CIMA - C2 Fundamentals of Financial Accounting
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80 5: Ledger accounting and double entry ⏐ Part B Accounting systems and accounts preparation
Required
(a) Open accounts for Omega's customers and suppliers and record therein the 1 May balances.
(b) Record the transactions in the appropriate personal account and nominal ledger accounts.
(c) Balance the personal accounts where necessary.
(d) Extract a list of receivables at 31 May.
Answer
SALES LEDGER
(a),(b),(c) ALPHA
$
$
Opening balance
210
May sales
88
Balance c/d
298
298
298
BETA
$
$
Opening balance
1,040
Cash
1,040
May sales
314
Balance c/d
314
1,354
1,354
GAMMA
$
$
Opening balance
1,286
Cash
826
May sales
432
Balance c/d
892
1,718
1,718
DELTA
$
$
Opening balance
279
Cash
279
May sales
417
Balance c/d
417
696
696
EPSILON
$
$
Opening balance
823
Cash
823
May sales
129
Returns
88
May sales
269
Balance c/d
538
May sales
228
1,449
1,449
PURCHASES LEDGER
ZETA
$
$
Cash
1,000
Opening balance
2,173
Balance c/d
1,441
May purchases
268
2,441
2,441
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Part B Accounting systems and accounts preparation ⏐ 5: Ledger accounting and double entry 81
ETA
$
$
Cash
187
Opening balance
187
Balance c/d
1,164
May purchases
423
May purchases
741
1,351
1,351
THETA
$
$
Cash
318
Opening balance
318
NOMINAL LEDGER
SALES ACCOUNT
$
$
May sales
1,877
PURCHASES ACCOUNT
$
$
May purchases
1,432
SALES RETURNS ACCOUNT
$
$
May returns
88
RECEIVABLES ACCOUNT
$
$
Opening balance
3,638
May returns
88
May sales
1,877
May receipts
2,968
Balance c/d
2,459
5,515
5,515
PAYABLES ACCOUNT
$ $
May payments 1,505 Opening balance 2,678
May purchases 1,432
CASH ACCOUNT
$
$
May receipts
2,968
May payments
1,505
(d) RECEIVABLES AS AT 31 MAY
May
$
Alpha
298
Beta
–
314
Gamma
892
Delta
–
417
Epsilon
538
2,459
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82 5: Ledger accounting and double entry ⏐ Part B Accounting systems and accounts preparation
Note. Compare this total to the balance on the receivables account! We will return to this in Chapter 13 on control
accounts. However you should not be surprised that the total of the individual customer accounts in the sales ledger
agrees to the balance on the receivables account.
6.6 Summary
(a) Business transactions are recorded on source documents.
(b) Source documents are recorded in day books.
(c) Totals of day books are recorded by double entry in nominal ledger accounts.
(d) Single transactions are recorded from day books to individual customer and supplier accounts by single entry.
(e) Customer accounts are in the sales ledger
(f) Supplier accounts are in the purchase ledger
(g) The sales and purchase ledger are not part of the double entry system
(h) The nominal ledger contains one account for each item in the statement of financial position and income
statement.
Chapter roundup
• The nominal ledger contains a separate account for each item which appears in a statement of financial position or
income statement.
• The double entry system of bookkeeping means that for every debit there is an equal credit. This is sometimes referred
to as the concept of duality.
• Cash transactions are settled immediately. Credit transactions give rise to receivables and payables.
• The journal is commonly used to record corrections of errors that have been made in writing up the nominal ledger accounts.
• Individual transactions are recorded in day books. Day book totals are recorded in double entry in the nominal ledger.
• Personal accounts are not part of the double entry system. They record how much is owed by a customer or to a
supplier. They are memorandum accounts only.
• The sales ledger contains separate accounts for each credit customer so that, at any time, a business knows how much
it is owed by each customer.
• The purchase ledger contains separate accounts for each credit supplier, so that, at any time a business knows how
much it owes to each supplier.
