LEDGER AND TRIAL BALANCE Learning Objectives After studying this chapter Students will be able t tell Meaning and Importance of Ledger. Format of Ledger. ‘Postings from Journal Postings from Cash Book and other Subsidiary Books. ‘Closing and Balancing of Ledger Accounts, Trial Balance - Meaning, objectives and Preparation. Meaning and importance of Suspense Account. LEDGER Meaning: After recording the business transactions the Joumal or special pur pose Subsidiary Books, the next step isto transfer the entries tothe respective ac- counts in the Ledger. Ledger is a book where all the transactions related to 8 particular account are collected at one place. Definition : The Led gers the main or Principal book of accounts in which all the business transactions would ultimately find thir place under various accounts ina duly classified form. Importance: To know the collective effect of all the transaction pertaining to one particular Account, By this classification / collective effect we are able to know the following — ‘@ How muchamountis due from each customerand how much amount the firm has to pay to each supplies! creditor fe The amount of Purchase and Sales duzing a particular period, © Amount paid orreceived on account of various items. ‘© Ultmate position of Assets and Capital fe Forthe preparation of Trial Balance which helps in ascertaining the Arithmatic Accuracy of the Accounts Important: Leder is also called the Principal Book of Accounts] Performa for Ledger Fach ledger account is divided into two equal pars, LeftHandSide > Debit side (D1) RightHandSide —* Creditside (C1)Nameofthe Account Dn ce Date] —Parioulas [EF [Amount | Dare [Parioulars [TF [ Amount ® @ Posting in the Ledger — This will be dealt separately from Joumal Entries and each Subsidiary Book Case I Posting from Journal Entries. ‘e 1fan account is debited inthe journal entry, the posting in the ledger should be ‘made on the debit sie ofthat particular account. Inthe particulars column the name of the other account (which has been credited in the Journal entry) should be written for reference fe Forthe A/c credited inthe Journal entry, the posting inthe ledger should bemade on the credit side of that particular A/c. Inthe particulars column, the name of the other account that has been debited (in the Joumal entry) is written for reference, important: To’ is written before the Alcs which appear om the debit side of Ledger fe. “By"is written before the Ales appearing onthe credit side. ¢ Use of these words ‘To’ and ‘By’ is optional Example I: Simple Journal Entry. ‘On F* August 2011, goods are sold for cash Rs, 2,000, SOLUTION - Journal Entry @® © Cash Ne Dr] 2,000 ToSales.A/c 2,000} (For cash sales) Ledger Ale Gash Ale (extract Dr. cr [Date | Partiulas [AF] «) | Date | Pariculars [IF] @ 2001 [Aug.t | To Sales Ale 2,000 Sales A/c (extract Dr. cr [Date | Particulas [IF] @) Date [Pariculars [IF[ @ Row Aug [By Cash A/e 2,000imple2: Compound Joumal Entry Reocived & 14,500 in full settlement ofa debt of € 15,000 ftom Ramon Aug, 2011 SULUTION- Journal Entry (oe) CashAle Dr] 14,500 Discount Allowed A/c Dr. 500 ToRam 15,000 (Cashreeeived and Giscount allowed) Ledger Ale Cash Ale Dr cr (Date_| Particulars [UF] | Date | Particulars [LF] © fort [Aug | To Ram 14,500 Discount Allowed Ave Dr cr [Date] Particular [CA @) | Date] Particulars [CF] © ort [Auge |*To Ram 300 ‘Rams Account Dr cr [Date] Particular [CH] | Date | Parioulars [UF] _@ 2011 ‘Aug. 8| By Cash Ale 14,500 By Discount 500 Allowed Ac ‘Case Il, - LEDGER POSTINGS FROM CASH BOOK Important Points (1) Cash Book itself serves as a cash A‘e also, therefore when cash book is ‘maintained, cash A/c isnot opened in the ledger. (@) When Bank column is maintained in the Cash Book, Bank A/c is also not ‘opened inthe ledger. The Bank column itself serves the purpose of Bank Ac. (3) Opening and closing balances of Cash Book will notbe entered in the ledger anywhere(4) AsCash Book serves the purpose of Cash/Bank AJ, it means that, only the second Ve (other than Cash Ae or Bunk AVe) is to be opened in the ledger and posting isto be made for each entry in the Cash Book, Rules of Posting (x) Posting from ttre Debit Side of Cash Book Enteies appearing on the debit side of Cash Book are tobe posted to the Credit Side of respective accounts in the Ledger by writing the wards, “By Cash A’e’ —> fits fromthe Cash Column ByBank Ale —> _ ifitis fromthe Bank column, (b) Posting from the Credit Side of Cash Book Entries appearing on the eredit side of the Cash Book are to be posted to the Debit side of respective accounts inthe ledger by writing the words. “To CashAle’ > ifitis fromthe Cash Column “To Bank A/c’ —>ifitis fromthe Bank Column (©) Allcontra entries marked ‘C” are ignored while posting from the Cash Book to the Ledger because double aspect of such transactions is completed in the Cash Book itself. Ex: Given some Cash Book entries Post them into ledger Accounts ie Partita [W]L-F[ Coat] an [Dees Pacers Ve] F] Coe [Rank TY] TY zou Jan 10 | Capial 30.000 Jun 13 | By Purchases af sooo) Ne tins frocaaac | |e | }10000] tants | By Bank Ate | 1n000| Jan 22 [ToSalese soo) = | Jen25] By Sumi = | 4.300 20,28 [To Al =| 2500 | faust | wy waance Ci sono) 8400 SOLUTION © 15° Jan, entry will not be posted (Contra Entry) ‘© Closing Balance will not be posted inthe ledger Ale Dr or Daie [Puricoms [LA] Amount] Date [Paricoars [LF] Amount @ @ 2011 Jan. 10 [Bycashare | b0,000 Bales Ale Dr 4 ce Date [Patiolas [CA @) | Date [Particulars [LAT @ 011 Jan. 22. [By CashAle 3,000 39AnilsAle Dr cr [Date [Partculars [LET Date [Particwlas LF) 2011 Jan. 28 [By BankAJe 2,900 Purchases Ale Dr cr [Date —[Pariealars [CF] Date | Paniealans [LF [© bot Jan. 12 | To Cash Ave 5,000 Sumit’sAle Dr cr (Date JPartcolas [CF] | Date [Pantoulans [CFT foi Jan. 25 [To Bank Ale 4500 ‘Case LII- Ledger posting from Purchases book Journal Entry for Credit Purchases is Purchases Ale Dr ‘ToSupplicr ‘Therefore the rules of posting from Purchases Book ae. (1) The total of the Purchases book will be posted to the Debit side of Purchase A/eand the words “To Sundries as per Purchase Book" will be written inthe particulars column, (2)Each ofthe Supplier*s A/e will be Credited and the wards. “By Purchases Ale” will be written in the particulars column. EXAMPLE: Purchases Book Date | Paricutas inv. No[-F] Details [Total Amount ®@ @ ou HJune4 | Sahil & Co, 10,000 une 14 | Geeta industries 20,000 Less Trade Discount 20% (4,000) 16,000 June 26| Vijay & Co, 72,000 Less 20% Trade Discount 2,400) 9,600 Tame 30] Purchases Ae Di 35,600 40SOLUTION: LEDGER Ales Purchases Alc Dr. Cr [Date | Particulars [LF [Amoum | Date| Particulars [LF[ Amount @ @ loons Liune30| To Sundries as 35,600 per Purchases Book Sahil & Co, Dr cr ate | Parciculars [LF] Amount | Date | Paniculars [LF] Amouat @ poi @ June 4] By Purchases 10,000 Ale Geeta Industries Dr. ce [Date [Particulars | LY] Amount | Date [Paniculars [LP[ Amount @ )2011 @ lune 14] By Purchases 16.000 Ale Vijay & Co. Dr. cr [Date [Particulars [Lr] Amount [Dae [Particulars [LF] Amouat ® 2011 @ June26) By Purchases 9,600 Ave Case 1V- Ledger Postings from Sales Book Journal Entry for Credit sales is Customer Dr To Sales Ale Hence rules for posting from sales Book are 1, Total of the Sales Book will be posted to the eredit side of sales A/c by writing the words “By Sundries as per Sales Book” 2. Customer’s personal A/cs are debited by writing the words “To Sales A/c” a‘Case V- Ledger Postings from Purchase Return Book Journal Entry for purchase Return is Personal A’c of Supplier Dr To Purchase Return Ave. Hence the rules for posting are. |. Supplier's Ac (to whom the goods are retumed) is debited by writing the 2. The total ofthe Purchases return Book is credited tothe Purchases Retum ‘Alc by writing the words “By Sundries as per Purchases Retum Book” Case VI- Ledger Postings of Sales Return Book Journal Entry for the Seles Return is- SalesRetum Alc Dr ToCustomer Hence the Rules for Posting are | Individual Customer's A/es by whom the goods areretumed are Credited, by writing the words “By Sales Return A/c” 2. The total ofthe Sales Return Bookis posted to the Debit of Sales Return ‘Ale by writing the words. “To Sundries as per Sales Return Book”. (7) Ledger Postings from Bills Receivable Book. Bills Reecivable book shows the names ofthe persons from whom the Bills are received. Therefore the Journal Entry is B/RAe Dr ToPersonal Ale Hence, (1) Posting will be done on the Credit side of the Personal AJes by writing the words. “By Bills Receivable A/<”, (2)'The total of the Bills Receivable Book will be posted to the debit side of Bills Receivable Afe by writing the words “To Sundries as per Bills Receivable Book”, (&) Ledger Postings of Bills Payable Book Bills payable isa lability, therefore the Journal Entcyis Personal A/c Dr ToBills Payable AVe. Hence therules of Posting are |. Personal A/es will be debited by writing the words. “To Bills Payable A/c”. 2, Total of the Bills Payable Book will be posted to the eredit of Bills Payable ‘Ale by writing “By Sundries as per Bills Payable Book”, [Closing and Balancing of Accounts Normally after every month or whenever a businessman is interested in knowing the position of various ‘vcs, the accounts are balanced. Various steps for this purpose ae. a2(1) Debitanl Credit sides of each A/e are totaled, (2) The difference between the two sides is inserted on the side whieh is shorter soas to make their totals equal G) The words “Balance C/d ie. the balance earried down and written against theamount of difference. ()Inthenext period, the balance is brought down onthe other sideby writing the words ‘Balance bid’ (5) If the Debit side exceeds the Credit Side the difference is a Debit Balance where as, (6) Ifthe Credit side exceeds the Debit side the difference isa Credit Balance. Important 1. Debit Balance ofa Personal A/e means the person is « Debtor of the firm whereas Credit Balance of Personal A/cindicates thatthe person is a Creditor of the fim, 2. Real Ales (which include Cash andall other Assets A/es)willusally show DebitBalances, 3.Nominal Ales (A/cs of Incomeand Expenses) are transferred to Trading. and Profit and Loss A/c of the firm at the end of the Accounting Perio. 