CIMA CO2 Official Learning System - Fundamentals of Financial Accounting
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STUDY MATERIAL C2
80
SUMMARISING THE LEDGER ACCOUNTS
Exercise 4.7
Prepare the balance sheet for Example 3.B.
Solution
Balance sheet as at 31 May
Assets $ $
Non-current assets
Furniture 1,500
Fittings 600
2,100
Current assets
Inventories 1,200
Receivables 8,340
Bank balance 13,725
Cash in hand 1,760
25,025
27,125
Capital and liabilities
Capital 20,000
N e t p r o fi t for the month 2,225
22,225
Less : drawings (100)
22,125
Current liabilities
Payables 5,000
27,125
4.5 Balancing off the ledger accounts
The fi nal task is to tidy up the remaining accounts in order to clearly show the fi nal balance
on each, in readiness for commencing posting the next period’s transactions. This process
is known as balancing off the accounts. In the previous chapter you saw how the balance
is mathematically calculated in order to produce the trial balance, and to determine the
amounts to be transferred to the income statement and included in the statement of fi nan-
cial position. Some accounts will now have no balance remaining, but those that appear on
the statement of fi nancial position will have, and this needs to be clearly identifi ed.
The procedure can be shown in the following steps:
Step 1 . Calculate the balance (or take the fi gure already used in the trial balance).
Step 2 . Enter the balance on the opposite side of the account, for example, if there is a debit
balance, enter it on the credit side. (Imagine the account as a pair of scales that was
out of balance; entering the item on the opposite side brings the scales into balance.)
Use the date at which the statement of fi nancial position is prepared, and describe
the balance as ‘ balance carried down ’ , abbreviated to ‘ balance c/d ’ . This is, of course,
making an entry in the ledger accounts, therefore an opposite entry needs to be made
to conform to the double-entry rule – see step 4 for this.
81
FUNDAMENTALS OF FINANCIAL ACCOUNTING
SUMMARISING THE LEDGER ACCOUNTS
Step 3 . Total up each side, to confi rm that the two sides now agree, and rule them off.
Step 4 . Enter the balance on its correct side, beneath the totals. This completes the double
entry from Step 2. Date the item as the fi rst day of the next accounting period,
for example, 1 January 20X2, and describe the balance as ‘ balance brought down ’ ,
abbreviated to ‘ balance b/d ’ .
Step 5 . Check that all accounts with debit balances are assets, and that all accounts with
credit balances are either liabilities or capital, and compare them with the state-
ment of fi nancial position fi gures.
Exercise 4.8
Balance off the asset, liability and capital accounts, from Example 3.B.
Solution
Capital
$ $
31 May Drawings 100 1 May Cash 20,000
Balance c/d
22,125 31 May Net profi t 2,225
22,225 22,225
1 Jun. Balance b/d 22,125
Cash
$ $
1 May Capital 20,000 2 May Bank 15,000
12 May Sales 210 7 May Wages 60
25 May Sales 430 19 May Purchases 3,900
28 May Sales 890 24 May Fittings 600
25 May Wages 110
30 May Cash 100
31 May Balance c/d 1,760
21,530 21,530
1 Jun. Balance b/d 1,760
Bank
$ $
2 May Cash 15,000 10 May Rent 80
27 May SP 330 16 May Furniture 1,500
28 May Advertising 25
31 May Balance c/d 13,725
15,330 15,330
1 Jun. Balance b/d 13,725
JM
$
4 May Purchases 2,000
STUDY MATERIAL C2
82
SUMMARISING THE LEDGER ACCOUNTS
ERD
$ $
10 May Bank 80 6 May Purchases 3,000
31 May Balance c/d
2,920
3,000 3,000
1 Jun. Balance b/d 2,920
Furniture
$
16 May Bank 1,500
SP
$ $
19 May Sales 580 27 May Bank 330
31 May Balance c/d 250
580 580
1 Jun. Balance b/d 250
Fittings
$
24 May Cash 600
Advertising
$
28 May Bank 25
KM
$
29 May Sales 8,090
You should notice that the accounts that only have one entry have not been balanced
off; this is because the balance on the account can easily be seen without balancing it.
However, it is a good practice to balance off in the standard way at least once a year, to
confi rm that the account has been considered and included in the appropriate fi nancial
statement.
For example, the fi ttings account above would appear as follows:
Fittings
$ $
24 May Cash 600 31May Balance c/d 600
600 600
1 Jun. Balance b/d 600
The balances brought down then become the fi rst entries in each account for the following
accounting period.
