FA1

Chapter 4
Completing ledger
accounts and financial
statements
 contents
1 Balancing ledger accounts
2 The trial balance
3 The general (nominal) ledger
4 The journal
5 Errors
6 Types of errors
7 Suspense Account
8 Financial Statements
 Balancing ledger accounts
• At the end of an accounting period, a balance is struck on each account in turn. This means
that all the debits on the account are totaled and so are all the credits.
• If the total debits exceed the total credits there is a debit balance on the account
• If the total credits exceed the total debits then the account has a credit balance
Opening and Closing Balances
 Example: balancing ledger
accounts
• A wholesale stationer Ringo Binder on 1 May 20X7 with a capital of $5,000 with which he
opened a bank account for his business.
• During May the following transactions took place.
May 1 Bought shop fittings and fixtures for cash from Folder Fitments for $2,000
2 Purchased goods on credit from Staple $650
4 Sold goods on credit to Clip $700
9 Purchased goods on credit from Green $300
11 Sold goods on credit to Hill $580
13 Cash sales paid intact into bank $200
16 Received cheque from Clip in settlement of his account
17 Purchased goods on credit from Kaye $800
18 Sold goods on credit to Nailor $360
May
19 Sent cheque to Staple in settlement of his account
20 Paid rent by cheque $200
21 Paid delivery expenses by cheque $50
24 Received from Hill $200 on account
30 Drew cheques for personal expenses $200 and assistant's wages $320
31 Settled the account of Green
 Bank $5000
1 May 20X7 Capital $5000
(Started business)
Fittings and fixtures
1 May 20X7 $2000
A/P (Folder Fitments)
$2000
(Bought fittings and fixtures on credit)
Purchases
2 May 20X7 $650
A/P(Staple)
$650
(Purchased goods on credit)
A/R(Clip )
4 May 20X7 $700
Sales
$700
Sold goods on credit

9 May 20X7 Purchases $300

A/P(Green ) $300
(Purchased goods on credit)
 A/R(Hill) $580
11 May 20X7
Sales $580
( Goods sold on credit )
Bank $200
13 May 20X7
Sales $200
( Goods sold on cash.)
16 May 20X7
Bank $700
A/R(Clip ) $700
( Customer paid through cheque )
17 May 20X7 Purchases
$800
A/P(Kaya)
$800
( Goods bought on credit )
A/R(Nailor ) $360
18 May 20X7 Sales $360
( Goods sold on credit )
A/P(Staple) $650
19 May 20X7 Bank $650
( Payment to supplier through cheque )
 Rent Exp $200
20 May 20X7 Bank $200
(Paid rent expense through cheque)
Delivery expenses $200
21 May 20X7
Bank $200
(Paid delivery expense through cheque)
Bank $200
24 May 20X7 A/R(Hill $200
(Customer paid through cheque)
Drawings $200
Assistant’s wages $320
30 May 20X7 Bank $520
(Owner withdrew money for personal use and
paid wages)

Bank $300
31 May 20X7
A/R(Green) $300
(Customer paid through cheque)
CASH BOOK (RECEIPTS)
CASH BOOK (PAYMENTS)
SALES DAY BOOK
PURCHASE DAY BOOK
 The trial balance
• Balances on ledger accounts
can be collected in a list of
account balances. The
debit and credit balances
should be equal.
• A trial balance is a list of
ledger balances shown in
debit and credit columns.
 Producing the trial balance
• The following steps are taken in order to put together the trial balance:
1. Collect together the ledger accounts
2. Balance the ledger accounts
3. Collect the balances on the ledger accounts
• If the basic principle of double entry has been correctly applied throughout the period it
will be found that the credit balances equal the debit balances in total. This can be
illustrated by collecting together the balances on Ringo Binder's accounts from the worked
example in the previous section.
The journal
 The journal
• You should remember that one of the books of prime entry is the journal.
• The journal keeps a record of unusual movement between accounts. It is used to record
any double entries made which do not arise from the other books of prime entry.
 The journal
• (Remember: in due course, the ledger accounts will be written up to include the transactions
listed in the journal.)
• A narrative explanation must accompany each journal entry. It is required for audit and
control, to indicate the purpose and authority of every transaction which is not first recorded
in a book of prime entry.
 Need of the journal

Off-set of amounts owed and owing. For example

$1,400 is owed from ABC Ltd in the receivables
Correction of ledger and $1,600 is owed to ABC Ltd in the Dealing bad
errors payables ledger (ABC Ltd is both a customer and a debts
supplier). The two amounts can be offset and only
$200 needs to be paid.
 Example 1- Correction of errors
An amount of $350 paid for the repair of a machine was incorrectly treated as the purchase of a
new machine.
What is the correcting journal?

