SELF - BALANCING & SECTIONAL BALANCING

A trial balance can be extracted to verify the correctness of accounts maintained in a business organization. But in certain cases the trial balance does not agree due to some errors and omission in the accounting work. It is not easy to verify all the ledger accounts and correct the errors when the firm is maintaining a large number of accounts. Hence it is desirable and convenient to divide the ledgers into several sections and it becomes easy to prepare separate trial balance for each sections. Thereby it becomes easy to locate and correct errors. Self - Balancing: A self - balancing ledger is one whose balance when extracted forms a complete trial balance. For self - balancing purpose the ledger is divided into three sections such as 1. General Ledger: Normally it contains all the real, nominal accounts and the personal accounts which does not appear in the sundry debtors and sundry creditors account 2. Purchase Ledger (Bought Ledger or Creditors Ledger) : It normally contains the personal accounts from whom goods were purchased on credit 3. Sales Ledger (Sold Ledger or Debtors Ledger) : It contains the personal accounts to whom goods were sold on credit. Usually purchase ledger and sales ledgers are in the charge of accounts clerk where as the general ledger is with the accountant. Procedure of Self - Balancing: In order to make each ledger to self - balance, it is essential to provide a credit entry to the ledger having debit entry and vice versa. This is achieved by opening an extra account called General Ledger Adjustment Account in each of the Sales and Purchase ledger and two accounts, ie., sales ledger adjustment account and purchase ledger adjustment account in general ledger. Contra entries of that are already recorded in one ledger will be posted to the adjustment account in each ledger on periodical basis. As every entry in the ledger has its contra posting in the adjustment account, the double entry of every transaction is recorded in the same ledger. Hence a separate trial balance can be prepared from each ledger. To make the ledgers self balancing, relevant changes will have to be made in the subsidiary books with analytical columns. Following are the specimen of Cash Book and Journal proper.(insert Page 468Jain) Journal Entries for Self-Balancing Sales Ledger: In the sales Ledger, all debtors accounts are opened and entries are made on the debit side of these accounts from the sales book. To make this sales ledger self balancing, a new account called General Ledger Adjustment Account is opened in sales ledger and the total of entries appearing on the debit side of various debtors accounts will be shown on the credit side of this account and all credit entries of various debtors accounts are credited to the debits side of this account To make the General Ledger self balancing a Sales Ledger Adjustment Account in the General Ledger is to be opened. It will contain all entries in the General Ledger

Adjustment Account in Sales Ledger on reverse sides. Following journal entries are passed to make the sales Ledger self balancing To record credit sales, bills receivable dishonored, interest or expenses charged to debtors Sales Ledger Adjustment Account in General Ledger Dr To General Ledger Adjustment Account in Sales Ledger To record total of cash received from debtors, discount allowed to debtors, bills received from debtors, sales return from debtors, bad debts written off General Ledger Adjustment Account in Sales Ledger Dr To Sales Ledger Adjustment Account in General Ledger Thus the General Ledger Adjustment Account in Sales Ledger and Sales Ledger Adjustment Account in General Ledger will appear like this to record the entries appearing in the Debtors Account (Sales Ledger) Debtors Account Date Particulars To Balance b/d To Credit Sales To B/R Dishonored Amount Date Particulars By Sales Return By Cash Received By Bills Received By Discount Allowed By Bad Debts By Balance c/d Amount

Date

Sales Ledger Adjustment Account in General Ledger Particulars Amount Date Particulars To Balance b/d By General Ledger To General Ledger Adjustment Account Adjustment Account Sales Return Credit Sales Cash Received B/R Dishonored Bills Received Discount Allowed Bad Debts By Balance c/d General Ledger Adjustment Account in Sales Ledger Particulars Amount Date Particulars To Sales Ledger By Balance b/d Adjustment Account By Sales Ledger Sales Return Adjustment Account Cash Received Credit Sales Bills Received B/R Dishonored Discount Allowed Bad Debts By Balance c/d

