit Office Supplies. Credit Cash.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 3: Paid office rent for June, Rs1,500. ANALYSIS: Expense (Rent Expense) increased. Asset (Cash) decreased. RULES: Debit expense to record increase. Credit asset to record decrease. ENTRY: Debit Rent Expense. Credit Cash.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 4: Bought office equipment from Agrawal Company for Rs 9,000 with a down payment of Rs 3,000 and agreed to pay the balance in six equal installments on the last day of the month beginning June. ANALYSIS: Asset (Office Equipment) increased. Asset (Cash) decreased. Liability (Creditors) increased. RULES: Debit asset to record increase. Credit asset to record decrease. Credit liability to record increase. ENTRY: Debit Office Equipment. Credit Cash. Credit Creditors.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 5 :Signed an agreement with Ethnic Wear for developing a special design. The agreement provided for payment of a fee of 72,000 by Ethnic Wear on completion of the work.
ANALYSIS: Signing an agreement with a customer is not an accounting transaction since it does not create any asset or revenue. Fashion Concepts will earn the revenue when it completes the design. June 6: Paid for a one-year fire insurance policy that will expire May 31, next year, Rs720. ANALYSIS: Asset (Prepaid Insurance) increased. Asset (Cash) decreased. RULES: Debit asset to record increase. Credit asset to record decrease. ENTRY: Debit Prepaid Insurance. Credit Cash

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 7: Received fee for designs supplied, Rs 2,000. ANALYSIS: Asset (Cash) Increased. Revenue (Revenue from Services) increased. RULES: Debit asset to record increase. Credit revenue to record increase. ENTRY: Debit Cash. Credit Revenue from Services

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 8: Collected from Kids wear, a customer, for services to be provided later, Rs1,500 ANALYSIS: Asset (Cash) increased. Liability (Unearned Revenue) Increased. RULES: Debit asset to record increase. Credit liability to record increase. ENTRY: Debit Cash. Credit Unearned Revenue

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 9: Bought office supplies on credit from Mohan Company, Rs 3,500. ANALYSIS: Asset (Office Supplies) increased. Liability (Creditors) increased. RULES: Debit asset to record increase. Credit liability to record increase. ENTRY: Debit Office Supplies. Credit Creditors.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 10: Billed Shah Company for designs completed, Rs9,000. ANALYSIS: Asset (Debtors) increased. Revenue (Revenue from Services) increased. RULES: Debit asset to record increase. Credit revenue to record increase. ENTRY: Debit Debtors. Credit Revenue from Services.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 14: Paid Mohan Company on account, Rs1,000.( An On Account Payment is a part payment. ANALYSIS: Liability (Creditors) decreased. Asset (Cash) decreased. RULES: Debit liability to record decrease. Credit asset to record decrease ENTRY: Debit Creditors. Credit Cash.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 18: Collected from Shah Company, Rs4,000. ANALYSIS: Asset (Cash) increased. Asset (Debtors) decreased. RULES: Debit asset to record increase. Credit asset to record decrease . ENTRY: Debit Cash. Credit Debtors.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 21: Appointed an office manager on a monthly salary of Rs 1,500. ANALYSIS: Appointing an employee is not an accounting transaction since it does not create any expense or liability. Fashion Concepts will record an expense after the office manager has provided services and her salary is paid or is payable.

June 27: Paid telephone bill, Rs 200.

ANALYSIS: Expense ,(Telephone Expense) increased. Asset (Cash) decreased. RULES: Debit expense to record increase. Credit asset to record decrease. ENTRY: Debit Telephone Expense. Credit Cash.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 28: Paid office assistant's June salary, Rs800.
ANALYSIS: Expense (Salaries Expense) increased. Asset (Cash) decreased. RULES: Debit expense to record increase. Credit asset to record decrease. ENTRY: Debit Salaries Expense. Credit Cash. .

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 29: Received (but did not pay) electricity bill, Rs150.
ANALYSIS: Expense (Electricity Expense) increased. Liability (Electricity Expense Payable) increased

RULES: Debit expense to record increase. Credit liability to record increase.