Right Entry Wrong Entry Rectified Entry

Dr Cr Dr Cr Dr Cr
Machine repair $350
Machine $350 Machine $350
Cash $350
Cash $350 Machine $350
 Example 1- Correction of errors
An amount of $1789 received from XYZ in settlement of an invoice was incorrectly treated as a
new sale.
What is the correcting journal?

Right Entry Wrong Entry Correction entry

Dr Cr Dr Cr Dr Cr
Cash $1789
Cash $350 Sales $350
A/R(XYZ) 1789
Sales $350 A/R(XYZ) $350
 Errors
• Errors can occur for a number of reasons. Accountants need the ability to understand how
errors have been made and how to correct them using the principles of double entry.
• If the two columns of the trial balance are not equal, there must be an error in recording of
transactions in the accounts. A trial balance, however, will not disclose the following types
of errors.
(a) The complete omission of a transaction, because neither a debit nor a credit is made
(b) Posting a debit or credit to the correct side of the ledger, but to a wrong account or
posting the wrong amount is an error of commission.
 Errors
(c) Compensating errors (eg debit error of $100 is exactly cancelled by credit $100 error elsewhere)
(d) Errors of principle (eg cash received from customers being debited to the total receivables
account and credited to cash instead of the other way round)
(e) Errors of transposition (eg $11,729 written as $11,279) Once an error has been detected, it
needs to be put right.
(a) If the correction involves a double entry in the ledger accounts, then it is done by using a
journal entry.
(b) When the error breaks the rule of double entry (eg error of single entry, where a debit entry
has been made but no corresponding credit), then it is corrected by the creation of a suspense
account which is then cleared using journal entries.
 When trial balance is not equal.
• The creation of a suspense account is the only circumstance in which a single entry is made
deliberately. For example, if the debit side of the trial balance is greater than the credit side,
the accountant will create a suspense account with a credit balance equal to the difference.
This is a temporary account that will remain in the trial balance only for as long as it takes
for the accountant to discover the errors and correct them using journal entries.
 Errors of transposition
• An error of transposition is when two digits in an amount are accidentally recorded the
wrong way round.
• To determine if it’s a transposition error, find the difference ($1,810 – $1,180). You’re left
with a discrepancy of $630.
• Is it divisible by 9?
• $630 / 9 = 70
• Yes! The divisible by 9 trick shows that you have a transposition mistake on your hands.
 Errors of omission
• An error of omission
means failing to record a
transaction at all, in this case
trial balance still balances
because of complete
omission from both debit
and credit sides.
• If it’s only one sided
omission, making a debit or
credit entry, but not the
corresponding double entry.
In this case trial balance will
not equal.
 Errors of principle
• An error of principle involves making a double entry in the belief that the transaction is
being entered in the correct accounts, but subsequently finding out that the accounting entry
breaks the 'rules' of an accounting principle or concept.
• This happens when an entry is made in the wrong account. The amount is correct but is
simply entered in the wrong place. An error of principle is a serious procedural mistake
because it can have big consequences. The most common example of an error of principle
is recording an owner's personal expense as a business expense.
 Errors of commission
• Error of commission is an error that
occurs when a bookkeeper or
accountant records a debit or credit to
the correct account but to the wrong
subsidiary account or ledger. For
example, money that has been received
from a customer is credited properly to
the accounts receivable account, but to
the wrong customer.
 Error of commission
• This is mishandling an item by putting it in the wrong place. The amount you enter is
correct, and you even put it in the right general account, but you then use the incorrect sub-
account. For example, you receive payment on an invoice but note the receipt against a
different customer's invoice. Your total payments come out right for accounting purposes,
but what's shown for a particular customer is wrong.
 Error of commission
• Here are two common errors of commission.
• (a) Putting a debit entry or a credit entry in the wrong account. For example, if telephone
expenses of $342 are debited to the el
• (b) Errors of casting (adding up). Suppose for example that the total daily credit sales in the
sales day book of a business should add up to $79,925, but are incorrectly added up as
$79,325. The total sales in the sales day book are then used to credit total sales and debit
total receivables in the ledger accounts, so that total debits and total credits are still equal,
although incorrect.ectricity expenses account, an error of commission would have occurred.
 Compensating errors
• Compensating errors are errors which are, coincidentally, equal and opposite to one
another.
 Use of suspense account: when the trial
balance does not balance
• If the error results in the trial balance
not balancing (eg single entry has
occurred when posting a transaction),
we create a suspense account before
putting through the necessary
corrections using journals.
• A suspense account is an account
showing a balance equal to the
difference in a trial balance.
 Use of suspense account: when the trial
balance does not balance
• A suspense account is a temporary account which can be opened for a number of reasons.
The most common reasons are as follows.
• (a) A trial balance is drawn up which does not balance (ie total debits do not equal total
credits).
• (b) The bookkeeper of a business knows where to post the credit side of a transaction, but
does not know where to post the debit (or vice versa). For example, a cash payment might
be made and must obviously be credited to cash. But the bookkeeper may not know what
the payment is for, and so will not know which account to debit.
• In both these cases, a temporary suspense account is opened up until the problem is sorted
out. The next few paragraphs explain exactly how this works.
 Use of suspense account: when the trial
balance does not balance
If a trial balance does not balance then:
1. A one sided error must have occurred (Such as Credit cash $120, Debit Purchases $100 and
forgetting about the sales tax of $20).
2. The production of the trial balance is incorrect. For example, leaving out an account or
listing it on the wrong side of the trial balance.
• Non-balancing trial balances often use a suspense account to indicate the amount by which
the two sides differ, and as errors are found, the suspense account can be brought back to
zero, indicating that the two columns of the trial balance agree.
 Use of suspense account: when the trial
balance does not balance
• For example: if the trial balance
produced was this:
 Use of suspense account: when the trial
balance does not balance
• Then a suspense account would be introduced to make
it balance:

• This suspense account indicates that there was

originally more on the credit side than on the debit side
so that more debits are needed.
Example 1- Correction of errors
An investigation of the differences then needs to be carried out. Let’s say that the following errors
were found:
1. Rent of £400 had been charged to wages.
2. Cash received of £200 had been assumed to be from a customer paying an invoice in the
receivables ledger. In fact it was a new sale.
3. Petty cash of $44 has been left out of the trial balance
4. A sales day book total of $820 had been debited to receivables (customers) as $280, though had
been correctly posted to the sales account.
5. Discounts allowed to customer of $30 had been credited to the sales account rather then debited
to the discounts allowed account.
 Example 1- Correction of errors
• Now look at each error and decide how to correct it. Also think carefully if it would have
caused the trial balance not to balance: if so, the suspense account will be affected.
 Example 1- Correction of errors
• Errors 1 and 2 would not cause the trial balance to be out of balance. They are errors of
commission and principle.
• Adjust the trial balance to correct these errors:
Example 1- Correction of errors
1. Rent of £400 had been charged to wages.

Right Entry Wrong Entry Rectified Entry

Dr Cr Dr Cr Dr Cr
Rent $400
Wages $400 Rent $400
Cash $400
Cash $400 Wages $400
Example 1- Correction of errors

1. Cash received of £200 had been assumed to be from a customer paying an invoice in
the receivables ledger. In fact it was a new sale.

Right Entry Wrong Entry Rectified Entry

Dr Cr Dr Cr Dr Cr
Cash $200
Cash $200 A/R $200
Sales $200
A/R $200 Sales $200
 Example 1- Correction of errors

1. Petty cash of $44 has been left out of the trial balance

Right Posting in TB To balance TB Rectified Entry

Dr Dr Dr Cr
Petty Cash $44 Suspense a/c $44 Petty Cash $44
(But we forgot to post in TB.) Suspense a/c $44
 Example 1- Correction of errors
4. A sales day book total of $820 had been debited to receivables (customers) as $280,
though had been correctly posted to the sales account.

Right Entry Wrong Entry Rectified Entry

Dr Cr Dr Cr Dr Cr
A/R $820
A/R $280 A/R $540
Sales $820
Sales $820 Suspense $540

Note: this wrong entry causes suspense a/c to open in Trial Balance. First we will write $540 at the Debit
side of the Trial Balance and after we found out the error we will credit Suspense a/c from $540.
Example 1- Correction of errors

4. Discounts allowed to customer of $30 had been credited to the sales account rather
then debited to the discounts allowed account.