4. Debit Balance of any A/c means an Asset or an Expense whereas Credit Balance means liability, Capital or Income earned. ‘TRIAL BALANCE 1 Meaning When posting of all the transactions into the Ledgeris completed and accounts are balanced off, then the balance of each account is putona list called ‘Trial Balane. Il Definition Trial Balance is the listof debit and creditbalances taken out from ledger. “It also includes the balances of Cash and bank taken from the Cash Book”. IIL Preparation —Steps (Only Balance Method) (1) Ledger A/es which shows a debit balance is put on the Debitside of the ‘ral balance, (@) Theale Showing credit balances put on the Credit side of Trial Balance. 1) Accounts winich shows no balance ic. whose Debit and Credit totals are equal are not entered in Trial Balance, (4 Then the two sides of the Trial Balance are totalled. If they are equal itis assumed that there is no arithmetical esror in the posting and balancing of Ledger Aes.Objectives or Functions of Trial Balance ve Ithelpsin ascertaining the arithmatic eecuracy ofledger accounts, ve. Helpsin locating errors ve Provides the summary of Ledger Alcs. ve. Helpsin the prepartion of Final Acs Recording in the journal and subsidi ary Books, Posting into the Ledger and Preparation of Trial Balance can be clearly understood with the help of ‘the example given on next pages. Problem: Enter the following transactions in proper Subsidiary Books, postthem {nto Ledger Accounts, balance the accounts and prepare a Trial Balance. 2011 June 1. Assets : Cash in hand % 20,000; Debtors : Amit and Co. 15,000, Sumit Bros. €30,000, Stock € 1,75,000, Machinery € 1,20,000, Furniture 40,000. Liabilities : Vishal € 16,000. June2 Purchased from Ramesh and Sons goods ofthe list price of €20,000 at 10% trade discount. JuneS _Retumed to Ramesh & Sons goods of the list priee of €2,000, June 10 Issueda cheque to Ramesh and Sons. fl settlement oftheir account. June 12 Sold to Amit and Co., goods worth & 25,000. June 1S Received cash 2 10,000and. cheque for & 8,000 from Amit and Co. ‘The cheque wasimmediately deposited into thebank, June 16 Withdraw forpersonal use cash © 5,000 and goods for € 3,000. June 17 Accepteda bill for45 days drawn by Viratand Co. fortheamount due to Bim. June 18 Acceptance received from Sumit Bros, forthe amount due from them payable after 30 days June 19 Sold to Mohit Bros., goods for & 16,000, June20 Cash purchases £15,000. June22 Withdraw from bank for office use € 10,000, June23/ Purchased from Vishal goods valued % 24,000, June24 —Amitand Co. retumed goods worth & 2.000. June25 Received from Mohit Bros. € 10,000. June 27 Accepted abill for € 25,000 for | month draw by Wishal Jume27. Paid by cheque, Rent €2,800 June27 Received Commission in Cash €800 Jume30 Paid salaries 5,000. tank overdraft € 33,000, Creditors : Virat and Co. € 24,000, 44;uIgap 99 18 apts pa OM U UMOYS SPY 20 [BaNpAAD 2g IM APIS Nga 9 WANS SPY 940 TTY PHL op ur mmo 9g Le EER pie USED jo soouDyE Hts0}-) -po] 249 a s1oga Au poysod 94 30u gf ua pospEU SOU ‘oun oN, (uupiono yu) ooo'rs_|- pra aounyeg fey | 1 Ajng on'st paammrgon | 1 Ang o00'79 | oov os: mo] oo'e9_[oow'os We oos'se pio eoumyea Sa] oF aun - c's swsaumres Se] oe sone] | ooo'ss |~ po sommes on| 0€ 50%f cove | soy wo se} iz 9unp av coo'or | 2 awa sae] come] |- | ons puso oy | oz axe ooo'st ary sosenaing Sg] 07 oon 000.01 ssepoug agen ex] sz 20mg - 00's: yy Summa kg) gt ung | | - ooo | 9 vqueR OLe | Zz une oorer | suog 7p sourry Aq} or une] | ooo" | oo0'ar ‘og Puy aL | s{ Suny aoo'ee | paeompa ses | tame! | | ao0'ae Prasscereg ete | Lang cso_| ew oz] |¢sw_|¢s0 itt D| oN Touma) apex wa] wo] a] 1s sxpooma| oma] | wa] geo] a] an awa 20 30 (eungog yung pu yse> im) yoog HIE 45Purchases Book Date [Name ofthe Supplier Taw. No. [LE] Details [Total Amount (Account to be Credited) ®. ®. por une2 | Ramesh & Sons 20,000 Less Trade Discount 10% 2,000 | 18,000 une23 | Vishal 24,000 lune 30°] Purchases Ave Di 42,000 Sales Book Date [Name of the Supplier InNo. [LF] Details [Toul Amount (Account to be Debited) ®, @ on fuse 12] Amit & Co 25,000 lune 19 | Mohit Bros. 16.000 une 30 | Sales Ale Gi 41,000 Sales Return Book Date | Name of te Customer Credit [LE | Details [Total Amount (Account tobe Credited) [Nove No. @. ® pom june 24] Amit & Co 2,000 fuse 30] SalesRetum Ale Dé 2,000 Purchases Return Book [Date | Name of the Supplier Debit [LE] Deis | Toul Amour (Account to be Debited) | Note No. @ ® Orr une | Ramesh & Sons, 2,000 Less Trade Discount 10% 200 | 1.800 une30| Purchases Retum Ale Ce 1,800. Bills Receivable Book From whom reseived [Period of [Due Date] LF [Amount] How the ill [Disposed Sumit Bros, so days | July2t 30,000 June 30 | Bill Receivable AicDr 30,000 46Bills Payable Book Date of | ToWhom Given ] Period of [Duc Date] LF [Amount] How Acceptance the Bill @)_{Disposea| 2011 June 17 | Virat & Co, 45 days | August 4 24,000 June27 | Wishal Lamont [July 30 25,000 Tune30 | Bills Payable Ale Gr 49,000 Posting of opening Entries : 1. Fistofall opening