ENTRY: Debit Electricity Expense. Credit Electricity Expense Payable.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 30: Paid Agrawal Company, Rs1,000.
ANALYSIS: Liability (Creditors) decreased. Asset (Cash) decreased. RULES: Debit liability to record decrease. Credit asset to record decrease. ENTRY: Debit Creditors. Credit Cash.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

June 30: Paid a dividend, Rs2,200.
ANALYSIS: Dividends (Dividends) increased. Asset (Cash) decreased. RULES: Debit dividends to record increase. Credit asset to record decrease ENTRY: Debit Dividends. Credit Cash.

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

The balance of an account is the result of recording more increase than decrease. We debit asset, expense, drawing, and dividend accounts to record increase, and credit to record decrease in those accounts. As a result, asset and expense accounts usually have debit balances.

Since we credit liability, share capital and revenue accounts to record increase and debit to record decrease, these accounts usually have credit balances. The usual balance for an account is its normal balance. The normal balances for the various types of accounts are summarized in the following table:

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

Exhibit 2.4 presents the ledger of Fashion Concepts at the end of June. The accounts are grouped into asset, liability and equity categories

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANY

Equity = Rs 50,000 + Rs 11,000 - Rs2,650 Rs 2,200 = Rs 56,150

RECORDING TRANSACTIONS - The Journal

The journal is called the book of original entry or primary book because this is the accounting record where we first record transactions. It provides in one' place a complete record of all transactions with necessary explanations. A journal entry has the transaction date, the individual accounts and the related debit and credit amounts, and a brief explanation of the transaction. Journalizing is the process of recording transactions in the journal. The General Journal: Companies usually maintain several kinds of journals. The nature of operations and the frequency of a particular type of transaction in a company determine the number and design of journals. In this chapter, we use the general journal, the most commonly used type of journal. It has separate columns to record the following information about each transaction: 1. Date 2. Individual accounts 3. Debit and credit amounts 4. Brief explanation of the transaction 5. Posting reference

RECORDING TRANSACTIONS - The Journal

Exhibit 2.5 illustrates the general journal using two transactions of Fashion Concepts Company

The procedure for recording transactions in the general journal is as follows: 1. Enter the year, month, and date of the transaction on the Date column. There is no need to repeat the year and month for subsequent entries until the start of a new page or a new month

RECORDING TRANSACTIONS - The Journal

2. Write the account titles under the Description column. Enter the account to debit on the first line of the entry next to the left margin. If there are several accounts to debit, enter them one after the other. Enter the account to credit on the line below the account(s) to debit and indent it to set the account apart from the account(s) to debit. If there are several accounts to credit, enter them one after the other. Use the account titles from the company's chart of accounts. A compound entry is a journal entry that has more than one debit and/or credit items.

RECORDING TRANSACTIONS - The Journal

3. Enter the amount of the debit in the Debit column alongside the account to debit, and the amount of the credit in the Credit column alongside the account to credit.
4. Write a brief explanation of the transaction.

5. The Post. Ref. (Posting reference) is left blank at the time of making the journal entry

Transferring Information to the Ledger

Posting is the process of transferring information from the journal to the ledger. We enter each amount on the Debit column in the journal on the debit side of the appropriate account and each amount on the Credit column on the credit side of the appropriate account. The frequency of posting could be daily, weekly, or monthly, depending on the number of transactions. Exhibit 2.6 illustrates these steps separately for the debit and credit parts of a journal entry.

Transferring Information to the Ledger

Posting has the following steps: 1. Locate in the ledger the account(s) debited in the journal entry. 2. Enter the date of the transaction in the account. 3. Enter the relevant journal page number in the Post. Ref. column of the account. 4. Enter the debit amount appearing in the journal in the Debit, column of the account. 5. Enter the account code or the ledger page number in the Post. Ref. column of the journal. 6. Repeat steps 1 to 5 for the account(s) credited in the journal entry.