Amount

Date

Amount

From the following information prepare Debtors Ledger Adjustment Account in General Ledger and General Ledger adjustment Account in Debtors Ledger for the month of January 2008 Debtors on 1st Jan 2008 Rs 32,000 Cash Sales Rs. 40,000 Discount Allowed to the debtors Rs.600 Acceptance received Rs.56,000 Charges debited to debtors Rs. 1,600 B/R dishonored Rs.8,000 Return from Debtors Rs 5,400 Cash received from Debtors Rs. 94,200 Goods sold to credit customers Rs.1,58,000 Bad debts written off Rs.2,400 Bad debts written off recovered Rs.1,000

The debtors account in general ledger to record the above transactions will appear like this Debtors Account Date Particulars To Balance b/d To Credit Sales To B/R Dishonored To Sundry Charges Amount 32000 156000 8000 1600 Date Particulars By Sales Return By Cash Received By Bills Received By Discount Allowed By Bad Debts By Balance c/d Amount 5400 94200 56000 600 2400 39000

197600

197600

The same transactions appear in the sales ledger adjustment account in general ledger and in general ledger adjustment account in the sales ledger as follows Date Sales Ledger Adjustment Account in General Ledger Particulars Amount Date Particulars To Balance b/d 32000 By General Ledger To General Ledger Adjustment Account Adjustment Account Sales Return Credit Sales 156000 Cash Received B/R Dishonored 8000 Bills Received Sundry Charges 1600 Discount Allowed Bad Debts By Balance c/d Amount 5400 94200 56000 600 2400 39000

197600

197600

Date

General Ledger Adjustment Account in Sales Ledger Particulars Amount Date Particulars To Sales Ledger By Balance b/d Adjustment Account To Sales Ledger Sales Return 5400 Adjustment Account Cash Received 94200 Credit Sales Bills Received 56000 B/R Dishonored Discount Allowed 600 Sundry Charges Bad Debts 2400 To Balance c/d 39000

Amount 32000 156000 8000 1600

197600

197600

Journal Entries for Self-Balancing Purchase Ledger: Under self - balancing system, total creditors account is called Creditors Ledger Adjustment Account. The creditors ledger adjustment account has only credit balances. Hence to complete the double entry, a new account called General Ledger Adjustment Account is opened in purchase ledger and the total of entries appearing on the credit side of various creditors accounts will be shown on the debit side of this account and all debit entries of various creditors accounts are shown to the credit side of this account To make the General Ledger self- balancing, a Purchase Ledger Adjustment Account in the General Ledger is to be opened. It will contain all entries in the General Ledger Adjustment Account in Purchase Ledger on reverse sides. Following journal entries are passed to make the Purchase Ledger self- balancing To record credit purchases, Bills payable dishonored, interest or expenses charged by creditors General Ledger Adjustment Account in Purchase Ledger Dr To Purchase Ledger Adjustment Account in General Ledger To record total of cash paid to Creditors, discount received from creditors, bills accepted from creditors, and purchase return to creditors, Purchase Ledger Adjustment Account in General Ledger Dr To General Ledger Adjustment Account in Purchase Ledger Thus the General Ledger Adjustment Account in Purchase Ledger and Purchase Ledger Adjustment Account in General Ledger will appear like this to record the entries appearing in the Creditors Account (Purchase Ledger) Creditors Account Date Particulars Amount Date Particulars Amount To Cash Paid By Balance b/d To Purchase Return By Credit Purchase To Discount Received By B/P Dishonored To B/P Issued To Balance c/d