Journal Entry is done inthe Journal proper 2. All Assets A/es are Debited and Liabilities A/es are Credited, Defference| between the totals of the two sides is the Capital, Important ; Besides opening Journal entries, any transaction which is not covered under any of the Subsidiary Book is done in Journal proper, Journal Praper Date] Particulars LE] Amount | Amount Dr Cr 2011 @ @ Junel | Cash ave Dr 20,000 Amit& Co, Dr 15,000 SumitBrothers Dr 30,000 Stock Ale Dr 175,000 Machinery Ale Dr 1,20,000 Fumiture Ale Dr 40,000 ‘To Bank (Overdraft) A/c 33,000 To Virat & Co. 24,000 ‘To Vishal 16,000 ‘To Capital Afe (Balancing fig) 3,27,000 (opening Balances, brought forward ‘fcom the previous years books) une 16] Drawings Ale Dr 3,000 To Purchases Ale 3,000 (Goods withdrawn far personal use) 47Ledger Accounts, Amit & Co, r. Date] Particulars [JP] Amoun [Date | Particulars | J.P] mount es) es) 2011 20 June 1 | To Balance bid 15,000 | June 15] By Cash Are 10,000 June 12: | To Sales Ale 000 | June 15] By Bank Ale 8,000 June 24 | By Sale Reum 2,000 Ale June 30} By Belsnee ed) — |20,000 40,000 40,000 July1 | ToBalance via] [20,000 Sumit Bros. Date | Particular J] Amount | Date | Perticutar |J.F | Amount (Rs) (Rs) Bir i June 1 }To Balance bid* | ]30,000 | Junets | By BR. A‘e] | 30,000 ‘Stock Account Date | Particular TA] Amount [Date] Parieular ]J.F [Amount (Rs) Rs) 2011 201 June 1|To Balance bee | |1,75,000 Mael Date | Particular TF] Amount [Dats | Particular | F] Amouse Rs) Rs) 20 2011 June 1] To Balance bid 120,000 | June 30] By Balance old t,20,000 1,20,000 1,20,000 Julyt_[To Balance bid? 120,000 48Furniture Ale Date | Particular TF [Amount [Date] Particular]. [Amount (Rs) (Rs) Boi Boi June 1] To Balance bid 1,000_| June 30 [By Balence eid} — | 40,000 July 1 [To Balance bid “40,000 Virat & Co, Date | Particular LP] Amount] Date | Particular | J.F [Amount (Rs) (Rs) iT ur Sune 17| Ta Bills Payable June | | By Balance Ale [24,000 ba 24,000 Balance on June 30° is Nilin this A/c (Virat & Co.) ‘Vishal’s Ave pate | Pariculae — |..F| Amount] Date | Particular |i, | Amount (Rs) Ry 20H 2011 June 27 | Ta Bills Payable June 1 |By Balance bid 16000 Ale 25,000 June 30 | To Balance efd 15,000 | June 23] By Purchases Ale 24,000 40,000 40,00 July 1 15,000 Capital Ale Date Particular [IF] Amount] Date | Particular [LF [Amount Rs) (5) 20m 201 Tune 30 | To Balance cfd] |3,27,000 | June! | By Balmce bid} | 3.27,000] July1_[By Balance ba] _[3,27,000] Drawings Ale ate | Partoular TF] Amouat] Date /Parteulr ——]F ]Amouar es) es) TIT TT ‘To Cash Ale June 30] By Balance id] | 8,000 To Purchases Ac} | 3,000 [e000] [x00 | July1_| To Balance bd* |_ [3,000Ramesh & Sons Date [Particular TF Amount | Dato [Panicular [FF [Amount Rs Rs) 2011 2011 June § | To Parchase 1,800 | tune2 | By Puchase 18,000 Retum Ale Ale tune 10) To Bank Ave 16,200 18,000 T5000 Purchases Ale Date | Panicutar F]Amoun | Date | Particular — | 1F|Amoun Rs) (Rs) Barr oT June 26) To Cash Ae 15,000 | June 16] By Drawings 3,000] June 30] To Sundties as per} | 42,000 Ale Purchase Book June 30] By Balance ed | | $4,000 37,000, 37,000 July 1_ffo Balance b/é* 54,0007 Mohit Brothers Date Particular sE]Amoun | Date | Particular — |.F [Amount Rs) Rs) 211 2011 June 19] To Sales Ave 16,000 | June 25] By Cash Ale 1,000 June 30] By Balance eid] | 6,000 16,000 16,000) July1 [To Balance bid 6,000 Rent Ale Date | Particular UF] Amount | Date | Particular {J.P |Amount Rs) Rs) port 20 June 27|To Bank Ave 2,800 _| June30| By Balance cid] | 200 June 30] To Balance bid | [2,800‘Commission Ale [pate | Paniculars JF]Amount | Date [Pariculars —— ]s.F [Amount Rs) Res) 2011 2011 June27| By Cash Ale 300 Salaries Ale bate | Panicular At]Amount | Date | Particular [J.F [Amount es) es) for oir liume 30} To Cash Ale 5,000 Sales Ale Date [Particular F[Amount] Date ] Particular [fF Amount @s) (Rs) 2011 June 30) By Sundries as per Sales Book} | 41,000] Sales Return A/c Date | Particular /J.FJAmount] Date | Particular [J.F Amount] Rs) Rs) Ron \June 30|'To Sundries as, per Sales Return Book Purchase Return A/c Dae ] Panicular [JF]Amouni] Date | Pardeular iF Amount (Rs) (Rs) Tor June 30} By Sundries as per Purchase Retum Book 1,800 SIBills Receivable Ale Date | Penicular JF] Amouni] Date [Panicular —[J.F fAmount (Rs) (Rs) June 30] To Sundiies as 30000 | Tune 30] By Balance eld | | 30.000 per BIR Book July: | To Balance bia* | [30,000 Bills Payable A/e Date | Particular — [JF] Amount] Date | Povticolar | F]Amount (Rs) (Rs) Jane 30'] “To Balance ofa] | 49,000 | Tine 30) By Sundriosas | | 4,000 per BP Book July [By Batance bia] | 49.000 TRIAL BALANC! as on 30" June, 2011 Name of the Accounts LF Debit] Credit Balances | Balances Rs) BS Cash Nie 25,800 Bank (overdrafi) Ave - 54,000 Amit& Co. 20,000 Stock Ac 1,175,000 Machinery Ale 120,000 FumitureAle 40,000 Vishal’s Ai 15,000 Capital Ave — | 3,27,000 Drawings Ale 8,000 Purchases A/c 54000 | - “Mohit Brothers 6,000 Renae 2800) - Commission A‘e 800 Salaries Aie 5,000 Sales Ale 41,000 SalesRetum Ae 2,000) ~ Purchase Return Afe 1,800 Bills Receivable Ale 30,000 | ~ Bills Payable