Transferring Information to the Ledger

Entering the account code in the "Post. Ref." column of the journal is the last step in posting. It indicates that the accountant has transferred all the information in the journal entry to the ledger. In addition, the account codes in this column are a convenient means for locating any additional information about an amount appearing in an account. The next step in the recording process is the preparation of a trial balance.

TRIAL BALANCE: Under the double-entry system, the debit and credit amounts must be equal. The trial balance is a device for verifying the equality of debits and credits. Exhibit 2.7 shows a trial balance for Fashion Concepts Company. The trial balance lists each account in the ledger that appears in Exhibit 2.4, with the debit balances in the left column, and the credit balances in the right column. Each column has a total, and the two totals must be equal. When this happens, the trial balance is said to be "in balance."

TRIAL BALANCE

The equality of the debit and credit totals of the trial balance proves that we have recorded equal debits and credits in the accounts. Further, it verifies that we have computed account balances correctly. However, we could have made errors that do not affect the equality of debits and credits:

TRIAL BALANCE
Errors of principle: Posting a journal entry to a wrong account will not affect the trial balance. For example, suppose that for payment of office rent we debited Office Equipment instead of Rent Expense. The trial balance will still balance.

Errors of omission and repetition: The trial balance will not reveal either the complete omission of a transaction from the ledger or the recording of the same transaction more than once.
Compensatory errors: The recording of the same erroneous amount for both the debit and credit of a transaction will not show up in the trial balance. Prepare a trial balance for Balaji Property Company has the following account balances as on March 31, 20XX Equipment Supplies Debtors Cash Share Capital 3,200 430 2,100 7,670 6,500 Dividends 600 Revenue from Services 8,800 Salaries Expense 800 Rent Expense 500

TRIAL BALANCE
BALAJI PROPERTY COMPANY Trial Balance, June 30, 20XX. Account Equipment Supplies Debtors Cash Debit 3,200 430 2,100 7,670 Credit

Share Capital
Dividends Revenue from Services Salaries Expense Rent Expense Total 800 500 15,300 600

6,500
8,800

15,300

TRIAL BALANCE- Locating Errors

If the debit and credit totals of the trial balance do not agree, the following types of errors are possible: 1. Recording different amounts for debit and credit in the journal 2. Posting a debit as a credit and/or a credit as a debit. 3. Computing an account balance incorrectly. 4. Copying the amount of an account balance to the trial balance incorrectly. 5. Copying a debit balance in an account as a credit balance, or a credit balance in an account as a debit balance, to the trial balance 6. Omitting an account balance from the trial balance. 7. Totalling the trial balance incorrectly.

Usually, the difference in the trial balance arises from a combination of errors rather than a single error. You must often proceed patiently, checking journal entries, postings, and the balancing of each account. Do it right the first time By being careful in transaction processing, your aim should be to avoid errors altogether.

TRIAL BALANCE- Locating Errors

Trial Balance. April 30, 20XX

The accountant's thorough check revealed the following errors: (i) A purchase of supplies of Rs 180 was posted as a credit to Supplies. Correction: (i) Supplies: This error had the effect of reducing the balance in the account by twice that amount. So add Rs 360 (ii) In computing the balance of Debtors, a debit of Rs 1,700 was omitted. Correction: (ii) Debtors: Add the omitted debit of Rs1,700 to the balance

TRIAL BALANCE- Locating Errors

Trial Balance. April 30, 20XX

(iii) The totalling of credits to Debtors was understated by Rs 900. Correction :(iii) Debtors: Deduct short credit of 7900.

(iv) A cash payment of Rs 2,700 was recorded as a debit of Rs 7,200 to Cash. Correction :(iv) Cash: Deduct wrong debit of Rs 7,200 and correct credit of Rs 2,700
(v) The balance of Salaries Expense was Rs1,200 Correction:(v) Salaries Expense: Copy the correct balance of Rs1,200 to the trial balance.