Right Entry Wrong Entry Rectified Entry

Dr Cr Dr Cr Dr Cr
Discount allowed $30 Dis/allow $30
-- - Sales $30
Sales $30
Sales $60 Suspense $60
 Example 1- Correction of errors
• The trial balance with the adjustments so far will be as follows:
Example 1- Correction of errors
 Question - 1
Which of the following errors would cause a trial balance not to balance?
1. Debiting the purchase of a car to the Purchases account instead of the Motor Vehicles account.
2. Debiting cash received to the cash book and crediting payables instead of Receivables
3. Listing discounts allowed to customers as a credit balance
4. Listing petty cash as a debit balance.

A 1, 2, 3 and 4
B 2, 3 and 4 only
C 3 only
D 3 and 4 only
 Answer - 1
Answer is C
• In 1 and 2 the double entry is arithmetically complete, though wrong in principle. In 4,
petty cash should be, and is, listed as a debit.
 Question – 2
A debit balance in the general ledger of £1123 was listed in the trial balance as $2123 credit.
By how much does this cause the trial balance not to balance?
A 3,246
B 1,000
C 3,266
D 1,633
 Answer - 2
Answer is A
• 1123 is missing from the debit side and 2123 has been arbitrarily introduced to the credit
side.
• The error is therefore 1123 + 2123 = 3246
 Question -3
• The trial balance of Mazar Ltd does not balance and a suspense account has been created.
Cash paid to a credit card account of $5,641 has been posted to the credit card account as
$5,146.
Which of the following entries is the correct adjustment?
A Dr Credit card company 990 Cr Suspense account 990
B Dr Credit card company 495 Cr Suspense account 495
C Dr Suspense account 495 Cr Credit card account 495
D Dr Suspense account 990 Cr Credit card account 990
 Answer - 3
Answer is B
• There had been too few debits made by $5,641 - $5,146 = $495. The adjustment is to debit
the credit card company with $495 more and to credit the suspense account with $495.
 Question -4
• A trial balance does not balance. One of the errors discovered was made in writing off a
bad debt of $500. The receivables ledger entry handled correctly, but the Irrecoverable
Debts Account was credited with $500.
The correcting entry would be to;
A Dr Irrecoverable Debts 500 Cr Suspense Account 500
B Dr Irrecoverable Debts 1,000 Cr Suspense Account 1,000
C Dr Suspense Account 1,000 Cr Irrecoverable Debts 1,000
D Dr Suspense Account 500 Cr Irrecoverable Debts 500
 Answer - 4
Answer is B
• $500 was not just left out, it was posted to the wrong side making the Bad Debts account
$1,000 too little.
 Question - 5
A sales order from a customer slips down the back of a desk before goods are despatched or
invoiced.
Which of the following errors in the accounting system has been committed?
A An error of omission
B An error of commission
C An error of principle
D None of the above
 Answer - 5
Answer is D
• This is not an error in the accounting system. No goods have been dispatched and no
transactions have been updated and the accounting records are correct
• An error of omission would have occurred if the goods had been dispatched and invoice or
them had not been recorded anywhere
 Financial statements
• Businesses produce financial statements to demonstrate how well they have performed over
the accounting period and to show their financial position at the end of that period.
• Financial performance
• Financial position
 Financial performance

• In order to determine financial performance over a period of time a business entity

produces a statement of profit or loss at the end of the accounting period. This statement
will show:
• Income: in simple terms this is the revenue earned by the business over the accounting
period and is generated mainly through the sale of goods and services.
• Expenditure: costs incurred by the business in generating the income referred to above.
Expenditure includes purchases and other costs such as wages and utilities.
• Where income exceeds expenditure for an accounting period, a profit has been made. If
expenditure exceeds income then the entity has made a loss.
 The statement of profit or loss
XYZ STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X9
$ Cost of Sales:
Sales or Revenue X
Sales return (X) Add Opening
Net Sales X Add Purchases
Cost of sales (X) Add Carriage inwards
Gross profit X Less Purchase returns
Less Selling costs -X Less Closing
Distribution costs -X
Purchase returns:
Administration expenses -X Carriage inward:
Buyer returned some goods
(X) Carriage inwards refers to the
Cause they were faulty or wrong
Profit for the year X transport costs, buyer paid.
items were delivered
 Financial position
At the end of an accounting period the statement of financial position or balance sheet provides a
snapshot of the entity's financial situation at that moment in time.

Assets: resources that the entity uses in generating

income. Examples include plant and machinery, motor
vehicles, inventory and cash.
Liabilities: amounts that are owed by
the entity, for example bank loans and
trade payables.

Capital: the owner's investment in the

business, comprising initial capital
introduced plus any accumulated profits.
THE END