A/c 49,000 Total 588,500 [488,600Suspense Account ‘When Trial Balance does not agree, then fist of all we try to locate the errors. Sometimes, inspite ofthe best efforts, all the errors are not located and the Trial Balance does not tally. Then in order to avoid delay in the preparation of final accounts, a new account is opened which is known “Suspense Account” Defference in Trial Balance is posted to this Acount. T. HthereisExcess Debit 9 Defference is posted inthe Trial Balance to the Creditside of Suspense Ae 2. Hithereis Excess Credit —» Differenceisposted ‘inthe Trial Balance to the Debit side of Suspense Account. Exampl (S. |_‘Irial Balance | Defference — |Posted to the Suspense Ae ? ino Dr. Total [(CrVotal)| _(Rs.) (Debit / Credit Side) CRs Rs CRY 1. 2,25,000 | 2,16,500 | 8,500 [Credit Side of Suspense A/e. |CExcess Debit) 2. [2.16500 | 2,25,000 | 8,500 Debit Side of Suspense A/c. Excess Credit) Closing of Suspense Aye: © The errors which fed to the difference still remains to have tobe located. © These errors will be rectified through Suspense A/c (One sided errors) which will be explained in the topic Rectification of Emors. @ When all the errors are rectified, this Account closes down automatically. Ifthe difference in Trial Balance persist, it is shown in the Balance Sheet. (@) Debit Balance of Suspense Account is shown in the Asset Side of the Balance Sheet. (b) Credit Balance of Suspense Account is shown in the Liat the Balance Sheet. ‘Suggested Methodology (1) Explanation and Ilustration Method, Side ofBANK RECONCILLIATION STATEMENT Learning objectives (1) Meaning of BRS. (2) Causes of Differences in Bank Balance us per Cash Book and Pass Book. (G) Importance of Bank Reconciliation Statement. (4) Procedure of preparation of BRS, (5) Preparation of Adjusted Cash Book. Introduction Usually all the firms open a current account with the bank as there are somany transactions and record these transactions in the Bank column of the Cash Book, Bank also maintains a separate ledger account of each firm (customer) and periodically supplies copy of the account to the fir for information. This copy of the fim’s Account supplied by the bank is known as Bank Statement or Bank Pass Book, Since al the transactions with the bank are entered in both the books Cash Book and Pass Book, the balances of the two books should tally with each other. But usually the two balances don’ttally ‘Bank Reconcilliation Statement is prepared to reconcile the difference between the Bank Balance shown by the Cash Book and Bank Pass Book, DEFINITION : Aschedule showing the items of difference between the bank statement and the bank column of Cash Book is known as Bank Reconcillation Stateent Causes of Differences in Cash Book and Pass Book ‘The differences may be caused by either (A) Time gap in recording transactions or (B) Exrors Committed in recording transactions, (A) Differences Caused by the time gap Reasons forthe time gap in recording the transactions in the two books (Cash Book and Pass Book) areas given below (1) Cheques issued but not yet presented for payment in the bank (2) Cheques deposited or paid into the bank for collection but not yet credited by he bank. \) Cheques deposited but dishonoured by the bank. ‘@) Interest allowed by the bank (8) Interest on overdraft bank charges, commission ete, charged by the bank (© Direct Depositby the customers into the bank. 54(9) Interest, Dividend ete, collected by the bank. ‘(8) Direct payments made by the bank on behalf of eustomeras per standing instruction (B) Defferences caused by Errors Committed Such errors may be of two types .() Errors committed by the firm @ Cheques issued to some creditors but omitted to be recorded in the Cash Book orrecorcled twice. (Gi Cheques deposited into the bank omitted to be entered in the Cash Book orreconded twice. (Gi) Error intotalling orbalancing the bank column of the Cash Book. .@) Errors committed by the bank ‘Somethingbank records a wrong entry inthe customer’s account which causes a difference in the two balances. Need and Importance ‘@ [the Ipsin locating and rectifying the errors oromissions committed either by the firm or by the bask. eCustomer becomes sure ofthe correctness ofthe bank balance shown by the cash book. ‘@ Facilitates the preparation of ameniked or revised Cash Book, fe Reduces the chances of fraud by the staf of the firm or bank f@ Helps in keeping a rack ofthe cheques deposited for collection. Procedure of Preparing Bank Reconcilliation Statement A Bank Reconeilliation Statement is prepared when we get the duly completed Pass Book from the Bank, On receiving the Cash Book : (1) First ofa tally the Debit side entries ofthe cash book with the Credit side entries of the Pass Book and vice versa. (2) Tick the items appearing in both the books. G) Unticked items will be the points of differences, (4) ABRSis then prepared by taking either the balance as per Cash Book or ass Book asa starting point Important Points (1) Ifthe Starting point is Cash Book Balance then the ending point will be Pass Book Balance. (Q) Ifthe