TRIAL BALANCE- Locating Errors

Trial Balance. April 30, 20XX The corrected trial balance is as follows: Trial Balance, April 30, 20XX

TRIAL BALANCE- Locating Errors

Trial Balance. Correcting Errors The accountant must correct an error when he locates it. If he discovers an error in a journal entry before posting, he can cross out the wrong amount and insert the correct amount immediately above Correcting entries rectify wrong postings of journal entries. A useful way to determine the correcting entry is to compare the incorrect entry with the correct entry and then make a correcting entry in the journal.
For example, assume that the accountant made the following journal entry to record the payment of electricity expense of Rs4,300 and posted it to the ledger:

This entry is incorrect because it debits Rent Expense instead of Electricity Expense. The correct entry is as follows:

The following is the correcting entry:

Note that the credit to Cash is proper and does not need correction

TRIAL BALANCE- Locating Errors

When the trial balance is not "in balance", the normal practice is to place the difference initially in a Suspense account. Then, the accounting records are to be scrutinized to locate the errors. Finally, the correcting entries are to be recorded by debiting or crediting Suspense and the relevant accounts. Suppose that an accountant has a trial balance that shows the following totals: Debits Rs 69,000 Credits Rs 77,730 The accountant opens a Suspense account with a debit of Rs 8,730 representing the difference in trial balance:

TRIAL BALANCE- Locating Errors

On scrutinizing the records, the accountant finds the following errors: 1. He has posted a journal entry to record an invoice for providing services for Rs 10,000 by debiting Rs10,000 to Debtors and crediting Rs 9,000 to Revenue from Services. 2. He has posted a journal entry to record an invoice for Rs 9,850 for purchase of supplies by debiting Rs 9,850 to Supplies and crediting Rs 9,580 to Creditors. 3. He has calculated the balance in Freight Inward as Rs19,200 instead of Rs 29,200. We now record the following journal entries to correct these errors:

TRIAL BALANCE- Locating Errors

We now post the correcting entries to the related accounts including the Suspense account. The Suspense account will appear as follows:

Note that, after all the errors have been corrected, the Suspense account will not have any balance

TRIAL BALANCE- Locating Errors

What, if any, is the effect of each of the following bookkeeping errors on the trial balance? (a) A debit of Rs 800 to Salaries Expense was overlooked and not posted. Ans a) The trial balance will not balance. Salaries Expense is understated by Rs800. (b) Payment of Rs1,400 for rent was recorded as a debit to Rent Expense of RS 1,400 and a credit to Cash of Rs140. Ans b) The trial balance will not balance. Cash is overstated by Rs1,260. (c) Payment of annual insurance premium of Rs180 for the company's equipment was recorded as a debit to Equipment of Rs180 and a credit to Cash of Rs180. Ans c) The trial balance will balance. Insurance Expense is understated, and Equipment overstated, by Rs180. (d) A purchase of supplies of Rs2,900 on credit was not recorded in the journal at all. Ans d) The trial balance will balance. Both Supplies and Creditors are understated by Rs 2,900 (e) Payment of telephone expense of Rs430 was recorded in the amount of Rs430 as a debit to Cash and a credit to Telephone Expense. Ans e) The trial balance will balance. Cash is overstated, and Telephone Expense understated, by Rs 860.

REVIEW PROBLEM
Ganesh quit his job and started Woodcraft Company. The transactions of the business for September are as follows: 20XX Sept. 1 Began business by investing cash Rs10,000 in company's share capital. 4 Paid two months' rent in advance for a shop, Rs2,000. 5 Bought equipment for cash, Rs 1,200. 7 Bought supplies on credit, Rs 700. 10 Received payment for remodeling a kitchen, Rs8,600. 14 Paid for an advertisement that appeared in the local newspaper, Rs1,400. 17 Received payment for furnishing office room, Rs 11,200. 23 Billed customers for work done other than on cash terms, Rs13,100. 25 Paid wages to assistant, Rs 1,500. 28 Paid electricity charges, Rs 240. 29 Received part payment from customers billed on September 23, Rs 4,800. 30 Paid a dividend, Rs 2,500 Required 1. Prepare journal entries for the above transactions. 2. Post the journal entries to Ledger. 3. Prepare a trial Balance.