83
FUNDAMENTALS OF FINANCIAL ACCOUNTING
SUMMARISING THE LEDGER ACCOUNTS
Exercise 4.9
Balance off the asset, liability and capital ledger accounts from Exercise 3.3, after trans-
ferring the net profi t of $355 and the balance on the drawings account into the capital
account. Remember that you also need to open an inventories account.
Solution
Bank
20X1 $ 20X1 $
1 Feb. Capital 500 1 Feb. Purchases 150
10 Feb. Sales 290 5 Feb. Rent 50
27 Feb. Sales 240 22 Feb. Advertising 25
26 Feb. Drawings 100
28 Feb. Balance c/d 705
1,030 1,030
1 Mar. Balance b/d 705
Capital
20X1 $ 20X1 $
28 Feb. Drawings 100 1 Feb. Bank 500
28 Feb. Balance c/d 755 28 Feb. Net profi t 355
855 855
1 Mar. Balance b/d 755
Inventories
20X1 $
28 Feb. Trading account 50
Exercise 4.10
Continue with the ledger accounts from Exercise 3.3 at 1 March, and enter the following
transactions for March:
2 Mar. Bought goods for resale, on credit from J Smith 100
5 Mar. Paid rent 50
14 Mar. Received a loan from L Lock 450
16 Mar. Business sales 330
23 Mar. A Thompson’s drawings 75
24 Mar. Paid J Smith by cheque 80
26 Mar. Business sales, on credit to A Pitt 180
29 Mar. Paid for advertising leafl ets 30
Balance off the bank account at 31 March.
STUDY MATERIAL C2
84
SUMMARISING THE LEDGER ACCOUNTS
Solution
Bank
20X1 $ 20X1 $
1 Mar. Balance b/d 705 5 Mar. Rent 50
14 Mar. Loan 450 23 Mar. Drawings 75
16 Mar. Sales 330 24 Mar. J Smith 80
29 Mar. Advertising 30
31 Mar. Balance c/d 1,250
1,485 1,485
1 Apr. Balance b/d 1,250
Capital
20X1 $
1 Mar. Balance b/d 755
Inventories
20X1 $
28 Feb. Trading account 50
Purchases
20X1 $
2 Mar. J Smith 100
J Smith
20X1 $ 20X1 $
24 Mar. Bank 80 2 Mar. Purchases 100
Rent payable
20X1 $
5 Mar. Bank 50
L Lock
20X1 $
14 Mar. Bank 450
Sales
20X1 $
16 Mar. Bank 330
26 Mar. A Pitt 180
Drawings
20X1 $
23 Mar. Bank 75
A Pitt
20X1 $
26 Mar. Sales 180
85
FUNDAMENTALS OF FINANCIAL ACCOUNTING
SUMMARISING THE LEDGER ACCOUNTS
Advertising
20X1 $
29 Mar. Bank 30
4.6 Columnar ledger accounts
As an alternative to the traditional ‘ two-sided ’ ledger account seen above, ledger accounts
can also be prepared in columnar format. This format was originally devised with the
introduction of mechanised bookkeeping systems, and is often the format used by compu-
terised systems. Instead of having two ‘ sides ’ to the account, with the date and details col-
umn repeated on each, there is a single date and details column, a debit column, a credit
column, and, usually, a balance column. The balance is calculated after each transaction,
or perhaps each day’s transactions, so that it is always available at a glance.
To illustrate the layout and operation of columnar accounts (also called three-column
accounts ), the bank account for March in Exercise 4.10 would appear as follows:
Bank
Date Details Ref. Debit ($) Credit ($) Balance ($)
1 Mar. Brought forward 705 debit
5 Mar. Rent 123 50 655 debit
14 Mar. Loan 450 1,105 debit
16 Mar. Sales 330 1,435 debit
23 Mar. Drawings 124 75 1,360 debit
24 Mar. J Smith 125 80 1,280 debit
29 Mar. Advertising 126 30 1,250 debit
With this layout, there is suffi cient room to add other columns, for example, for cheque
numbers, and the balance is readily visible every day.
4.7 Summary
In this chapter you have looked at:
●
the preparation of the trial balance;
●
the form and content of the trading account within the income statement;
●
the form and content of the income statement;
●
the ledger entries needed to prepare an income statement;
●
the entries needed to record profi t and drawings in the capital account;
●
the preparation of the statement of fi nancial position;
●
the balancing off the ledger accounts at the end of the period.