starting pointis Pass Book Balance then the ending point will be the Balance as per Cash Book, (3) Debit Balance as per Cash Book or Credit Balance as per Pass Book, means that the frm has that much amount of deposited atthe bank - also called favaurable balance » write the amount under + item (4) Credit Balance as per Cash Book or Debit Balance as per Pass Book, means thatthis much amount has been withdrawn in excess af deposit » also called over- draftor unfavourable balance write the amount under item, ssMethod of Preparing BRS Starting with by the Balance / overdraft as per Bank Column of Cash Book, ‘StartingPoint —> End Point Cash Book = —> Pass Book lLessBalance vite, More Balance MoreBalance fem? LessBalance Note: To get more from less means something isto be added therefore+ item -& To get less from more, something is to be deducted therefore _ item. 1. Firstofall write Under Plus Item ~ Ifthe Cash Book Balance is debit or favourable or simple balance. ‘Under Minus Item ~ IF the Credit Balance or overdrafts per Cash Book is sive, 2, Nowstudy the point of difference, (@) Ifthe entry is done inthe Cash Book and not in the Pass Book then ‘@ifitis done on the debit side of Cash Book, Balance in the Cash Book will be more as compared to Pass Book and hence the item will be item as shown in the box above. Gi) whereas ifthe entry is done on the Credit side of Cash Book, the Balance inthe Cash Book willbe less as compared to Pass Book and hence the item will item, (b) Ifthe entry is done in the Pass Book and notin the Cash Book then. @ ifdone an the Credit side of Pass Book Pass Book Balance is mare as compared to CashBook + item. ‘G@ Ititis done on the Debit side of Pass Book. Pass Book Balance is les as compared to Cash Book -> (-) item 3. Attheend + itemsand items are totalled (2) [ftotal of Plus tems is more than the total of (items + Difference is Cr Balance or favourable balance as per Pass Book, (6) Whereas ifthe— items total is more than the + items total » Difference is Dr Balance or overdraftas per Pass Book. Ready Reference + Items (Items which increases the Pass Book Balances or decreases the Cash Book Balance) (1) Cheques issued but ot yet presented. 2) Credits made by the bank for Interest. G) Amount directly deposited by the customers in our bank A’e, (@) Interest and dividend callected by the bank. (5) Cheques paid into the bank but omitted to-be recorded in the Cash Book, 56~ Items (Items which, deereases the Pass Book Balance or increase the Cash Book Balance) (1) Cheques sentto the bank for collection but not yet credited by the bank (2) Cheques paid into the bank but dishonoured. ) Direct payments made by the bank, (4) Bank charges, commission ete. debited by the bank. (6) Cheges issued but omitted to be recorded in the Cash Book Example 1 : Balance as per Cash Book is given Prepare BRS as on 31* July 2011 (1) Balance as per Cash Book is Rs, 25,000 as on 31* July 2011 (2) Cheques for Rs. 15,000 were deposited into the Bank in the month of July but jnly cheques for Rs. 11,000 were credited by the bank till 31*July 2011 (G) Cheues issued for Rs, 13,000 in July, out of which a cheque for Rs, 3,800 was presented for payment on3 August. (4) Bank charged Rs. $0 as Bank charges and credited interest of Rs. 370. (5) Acustomer directly deposited Rs. 1,550 in firms bank Ale (6) Bank paid the Insurance Premium of Rs. 1,200. per standing instructions on 25.07.2011 SOLUTION Bank Reconcilliation Statement as on 31* July 2011 Particulars +items | items (Rs) (Rs) (1) Balance as per Cash Book 25,000 (2) Cheques deposited but not yet ‘collected by the banks (15,000-11,000) - 4,000 3) Cheques issued butnot yet 3,800 presented for payment (4) (@) Banke Charges 50 {(b)Laterest credited by the bank 370 (6) Directly deposited by the customers 1,550 not recorded in the Cash Book (6 Insurance Premium paid by the 1,200 ‘bank not recorded in Cash Book ‘Total 30,720 5,250 Balance as per Book (30,720~ 5,250) | 25,470 = 57lanation: 1. Balance as per Cash Book means favourable Balance, hence + item. If nothing (Le. Debit or Credit) is written with the Balanee given, itis treated as favourable. 2. Cheques were deposited into the bank fox Rs. 15,000 but eredited by the bank for Rs. 11,000 in the month of July, implies that cheques for Rs. 4,000 (15,000-11,000) are entered in the Cash Book but not in the Pass Book Increasing the Cash Book Balance by Rs. 4,000 as compared to Pass Book. Henceto get Pass Book Balance from the Cash Book Balance Rs. 4,000 will have tobe deducted. {@) Cheque issued but not presented for payment tll 31° July is for Rs. 3800 entered more on the edit side of Cash Book es compared to Pass Book —> Cash book Balance is less by Rs. 3800 as compared to Pass Book —| (4) @) Bank charges of Rs. $0 entered inthe Pass Book —+ decreases the Bal- ance of Pass Book. To reach Pass Book Balance from Cash Book Balance, this item has tobe deducted i.e {) Interest credited by the Bank Rs. 370 entered in P ass Book Increases the, balance of Pass Book, hence to reach the Balance from eash book and this item. istobe