REVIEW PROBLEM
Solution: 1. Journal Entries:

REVIEW PROBLEM
Solution: 1. Journal Entries:

REVIEW PROBLEM
Solution: 2. Ledger

REVIEW PROBLEM
Solution: 2. Ledger

REVIEW PROBLEM

REVIEW PROBLEM

PROBLEM SET
Identification of Accounts. Identify the account to be debited and credited for the following transactions : Transaction Debit Credit (a) Paid electricity expense for the current period. (b) Paid creditors for services received earlier. Electricity Expense Cash

(c) Billed customers for services provided.

(d) Took a loan from bank. (e) Paid rent outstanding for the previous year. (f) Proprietor made additional investment in the business. (g) Bought office supplies on credit. (h) Paid insurance premium for the next year. (i) Provided services for cash.

(j) Bought a computer on credit.

(k) Repaid part of bank loan. (l) Paid proprietor's son's school fees. (m) Paid interest on bank loan. (n) Collected cash from customers on account.

PROBLEM SET
Identification of Accounts. Identify the account@) to be debited and credited for the following transactions :
Transaction a b Debit Credit Cash Cash Electricity Expense Creditors

c d
e f g h i j k l m n

Accounts Receivable Cash

Rent Payable Cash Office Supplies Prepaid Insurance Cash Computers Bank Loan Payable Drawings Interest Expenses Cash

Revenue from Services Bank Loan Payable

Cash Cash Capital Creditors Cash Revenue from services Cash Cash Cash Accounts Receivable

PROBLEM SET
Using T Accounts. Rakesh set up Mechanotronics Ltd. Record the following transactions by entering debits and credits directly in the company's accounts using the transaction letters as the key.
(a) Rakesh invested cash in the company's share capital, Rs 10,000.

(b) Paid rent deposit for office premises, Rs 5,000.

(c) Provided services for cash, Rs 3,500. (d) Purchased office equipment on credit, Rs 2,500 (e) Paid office rent for the month, Rs 750. (f) Billed customers for services provided, Rs 3,300. (g) Paid creditors, Rs1,500. (h) Paid assistant's wages, Rs 250.

(i) Paid dividends, Rs1,000

PROBLEM SET
Solution 2 : Using T Accounts
Office Equipment (d) 2500 Accounts Receivable (f) 3300 Cash

(a)
(c)

10000
3500

(b)
(e) (g) (h) (i)

5,000
750 1500 250 1000

Rent Deposit
(b) 5000

PROBLEM SET
Solution 2 : Using T Accounts
Creditors (g) 1500 (d) Share Capital (a) Dividends (i) 1000 Revenue From Services (c) 3500 (f) 3300 Rent Expenses (e) 750 Salaries Expenses (h) 250 10,000 2500

PROBLEM SET
Recording Transactions in General Journal. Shalini Arora set up Ace Marketing Ltd. to provide consultancy. During a short period, the company completed the following transactions:
(a) Shalini invested cash in Ace's share capital, Rs 20,000. (b) Billed customers for services provided, Rs 5,600. (c) Paid assistant's salary, Rs 600. (d) Bought computer on credit, Rs 4,400. (e) Received cash from customers billed earlier, Rs 1,350. (f) Took a bank loan, Rs 5000. (g) Paid creditors, Rs 2,000. (h) Received fee for professional services, Rs 8,250. (i) Paid dividends, Rs 1,100.

Prepare journal entries to record the transactions.

