processing transactions

8/3/2019 Processing Transactions

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PROCESSING

TRANSACTIONS

By Prof Sameer Lakhani


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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


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ACCOUNTS

Describe an account and a ledger: An accounting system classifies transactions into

meaningful categories in order to prepare financial statements and other reports. Tofacilitate 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.


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LEDGERIn 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. Theaccounting 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 accounttitles 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 codesrather 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.


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LEDGER


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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 willneed 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.


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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 areseparate 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 showsvarious 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.


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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 forsales 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 duefrom 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.


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Liability Accounts: Liabilities are what an enterprise owes. Liabilities can be short-

term 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.


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COMMONLY USED ACCOUNTSLong-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.

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 belongsto 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 themin Retained Earnings.


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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 majorrevenue 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 adecrease 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.


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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, dividendsmust 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


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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 eachtransaction 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.


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Debits and credits. Accountants use the terms debit and credit. respectively, to refer tothe 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


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The totals cash receipts Rs 82,000, and cash payments, Rs 68,700 are in bold so asto 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 82,000Rs

68,700). This balance represents the cash available with Softomation on March 31.


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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. Inpractice, 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 onseparate columns.


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THE BASIS OF MODERN ACCOUNTINGDebit 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 Liability + Equity

Debit Credit Credit

Credit Debit Debit

O S S


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THE BASIS OF MODERN ACCOUNTINGExpanded 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.

Fi i T i f A


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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.

.

Fi i T ti f A t


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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


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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 followingfour 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


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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.



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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.



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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.



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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.



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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



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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



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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



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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.



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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.



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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.



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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.



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COMPREHENSIVE ILLUSTRATION: FASHION CONCEPTS COMPANYJune 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.


ENTRY: Debit Telephone Expense. Credit Cash.



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June 28: Paid office assistant's June salary, Rs800.

ANALYSIS: Expense (Salaries Expense) increased. Asset (Cash) decreased.


ENTRY: Debit Salaries Expense. Credit Cash.

.



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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.



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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.



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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.



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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:



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Exhibit 2.4 presents the ledger of Fashion Concepts at the end of June. The accounts are grouped

into asset, liability and equity categories



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

RECORDING TRANSACTIONS - The Journal


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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



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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



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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 areseveral 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.



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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


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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.



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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. Re eat ste s 1 to 5 for the account s credited in the ournal entr .



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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


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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


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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 3,200 Dividends 600

Supplies 430 Revenue from Services 8,800Debtors 2,100 Salaries Expense 800

Cash 7,670 Rent Expense 500

Share Capital 6,500

TRIAL BALANCE


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BALAJI PROPERTY COMPANY

Trial Balance, June 30, 20XX.

Account Debit Credit

Equipment 3,200

Supplies 430

Debtors 2,100

Cash 7,670

Share Capital 6,500

Dividends 600

Revenue from Services 8,800

Salaries Expense 800Rent Expense 500

Total 15,300 15,300

TRIAL BALANCE- Locating Errors


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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 balance6. 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 ofeach account. Do it right the first time By being careful in transaction processing, your aim

should be to avoid errors altogether.



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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 twicethat 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



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(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.



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The corrected trial balance is as follows:

Trial Balance, April 30, 20XX



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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



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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:



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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:



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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



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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


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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


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Solution: 1. Journal Entries:

REVIEW PROBLEM


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Solution: 1. Journal Entries:

REVIEW PROBLEM


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Solution: 2. Ledger

REVIEW PROBLEM


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Solution: 2. Ledger

REVIEW PROBLEM


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REVIEW PROBLEM


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PROBLEM SETIdentification of Accounts. Identify the account to be debited and credited for the following


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de t cat o o ccou ts. de t y t e accou t to be deb ted a d c ed ted o t e o ow g

transactions :

Transaction Debit Credit

(a) Paid electricity expense for the current period. Electricity Expense Cash

(b) Paid creditors for services received earlier.

(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

Id ifi i f A Id if h @) b d bi d d di d f h f ll i


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Identification of Accounts. Identify the account@) to be debited and credited for the following

transactions :Transaction Debit Credit

a Electricity Expense Cash

b Creditors Cash

c Accounts Receivable Revenue from Services

d Cash Bank Loan Payable

e Rent Payable Cash

f Cash Cash

g Office Supplies Capital

h Prepaid Insurance Creditors

i Cash Cash

j Computers Revenue from services

k Bank Loan Payable Cash

l Drawings Cash

m Interest Expenses Cash

n Cash Accounts Receivable

PROBLEM SET

U i T A t R k h t M h t i Ltd R d th f ll i t ti b


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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

S l ti 2 U i T A t


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Solution 2 : Using T Accounts

Office Equipment

(d) 2500

Accounts Receivable

(f) 3300

Cash(a) 10000 (b) 5,000

(c) 3500 (e) 750

(g) 1500

(h) 250

(i) 1000

Rent Deposit

(b) 5000

PROBLEM SET

S l ti 2 U i T A t


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Solution 2 : Using T Accounts

Creditors

(g) 1500 (d) 2500

Share Capital

(a) 10,000

Dividends

(i) 1000

Revenue From Services

(c) 3500

(f) 3300

Rent Expenses

(e) 750

Salaries Expenses

(h) 250

PROBLEM SET

R di T ti i G l J l Sh li i A t A M k ti Ltd t id


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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:


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Solution: Transaction

Description Post

Ref.

Debit Credit

(a) Cash

Share Capital

Invested cash

20,000

20,000

(b) Accounts Receivable

Revenue from Services

Billed customers for services

5,600

5,600

(c) Salaries ExpenseCash

Paid assistant's salary

600600

(d) Computers

Creditors

Bought computers on credit

4,400

4,400

(e) Accounts ReceivableCash

Collected accounts receivable

1,3501,350

(f) Cash

Bank Loan Payable

Took a bank loan

5,000

5,000

PROBLEM SET

Solution:


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Solution:

Trans

action

Description Post

Ref.

Debit Credit

(g) Creditors

Cash

Paid creditors

2,000

2,000

(h) Cash

Revenue from Services

Received fee for professionalservices

8,250

8,250

(i) Dividends

Cash

Paid dividend

1,100

1,100

PROBLEM SET


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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.

PROBLEM SETSolution: Time Value Company

T i l B l S t b 30 20XX


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Trial Balance September 30 , 20XXAccount Debit Credit

Building 15,000

Office Equipment 3,000

Accounts Receivable 1,200

Cash 1,500

Prepaid Insurance 1,400

Creditors 2,300

Share Capital 7,500

Retained Earnings (missing amount) 4,700

Dividends 750

Revenue from Services 12,500

Electricity Expense 500

Rent Expense 1,000

Salaries Expense 1,600

Telephone Expense 1,050

Total 27,000 27,000

PROBLEM SETEffect of Errors on Trial Balance. The trial balance of your company does not balance. Your review of the


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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


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Solution: Effects of Errors on trial Balance

Error In Balance Difference Large Column

(a) No 300 Credit

(b) No 6750 Debit

(c) Yes None None

(d) Yes None None

(e) No 500 Debit

(f) Yes None None

(g) No 800 Credit

PROBLEM SET


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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 toRevenue 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 1900

Unearned Revenue 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


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(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


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THANK YOU

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