This chapter is one of the most ‘ technical ’ chapters you will study. Do practise the tech-
niques you have learned here to ensure that you have a thorough understanding of them.
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87
Question 1 Multiple choice
1.1 Where a transaction is credited to the correct ledger account, but debited incorrectly
to the repairs and renewals account instead of to the plant and machinery account,
the error is known as an error of:
(A) omission.
(B) commission.
(C) principle.
(D) original entry.
1.2 If a purchase return of $48 has been wrongly posted to the debit side of the sales
returns account, but has been correctly entered in the supplier’s account, the total of
the trial balance would show:
(A) the credit side to be $48 more than the debit side.
(B) the debit side to be $48 more than the credit side.
(C) the credit side to be $96 more than the debit side.
(D) the debit side to be $96 more than the credit side.
1.3 The debit side of a trial balance totals $50 more than the credit side. This could be
due to:
(A) a purchase of goods for $50 being omitted from the payables account.
(B) a sale of goods for $50 being omitted from the receivables account.
(C) an invoice of $25 for electricity being credited to the electricity account.
(D) a receipt for $50 from a debtor being omitted from the cash book.
1.4 An invoice from a supplier of offi ce equipment has been debited to the stationery
account. This error is known as:
(A) an error of commission.
(B) an error of original entry.
(C) a compensating error.
(D) an error of principle.
Revision Questions
4
SUMMARISING THE LEDGER ACCOUNTS
REVISION QUESTIONS C2
88
1.5 The double-entry system of bookkeeping normally results in which of the following
balances on the ledger accounts?
Debit balances Credit balances
A Assets and revenues Liabilities, capital and expenses
B Revenues, capital and liabilities Assets and expenses
C Assets and expenses Liabilities, capital and revenues
D Assets, expenses and capital Liabilities and revenues
1.6 Which one of the following is an error of principle?
(A) A gas bill credited to the gas account and debited to the bank account.
(B) The purchase of a non-current asset credited to the asset at cost account and
debited to the payables account.
(C) The purchase of a non-current asset debited to the purchases account and
credited to the payables account.
(D) The payment of wages debited and credited to the correct accounts, but using
the wrong amount.
1.7 Recording the purchase of computer stationery by debiting the computer equipment
at cost account would result in:
(A) an overstatement of profi t and an overstatement of non-current assets.
(B) an understatement of profi t and an overstatement of non-current assets.
(C) an overstatement of profi t and an understatement of non-current assets.
(D) an understatement of profi t and an understatement of non-current assets.
Question 2
On 1 January, P Roberts starts a business with $2,500 in the bank and $500 cash. The
following transactions occur:
2 Jan. He buys raw materials on credit for $700 from J Martin.
3 Jan. He sells goods for $300 on credit to G Goddard.
7 Jan. He sells goods for $1,100 to K Lemon on credit.
12 Jan. He buys equipment for $3,000, paying by cheque.
18 Jan. He pays wages of $50 by cheque.
20 Jan. He buys raw materials for $350, paying by cheque.
He takes $80 from the cash box for himself.
28 Jan. He pays J Martin $250 by cheque.
30 Jan. He transfers $200 cash into the bank from his cash box.
SUMMARISING THE LEDGER ACCOUNTS
89
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Requirements
(a) Record the above transactions in the ledger accounts provided below.
Capital
$ $
31 Jan. Drawings … 1 Jan. Bank …
Balance c/d … Cash …
31 Jan. Net profi t …
… …
1 Feb. Balance b/d …
Bank
$ $
1 Jan. Capital … 12 Jan. Equipment …
30 Jan. Cash … 18 Jan. Wages …
31 Jan. Balance c/d … 20 Jan. Purchases …
28 Jan. J Martin …
… …
1 Feb. Balance b/d …
Cash
$ $
1 Jan. Capital … 20 Jan. Drawings …
30 Jan. Bank …
31 Jan. Balance c/d …
… …
1 Feb. Balance b/d …
Purchases
$ $
2 Jan. J Martin … 31 Jan. Trading a/c …
20 Jan. Bank …
… …
J Martin
$ $
28 Jan. Bank … 2 Jan. Purchases …
31 Jan. Balance c/d …
… …
1 Feb. Balance b/d …
Sales
$ $
31 Jan. Trading a/c … 3 Jan. G Goddard …
7 Jan. K Lemon …
… …
G Goddard
$ $
3 Jan. Sales …