PROBLEM SET
Solution:
Trans action (a) Description Post Ref. Debit Credit

Cash Share Capital Invested cash Accounts Receivable Revenue from Services Billed customers for services Salaries Expense Cash Paid assistant's salary Computers Creditors Bought computers on credit Accounts Receivable Cash Collected accounts receivable Cash Bank Loan Payable Took a bank loan

20,000 20,000

(b)

5,600 5,600

(c)

600 600

(d)

4,400 4,400 1,350

(e)

1,350
5,000 5,000

(f)

PROBLEM SET
Solution:
Trans action Description Post Ref. Debit Credit

(g)

Creditors Cash Paid creditors

Cash Revenue from Services Received fee for professional services

2,000
2,000

(h)

8,250

8,250

(i)

Dividends Cash Paid dividend

1,100
1,100

PROBLEM SET
Preparation of Trial Balance. Time Value Company provides trainings on time management. The following are the account balances of the company on September 30, 20XX

Prepare a trial Balance.

Solution:
Account Building Office Equipment Accounts Receivable Cash Prepaid Insurance Creditors Share Capital

Time Value Company Trial Balance September 30 , 20XX

Debit 15,000 3,000 1,200 1,500 1,400 2,300 7,500 4,700 Credit

PROBLEM SET

Retained Earnings (missing amount)

Dividends
Revenue from Services Electricity Expense Rent Expense Salaries Expense Telephone Expense Total

750
12,500 500 1,000 1,600 1,050 27,000 27,000

PROBLEM SET
Effect of Errors on Trial Balance. The trial balance of your company does not balance. Your review of the records reveals the following errors: (a) A cash payment of Rs 900 for salaries expense was recorded as a debit of Rs600 to Salaries Expense and a credit of Rs 900 to Cash. (b) Supplies Expense with a balance of Rs 750 was listed in the trial balance as Rs7,500. (c) A purchase of supplies for Rs 500 on account was posted as a debit to Supplies and a credit to Cash. (d) Rent Expense of Rs 4,000 was posted as a debit to Cash and a credit to Rent Expense. (e) A cash payment of Rs 3,800 to creditors was recorded as a debit to creditors of Rs 3,800 and a credit to cash of Rs3,300. (f) A cash receipt of Rs 1,200 from customers was posted twice to Accounts Receivable and Cash. (g) Electricity Expense with a balance of Rs 800 was omitted from the trial balance. Using the format given below, for each error indicate whether the trial balance will balance (Yes) or will not balance (No). If it will not balance, specify the amount of the difference and the trial balance column (Debit, Credit) that will have a larger total. The errors are independent of each other.

PROBLEM SET
Solution: Effects of Errors on trial Balance

Error

In Balance

Difference

Large Column

(a) (b)
(c) (d) (e) (f) (g)

No No
Yes Yes No Yes No

300 6750
None None 500 None 800

Credit Debit
None None Debit None Credit

PROBLEM SET
Error Analysis and Correcting Entries. State the effect of the following errors on the trial balance, and prepare journal entries, where needed, to correct them. Use the format given. (a) A cash receipt of Rs 1,900 for services yet to be provided was debited to Cash and credited to Revenue from Services. (a) Effect: The trial balance will balance. Revenue from Services is overstated by Rs 1,900 and Unearned Revenue is understated by Rs 1,900. Correcting entry: Revenue from Services Unearned Revenue 1900 1900

(b) A purchase of supplies of Rs 4,400 on credit was recorded as a debit to Supplies of Rs 4,400 and a credit to Cash of Rs 4,400.
(b) Effect: The trial balance will balance. Cash is understated by Rs 4,400 and Creditors is understated by Rs 4,400. Correcting entry: Cash 4,400 Creditors

4,400

PROBLEM SET
(c) An interest payment of Rs 1,000 was debited to Bank Loan Payable and credited to Cash. (c) Effect: The trial balance will balance. Interest Expense is understated by Rs 1,000 and Bank Loan payable is understated by Rs 1,000. Correcting entry: Interest Expense 1,000 Bank Loan Payable

1,000

(d) Cash payment of Rs 3,600 to suppliers was recorded as a debit to Creditors of Rs 6,300 and credit to Cash of Rs 3,600.

(d). Effect: The trial balance will not balance. Creditors is understated by Rs 2,700.
Correcting entry: Suspense 2,700 Creditors

2,700

THANK YOU