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Part B Accounting systems and accounts preparation ⏐ 5: Ledger accounting and double entry 83
Quick quiz
1 The suppliers personal accounts will appear in which of the following business records?
A The nominal ledger
B The sales ledger
C The purchase day book
D The purchase ledger
2 The double entry to record a cash sale of $50 is:
DEBIT ___________________________ $50
CREDIT ___________________________ $50
3 The double entry to record a purchase of office chairs for $1,000 is:
DEBIT ___________________________ $1,000
CREDIT ___________________________ $1,000
4 The double entry to record a credit sale is:
DEBIT ___________________________
CREDIT ___________________________
5 Which of these statements are correct?
(i) The purchase day book is part of a double entry system.
(ii) The purchase ledger is part of a double entry system.
A (i) only
B (i) and (ii)
C (ii) only
D Both are false
6 Personal accounts contain records of
A Receivables and payables
B Assets and liabilities
C Income and expenditure
D Transactions with the proprietor of the business
7 A credit sale of $2,000 would be recorded using which of the following journals?
A DEBIT sales $2,000
CREDIT receivables $2,000
B DEBIT receivables $2,000
CREDIT sales $2,000
C DEBIT sales ledger $2,000
CREDIT sales $2,000
D DEBIT sales $2,000
CREDIT sales ledger $2,000
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84 5: Ledger accounting and double entry ⏐ Part B Accounting systems and accounts preparation
Answers to quick quiz
1 D This is correct
A This ledgers is used to record impersonal accounts.
B Customers accounts are kept in the sales ledger.
C This is simply a record of purchase invoices received.
2 DEBIT: CASH $50; CREDIT: SALES $50
3 DEBIT: NON-CURRENT ASSETS $1,000; CREDIT: CASH $1,000
4 DEBIT: RECEIVABLES; CREDIT: SALES
5 D is correct. The purchase day book is a book of prime entry, and the purchase ledger shows balances on suppliers
accounts. Neither are part of the double entry in the nominal ledger.
6 A Correct.
B These would be in the nominal ledger.
C These would be in the nominal ledger.
D These would be in either the nominal ledger or a 'private ledger' not accessible by accounting staff.
7 B Correct.
A This is a reversal of the correct entries.
C&D Remember that the sales ledger is not usually part of the double entry system.
Now try the questions below from the Question Bank
Question numbers Page
13–19 394
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85
From trial balance to
financial statements
Introduction
In the previous chapters you learned the principles of double entry and how to post to the
ledger accounts. The next step in our progress towards the financial statements is the trial
balance.
Before transferring the relevant balances at the year end to the income statement and putting
closing balances carried forward into the statement of financial position, it is usual to test the
accuracy of the double entry bookkeeping records by preparing a trial balance. This is done
by taking all the balances on every account. Due to the nature of double entry, the total of the
debit balances will be exactly equal to the total of the credit balances.
In very straightforward circumstances, it is possible to prepare accounts directly from a trial
balance. This is covered in Section 4.
Topic list S yllabus references
1 The trial balance B (7)
2 The income statement D (6)
3 The statement of financial position D (6)
4 Balancing accounts and preparing financial statements D (6)
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86 6: From trial balance to financial statements ⏐ Part B Accounting systems and accounts preparation
1 The trial balance
A trial balance is a list of nominal ledger account balances. It is prepared to check that the total of debit balances is the
same as the total of credit balances and offer reassurance that the double entry recording from day books has been done
correctly.
1.1 Example: trial balance
Here are the accounts of Ron Knuckle from the last chapter.
CASH
$
$
Capital – Ron Knuckle
7,000
Rent
3,500
Bank loan
1,000
Shop fittings
2,000
Sales
10,000
Trade payables
5,000
Receivables
2,500
Bank loan interest
100
Incidental expenses
1,900
Drawings
1,500
14,000
(Balancing figure – the amount of
cash left over after payments have
been made) Balance c/d
6,500
20,500
20,500
Balance b/d
6,500
CAPITAL (RON KNUCKLE)
$
$
Cash 7,000
BANK LOAN
$ $
Cash 1,000
PURCHASES
$ $
Trade payables 5,000
TRADE PAYABLES
$
$
Cash
5,000
Purchases
5,000
RENT
$ $
Cash 3,500
FA
S
T F
O
RWAR
D
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Part B Accounting systems and accounts preparation ⏐ 6: From trial balance to financial statements 87
SHOP FITTINGS
$ $
Cash 2,000
SALES
$
$
Cash
10,000
Receivables
2,500
12,500
RECEIVABLES
$
$
Sales
2,500
Cash
2,500
BANK LOAN INTEREST
$ $
Cash 100
OTHER EXPENSES
$ $
Cash 1,900
DRAWINGS ACCOUNT
$ $
Cash 1,500
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 totalled and so are all the credits. If the total debits exceed the total credits there is said to be a debit balance
on the account. If the credits exceed the debits, then the account has a credit balance.