Date

Purchase Ledger Adjustment Account in General Ledger Particulars Amount Date Particulars To General Ledger By Balance b/d Adjustment Account By General Ledger Cash Paid Adjustment Account Purchase Return Credit Purchase Discount Received B/P Dishonored B/P Issued To Balance c/d General Ledger Adjustment Account in Purchase Ledger Particulars Amount Date Particulars To Balance b/d By Purchase Ledger To Purchase Ledger Adjustment Account Adjustment Account Cash Paid Credit Purchase Purchase Return B/P Dishonored Discount Received B/P Issued By Balance c/d

Amount

Date

Amount

Contra Balances: The purchase ledger contains credit balances and sales ledger contains debit balances. But sometime there may be a debit balance of small amount in purchase ledger and a small credit balance in sales ledger. In such case both the balance are to be brought forward in adjustment accounts. From the following details prepare purchase ledger adjustment account in general ledger and general ledger adjustment account in purchase ledger Creditors on 1-1-2008 (Cr) 27408 Discount allowed by creditors 1020 Creditors on 1-1-2008 (Dr) 210 Cash purchases 4320 Purchases 25200 Purchase return 714 Cash paid to creditrs 12700 Bills accepted 7400 Debit balance in Bought ledger 2678 The creditors account will appear like this Creditors Account Particulars Amount Particulars Amount To Balance b/d 210 By Balance b/d 27408 To Purchase return 714 By Purchases 25200 To Cash 12700 By Balance c/d 2678 To Bills Payable 7400 To Discount 1020 To Balance c/d 33242 55286 55286

Purchase Ledger Adjustment Account in General Ledger Date Particulars Amount Date Particulars To Balance b/d 210 By Balance b/d To General Ledger Adjustment Account By General Ledger Purchase return 714 Adjustment Account Cash 12700 Purchases Bills Payable 7400 By Balance c/d Discount 1020 To Balance c/d 33242 55286 General Ledger Adjustment Account in Purchase Ledger Particulars Amount Date Particulars To Balance b/d 27408 By Balance b/d To General Ledger By General Ledger Adjustment Account Adjustment Account Purchases 25200 Purchase return To Balance c/d 2678 Cash Bills Payable Discount By Balance c/d 55286

Amount 27408

25200 2678

55286

Date

Amount 210 714 12700 7400 1020 33242 55286

Transfer from One Ledger to Another: Sometime the goods may be purchased from the same party to whom goods may be sold. In such case the same person cannot be a debtor and a creditor of the firm. Hence his smaller account balance is to be transferred to the higher amount account. So the transfer may be from the sales ledger to the purchase ledger or vice versa as the case may be. Transfer must be made through proper journal entries. For eg. Rajus account in the purchase ledger shows a balance of Rs.5000 and his account in he sales ledger shows a balance of Rs.10,000. Here the former will be transferred to the later, by passing following entry. Rajus account in Purchase ledger Dr Rs.5000 To Rajus Account in Sales ledger Rs.5000 If the firm is following the self -balancing system then the following adjusting entries are to be passed. Purchase ledger adjustment account in General Ledger Dr Rs.5000 To General ledger adjustment account in Purchase ledger Rs.5000 General Ledger adjustment account in Sales Ledger Dr Rs 5000 To Sales Ledger adjustment account in General Ledger Rs.5000

Eg:1) Sold to Mohan Rs.8000, purchase from him Rs.500 2) Purchase from Prem 800 sold to him Rs.600 Journal Entries:1) Mohans account in Purchase Ledger To Mohans account in Sales Ledger Purchase ledger Adjustment account in General Ledger To General Ledger Adjustment account in Purchase ledger General Ledger Adjustment account in Sales Ledger To Sales Ledger Adjustment account in General Ledger 2) Prems account in purchase ledger To Prems account in Sales Ledger

