Part C The use of double
entry and accounting systems
5: Ledger accounts and double entry
89
CAPITAL (RON KNUCKLE)
$
$
Cash at bank (A)
7,000
BANK LOAN
$
$
Cash at bank (D)
1,000
PURCHASES
$
$
Trade accounts payable (C)
5,000
TRADE ACCOUNTS PAYABLE
$
$
Cash at bank (H)
5,000
Purchases (C)
5,000
RENT
$
$
Cash at bank (B)
3,500
NON-CURRENT ASSETS (SHOP FITTINGS)
$
$
Cash at bank (E)
2,000
SALES
$
$
Cash at bank (F)
10,000
Trade accounts receivable (G)
2,500
TRADE ACCOUNTS RECEIVABLE
$
$
Sales (G)
2,500 Cash at bank (I)
2,500
BANK LOAN INTEREST
$
$
Cash at bank (J)
100
OTHER EXPENSES
$
$
Cash at bank (K)
1,900
90
5: Ledger accounts and double entry Part C The use of double entry and accounting systems
DRAWINGS ACCOUNT
$
$
Cash at bank (L)
1,500
(a)
If you want to make sure that this solution is complete, you should go through the transactions A
to L and tick off each of them twice in the ledger accounts, once as a debit and once as a credit.
When you have finished, all transactions in the 'T' account should be ticked.
(b)
In fact, there is an easier way to check that the solution to this sort of problem does 'balance'
properly, which we will meet in the next chapter.
(c)
On asset and liability accounts, the debit or credit balance represents the amount of the asset or
liability outstanding at the period end. For example, on the cash at bank account, debits exceed
credits by $6,500 and so there is a debit balance of cash in hand of $6,500. On the capital account,
there is a credit balance of $7,000 and so the business owes Ron $7,000.
(d)
The balances on the revenue and expense accounts represent the total of each revenue or expense
for the period. For example, sales for the period total $12,500.
5 The journal
The
journal is the record of prime entry for transactions which are not recorded in any of the other books
of prime entry.
You should remember that one of the books of prime entry was 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. For example, journal entries are
made when errors are discovered and need to be corrected.
Whatever type of transaction is being recorded, the
format of a journal entry is:
Date
Debit
Credit
$
$
Account to be debited
X
Account to be credited
X
(Narrative to explain the transaction)
(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 original
entry.
An examination question might ask you to 'journalise' transactions which would not in practice be
recorded in the journal at all. If you are faced with such a problem, you should simply record the debit
and credit entries for every transaction.
5.1 Examples: Journal entries
The following is a summary of the transactions of Hair by Fiona Middleton hairdressing business of which
Fiona is the sole proprietor.
Key term
Exam focus
point
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Part C The use of double entry and accounting systems
5: Ledger accounts and double entry
91
1 January
Put in cash of $2,000 as capital
Purchased brushes and combs for cash $50
Purchased hair driers from Gilroy Ltd on credit $150
30 January
Paid three months rent to 31 March $300
Collected and paid in takings $600
31 January
Gave Mrs Sullivan a perm, highlights etc on credit $80
Show the transactions by means of journal entries.
Solution
JOURNAL
$ $
1 January
DEBIT
Cash at bank
2,000
CREDIT Fiona Middleton – capital account
2,000
Initial capital introduced
1 January
DEBIT
Brushes and combs account
50
CREDIT
Cash at bank
50
The purchase for cash of brushes and combs as non-current
assets
1 January
DEBIT
Hair dryer account
150
CREDIT Sundry accounts payable *
150
The purchase on credit of hair driers as non-current assets
30 January
DEBIT
Rent account
300
CREDIT
Cash at bank
300
The payment of rent to 31 March
30 January
DEBIT
Cash at bank
600
CREDIT
Sales account
600
Cash
takings
31 January
DEBIT
Trade accounts receivable
80
CREDIT
Sales account
80
The provision of a hair-do on credit
* Note. Suppliers who have supplied non-current assets are included amongst sundry accounts payable,
as distinct from trade suppliers (who have supplied raw materials or goods for resale) who are trade
accounts payable. It is quite common to have separate 'total accounts payable' accounts, one for trade
accounts payable and another for sundry other accounts payable.
5.2 The correction of errors
The journal is most commonly used to record corrections to errors that have been made in writing up the
nominal ledger accounts. Errors corrected by the journal must be
capable of correction by means of a
double entry in the ledger accounts. In other words the error must not have caused total debits and total
credits to be unequal.
Special rules apply when errors are made which break the rule of double entry.
We will deal with errors in
Chapter 16
.
6 Day book analysis
Entries in the daybooks are totalled and analysed before posting to the nominal ledger.
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