In our example, there is very little balancing to do. Both the trade payables account and the receivables account balance
off to zero. The cash account has a debit balance of $6,500 and the total on the sales account is $12,500, which is a
credit balance. Otherwise, the accounts have only one entry each, so there is no totalling to do to arrive at the balance on
each account.
If the basic principle of double entry has been correctly applied throughout the period, the credit balances equal the debit
balances in total.
Debit
Credit
$
$
Cash
6,500
Capital
7,000
Bank loan
1,000
Purchases
5,000
Trade payables
–
Rent
3,500
Shop fittings
2,000
Sales
12,500
Receivables
–
–
Bank loan interest
100
Other expenses
1,900
Drawings
1,500
20,500
20,500
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88 6: From trial balance to financial statements ⏐ Part B Accounting systems and accounts preparation
It does not matter in what order the various accounts are listed, because the trial balance is not a document that a
business has to prepare. It is just a method used to test the accuracy of the double entry bookkeeping.
1.2 What if the trial balance shows unequal debit and credit balances?
If the two columns of the trial balance are not equal, there must be an error in recording the transaction. However, a trial
balance will not disclose the following types of errors.
• Complete omission of a transaction, because neither a debit nor a credit is made. This is called an error of
omission.
• Posting of a transaction to the wrong account, although the right type of account, is called an error of
commission (eg a petrol purchase debited to heat and light expense account rather than motor expenses:
both are revenue expense accounts).
• Compensating errors (eg an error of $100 is exactly cancelled by another $100 error elsewhere).
• Errors of principle occur when the wrong type of account has been used (eg the purchase of a motor van
is debited to a revenue expense account, such as motor expenses, rather than a non-current asset
account).
• Errors of original entry, when the wrong amount is debited and credited to the correct accounts.
We will look at errors in detail at a later date.
Question
Trial balance
As at 30.3.20X7, your business has the following balances on its ledger accounts.
Accounts Balance
$
Bank loan 12,000
Cash 11,700
Capital 13,000
Rent 1,880
Trade payables 11,200
Purchases 12,400
Sales 14,600
Sundry payables 1,620
Receivables 12,000
Bank loan interest 1,400
Other expenses 11,020
Vehicles 2,020
On 31.3.X7 the business made the following transactions.
(a) Bought materials for $1,000, half for cash and half on credit.
(b) Made $1,040 sales, $800 of which was for credit.
(c) Paid wages to shop assistants of $260 in cash.
Required
Draw up a trial balance showing the balances as at the end of 31.3.X7.
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Part B Accounting systems and accounts preparation ⏐ 6: From trial balance to financial statements 89
Answer
First you must put the original balances into a trial balance – ie decide which are debit and which are credit balances.
Account
Dr
Cr
$
$
Bank loan
12,000
Cash
11,700
Capital
13,000
Rent
1,880
Trade payables
11,200
Purchases
12,400
Sales
14,600
Sundry payables
1,620
Receivables
12,000
Bank loan interest
1,400
Other expenses
11,020
Vehicles
2,020
52,420
52,420
Now we must take account of the effects of the three transactions which took place on 31.3.X7.
$ $
(a) DEBIT Purchases 1,000
CREDIT Cash 500
Trade payables 500
(b) DEBIT Cash 240
Receivables 800
CREDIT Sales 1,040
(c) DEBIT Other expenses 260
CREDIT Cash 260
When these figures are included in the trial balance, it becomes:
Account
Dr
Cr
$
$
Bank loan
12,000
Cash (11,700 – 500 + 240 – 260)
11,180
Capital
13,000
Rent
1,880
Trade payables (11,200 + 500)
11,700
Purchases (12,400 + 1,000)
13,400
Sales (14,600 + 1,040)
15,640
Sundry payables
1,620
Receivables (12,000 + 800)
12,800
Bank loan interest
1,400
Other expenses (11,020 + 260)
11,280
Vehicles
2,020
53,960
53,960
And it balances!
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