Dr Dr Dr. Dr

Rs500 Rs.500 Rs500 Rs.500 Rs.500 Rs.500 600 Rs.600

Purchase Ledger Adjustment account in General Ledger Dr Rs.600 To General Ledger Adjustment account in Purchase Ledger Rs.600 General Ledger Adjustment account in Sales Ledger Dr. 600 To Sales ledger Adjustment account in General Ledger Rs.600 Errors Affecting Self- Balancing Ledgers: The technique of correcting errors under double entry system can also be applied in the correction of errors under self-balancing system also with a little deviation. Under self balancing system, one has to identify that whether th e error in question affects the total subsidiary book or it relaes to transfer of an amount from one ledger to another. If the error affects the subsidiary books like purchase day book, sales day book etc or receipts side or payments side of the cash book, then the error can be rectified by passing a self-balancing entry in addition to the usual rectification entry. Eg: If total of sales day-book is under casted by Rs. 100, it will effect sales account, sales ledge adjustment account and general ledger adjustment account in sales ledger. This error will be corrected by passing following entries. Suspense Account Dr Rs.100 To Sales Account Rs.100 (Being to correct Sales account) Sales Ledger Adjustment Account in General Ledger Dr Rs.100 To General Ledger Adjustment Account in Sales Ledger Rs.100 (Self-balancing entry to correct adjustment account) If the error relates to a transfer from one ledger to another and does not affect the totalo the subsidiary books, then no entry is required to be passed to correct the adjustment accounts. Eg: Goods purchased from Mohan for Rs.500 posted to Ram Mohan as Rs.50 the error will be corrected by passing an entry as: Suspense A/c Dr Rs 450 Ram Mohan A/c Dr Rs. 50 To Mohan Rs.500 (Being to correct two personal accounts)

Eg: Pass Journal entries to correct the following errors committed by a trader who is following self-balancing system. a) An overcast of Rs.100 in the sales day book b) Return outward of Rs.420 has been posted to the personal account as Rs.240 c) Goods returned by Rajesh Rs.200 not entered in the books d) Cash received from Sukesh were wrongly posted to Mukesh Rs.300 e) Goods returned by a customer in the sales ledger has been entered but no other entry being made Rs.1000 Journal a) Sales A/c Dr 100 1 To Suspense A/c 00 (To Correct Overcasting) General Ledger Adjustment jn Sales Ledger Dr 100 To Sales ledger Adjustment in General Ledger 100 (To correct Adjustment accounts) b) Creditors A/c Dr 180 To Suspense A/c 180 (To correct wrong posting) No additional entry required c) Return inwards a/c Dr 200 To Rajesh A/c 200 (To record omission on Sales return) General Ledger Adjustment A/c in Sales Ledger Dr 200 To Sales Ledger Adjustment A/c In General Ledger 200 (To record omission in Adjustment A/C) d) Mukesh A/c Dr 300 To Sukesh A/c 300 (Rectification of Wrong entry in personal A/cs) General Ledger Adjustment A/c in Sales Ledger Dr 300 To Sales Ledger Adjustment A/c in General Ledger 300 (To Correct entry in the sales Ledger) Sales Ledger Adjustment A/c in General Ledger Dr 300 To General Ledger Adjustment A/c in Sales Ledger 300 (To Correct entry in the sales ledger) e) Sales Return A/c Dr 1000 To Suspense A/c 1000 (To correct omission of sales return) General Ledger Adjustment A/c in Sales Ledger Dr 1000 To Sales Ledger Adjustment A/c in General Ledger 1000 (To Correct Adjustment account) Advantages of Self-balancing System: The self balancing ledgers have following advantages: 1. Through self- balancing system, one can locate errors easily. So delay in balancing is minimized and hence there is saving of time, money and labour.