added (6) Direct deposity a customer Rs, 1,550 Increases the Pass Book Balance (6) Payrment made by the bank for insurance premium decreases the Pass Book Balance (1) items total Rs, 30,720 is more than —item total Rs, 5250 by Rs. 25,470. Hence the diflerence of Rs. 25,470 will be + item ic. Favaurable Balance or Cr. Balance as per Pass Book, EXAMPLE 2- when overdraft as per Cash Bookis given Given. (1) Overdraftas per Cash Book is Rs. 10,500 on 30" June 2011 .Q) Cheques deposited but not yet collected Rs, 2,000. .G) Chequs issued but not yet presented for payment of Rs. 2,800. (@) Bank charges of Rs, 50 and Interest on overdraft of Rs, 250 are. charged by thebank, (G) Acustomer directly deposited Rs. 1,200 into the Bank, (©) Insurance Premium of Rs. 1,500 paid by the bankas per standing in- structions, ‘Prepare Bank Reconcilliation Statement forthe month of June 2011. 58SOLUTION: Bank Reconcilliation Statement as on 30% June 2011 Paricalars “Fite item (Rs) (Rs) (1) Overdrafias per Cash Book* 10,500 (2) Cheques deposited but not yet 2,000 collected. (G) Cheques issued but not yet 2,800 ‘presented for payment (4) (@) Bank Charges s0| (b) Interest on overdraft charged 250 by thebank. (6) Directly deposited by customer 1,200 - inthe bank. (6 Insurance Premium paid by - 1,500) the bank not entered in Cash Book. Total 4,000 14,300) ‘Overdraft as per Pass Book (14,300 - 4,000) [= 10,300} ‘Overdraft means unfavaurable balance or Negative Balance Henee putt under - item. Explanation for all other items is similar as example I except the follow- ing. 1 Item No. 4 (b) ~ Interest on overdraft decreases the Pass Book Balance hence it is to be deducted from Cash Book Balance to reach at Pass Book Balance —> 2. This time the total of items Rs, 14,300s more te the total of + item is Rs, 4,000 by Rs. 10,300. Hence thisis a (item orin other words overdraft as per Pass Book, e Il Starting with Pass Book Balance / overdraft. ting Point Ending Point Pass Book [Cash Book] Less Balance More Balance More Balance Less Balane 1. Firstofallwriteunder + em If Cr Balance, favaurable balance or Simply Balance as per Pass Rooks given,(Item —+ If Debit Balance or overdraft as per Pass Book is given 2. Now study the point of difference between the Cash Book and Pass Book, (@) Ifthe entry is done in the Cash Book and not in the Pass Book then, () [fis donc on the Debit sideof Cash Book Balance inthe Cash will be more as compared to Pass Book and hence the item is to be added in the Pass ‘Book Balance to gct the Cash Book Balance i.e (G) Whereas ifthe entry is done on the Credit side of Cash Book —> Cash Book Balance will be less as compared to Pass Book hence (~) item (6) Iftheentry is done in the Pass Book and notin the Cash Book then, (9 ifitisdone on the Debit side of Pass Book —»Pass Book Balance is less as compared to Cash Book —>item isto be aded in Pass Book Balance to get (i) ifisdone onthe Credit side of Pass Book Pass Book Balance is more as compare to Cash Book item. —>[(=) item] 3. Attheend -Fitemand —itemare totalled (@) Itotalof items ismore than thetotal of(-) = Difference is favourable Balance or Debit Balance as per Cash Book . (0) Where as if the total of (—) items is more than the total of + items —» Differences unfavourable or overdraft as pet Cash Book, Ready Reference + Items [items which increases the Cash Book Balances or decreases the Pass Book Balance] (1) Cheques sent for collection tothe bank but not yet credited collected by the bank. (@) Cheques deposited into the bank but dishonoured. @) Direct Payments made by the bank. (4) Bank charge, commmission ct. debited by the bank, (6) Cheques issued but omitted tobe recorded in the Cash Book. Item [Items which decreases the Cash Book Balance or increases the Pass Book Balance] (1) Cheques issucd but not yet presented. 2) Credits made by the bank for intrest G) Amount dircetly deposited by the customers into the Bank. (4) Interest and dividend collected by the Bank. (6) Cheques paid into the bank but omitted tobe recorded in the Cash Book. EXAMPLE 3 Balance as per Pass Book is given Given_ (1) Balance as per Pass Book is Rs, 25,470 Point No. (2) (6)are same as given in example (1) Prepare B.R. Statement fr the month of fuly 2011 60Bank Reconcilliation Statement as on 31" July 2011 Particulars ++item =item (Rs) (Rs) (1) Batance as per Pass Book (C1) 25,470 (2) Cheques deposited butnot yet collected by the Bank (15,000-11,000). 4,000 @) Cheques issued but not yet 3,800 _presented for payment (4) (9) Bank: Charges 50 (b) Interest Credited by the Bank. 370 (5) Directly deposited by the customer - 1,550 not recorded in the Cash Book. (6) Insurance Premium paid by 1,200 the bank not recorded in Cash Book. ‘Total 30,720 | _ 5,720 Balance as per Cash Book (Dr) 0720-5720) 25,000 - Important Point ‘© Starting and Ending Points are reversed as compared to Example No. 1, Hence + items and (-) tems are interechanged ‘© Favourable balance whether of Cash Book or Pass Book is always a ~item. ‘© 1f+ items otal is more than the items total then the difference in the two totals is always.a favourable balance. ‘@ whereas if items total is ess than the —items total then te difference in the ‘wo otasis overdra, Ecample 4 ~ Overdraft as per Pass Book is given. Given that (1) Overdraft as per Pass Book is RS, 10,300 Rest of the contents, (points 106 are sameasgivenin example No.2 Prepare BAR, Statement forthe month of Tune 2011 6SOLUTION Bank Reconcilliation Statement as on 30% June 2011 Particulars Fite item Rs.) (Rs.) ( Overdrattas per Pass Book 70,300 {@) Cheques deposited butnot yet 2,000 collected or Credited by the Bank 6) Cheques issued but not yet = | 2,800 presented for payment (4) (a) Bank Charges not entered in in Cash Book 50 - Ab) Interest on overdraft chargeg by the bank 250 (5) Directly deposited by a customer inthe Bank 1,200 (6) Insurance Premium paidby 1,500 the Bank Total, 3.800 _ | 14,300 ‘Overdraft as per Cash Book (14,300-3,800) [—_— | 10,500 important Points— fe Overdraft whether as per Cash Book or Pass Book is always. (-) items, @ _Startingand Ending points are interchanged as compared ta Example No. 2, hence items and (-) are also interchanged. fe Here (-} items total is more as compared to (+) items total, therefore the difference inthe two balance isa negative items ic. overdrafts per Cash Book. Amended Cash Book Method Introduction : So far wehave studied the preparation Bank Reconcillation State- rment simply by reconciling the causes of differences between the Cash Book and Pass Book. In actual practice adjustments are done in the Cash Book by comparing the Bank column of Cash Book withthe Bunk Statement and after that: B.R, Statementis prepared, It is called Amended 10k Method, Procedure (1) Adjusted Cash Book is prpared starting with the Balance of the Cash Book ven in the question OG) Alleorstathaveboen commited inthe Cash Book wilhave tbe reife by passing adjusting entries in the Cash Book Usual or General Errors are (@) Overcasting or Undrcasting of Debit/ Credit Colurmn of Cash Fook (©) Cheques deposited or Issued but omitted to be entered in the Cash Book. (6) Incorrect amount (ifany) entered in the Cash Book. (@) Entries onthe incorrect side orn the wrong column of Cash Book, (©) Any amount recorded twice inthe Cash Book. 2(G3) Certsin amounts for which Bank hs debited our Ave will bereeorded on the Credit side of Cash Book. Such items are a) Interest changed by the bank on overdraft ete (6) Debits made by the bank forthe bank changes, commission et. (©) Direct payments made by the Bank on behalf ofthe A/c holder. {@) Cheques sent for collection but dishonoured by the bank. (4) Cash Book isthen balanced and the new Balance of the Cash Book istaken as the Starting point for preparing the BR. Statement Important "a _It should be noted that the following emis must not be recorded in the] | Amended Cash Book ve Cheques deposited into the Bank but not yet credited by the bank. ve Cheques Issued but yet not presented for payment, -e_Any wrong entry inihe Pass Book. EXAMPLES— ‘The Cash Book of Mr, Sharma showed a balance of & 3,560 as on 3 1" Dee. 20100 the Bank where as Pass Book showed a balance of 84,230 ‘Comparison ofthe Cash Book and Pass Book revealed the following. (1) The Banik has debited Mr. Sharma with 460, the annual premum of his life policy according to his standing instructions and 20-as Bank charges. (@) Mr. Sharma paid into the Bank cheques totaling 3,100 on Dec. 26. 2010 ‘of which those for 2,500 were collected in December. One cheque For 200 was retumced deshonoured on 2% Jan. 2011 (G) The Bank tas credited Mr, Sharma by 1,600, the preceeds ofa bill (4) Cash collected on 31" Dec. 2016 totalling % 850 was entered in the Cash ‘Book in the Bank column on the same date butbanked on 2.1.2011 (5) Mr. Sharma issued cheques totalling @ 2,300 in the month of Dec. out of ‘which sheques for 1000 have net boen presented for payment ill 31* Dec, SOLUTION Amended Cash Book (Bank Column only) as on 31" Dec. 2010 Reveipt side Payment side Particulars © | Pariculas @ To Balance bid 3,560 | ByDrawings 460 ‘To BIR (Proceeds ofaBill) | 1,600 | By Bank charges 20 By Balance cd. 4,680 5,160, 5,160,Bank Reconcilliation Statement as on 31” Dec, 2010 Particulars item ~item (Rs) (Rs) (1) Bolance as per Adjusted Cash Book (Dr) 4,680 (@) Cheques paid into the Bank but not Credited by Dec. 31, 2010 600 3100-2500) G) Cheques issued but not presented 1,000 ‘illdate (4) Cash collected entered in the 850 ‘Cash Book but not banked. Aill 31" Dee. Tor 5,080 1.450 ‘Balance as per Pass Book cy [4230 = (5680 -1,450) Points to Remember ‘@ Amended or adjusted Cash Book isstarted with the given balance of bankas per Cash Book, @ Closing Balance of the adjusted Cash Book isthe opening balance of Bank Reconciliation staterment. ‘e _Eniry forthe dishouner of the cheques of Rs, 200 isnot done. (@) Inthe Cash Book as its was dishamoured after31"*Dee, () InBank Reconcillation Statement itis included inthe adjustment (Rs, 3100 2500) Methodology Suggested Teachers are suggested to show the actual Bank Statement to students and the topic canbe explained through discussion and Project Method. 64