2. Through self-balancing system, it is easy to compile trial balance before individual personal ledger balances are absorbed. Hence it facilitates the preparation of final accounts. 3. The control accounts under self-balancing system provide an up to date and quick means of amount owing to and by the business. Through this, better management is possible. 4. With the help of self-balancing system one can check the honesty of clerks in charge of recording transactions in personal ledgers. 5. It provides a good method of office control and it helps to keep information regarding capital, profit, loss etc.. contained in the general ledgers in confidence. Sectional Balancing System: Sectional balancing system differ from self-balancing system. In sectional balancing only a section of the group of ledgers is self balanced and correctness of the posting of the sales and purchased ledgers can be verified by preparing total debtors and total creditors accounts in the general ledger. Under sectional balancing system a trial balance is prepared only for the general ledger whereas in self-balancing system a trial balance is prepared for each one of the ledgers independently. Thus following are the main features of sectional balancing system 1. The debtors ledger contains the personal accounts of each of the trade debtors of the firm and the creditors ledger contains each of the trade creditors. 2. The general ledger contains all accounts such as real, personal and nominal except those of trade debtors and trade creditors. However it contains total debtors account and total creditors account. 3. The accounts of individual trade debtors and trade creditors are posted without completing the double entry. The double entry is completed only in general ledger in respect of total debtors account and total creditors account. 4. The balance of total debtors account in the general ledger at the end of a period should tally with the total of individual balances in the debtors ledger as well as in the creditors ledger. Hence the accuracy of the entries made in the debtors and creditors ledger can be checked and can locate errors at an early stage. 5. Since double entry is completed only in respect of general ledger and not in respect of the debtors and creditors ledger, a trial balance of only the general ledger can be prepared and not of the debtors and creditors ledger. Hence the sectional balancing is self-balancing of a section of group ledgers. Accounting under sectional balancing is done as follows: For example: Following are the details of transactions of a firm in a month of 20 Debtors Credit Sales Cash Received Discount Allowed A 1000 500 50 B 2000 1000 100 C 3000 1000 100 TOTAL 6000 2500 250 Following entries are to be made in the debtors ledger under sectional balancing system.

1. To record credit sales, accounts of A, B and C will be debited with Rs 1000, Rs 2000 and Rs 3000 respectively. 2. To record cash received from debtors, the accounts of A, B and C will be credited with Rs 500, Rs 1000 and Rs 1000 respectively and 3. To record discount allowed to them, the accounts of A, B and C will be credited with Rs 50, Rs 100 and Rs 100 respectively. Here it is to be remembered that there will be no double entry in the debtors ledger to record the above transactions. Moreover the entries are to be made in the personal accounts of the debtors as and when the transaction takes place. In general ledger the total of the credit sales is to be recorded by passing the following entries at the end of a period. At the end of the period, a schedule of debtors is prepared from the debtors ledger and tallied with the balance in the total debtors account in order to check the accuracy of the posting made in the debtors ledger. In General Ledger: 1. Total Debtors account Dr 6000 To Sales Account 6000 (Being to record credit sales) 2. Cash Account Dr 2500 To Total Debtors Account 2500 (Being to record cash received from debtors) 3. Discount account Dr 250 To Total Debtors Account 250 (Being to record discount allowed to debtors) Transaction relating to the creditors such as credit purchases, discount received, cash paid etc., are recorded in the creditors ledger on the same pattern as explained above and at the end of the period a schedule of creditors can be prepared from the creditors ledger and tallied with the balance in te total creditors account in order to check the accuracy of the posting made in the creditors ledger. Distinctions between sectional balancing and self- balancing: 1. In the case of sectional balancing only General ledger is made self- balancing where as in self balancing all the three ledgers are made self balancing 2. In sectional balancing, the general ledger contains two control accounts, such as Total debtors account and Total creditors account where as in the case of self- balancing, each ledger contains an Adjustment account for reconciling the corresponding entries in the other ledger 3. In the case of sectional balancing, no account is opened in the debtors ledger and creditors ledger to reconcile them with the entries in the general ledger. Where as in the case of self- balancing, the Debtors ledger has a General Ledger Adjustment account and the Creditors ledger also has a General Ledger Adjustment account. Further the general ledger has two accounts such as Debtors Ledger Adjustment account and Creditors Ledger Adjustment account.