INTRODUCTION
In this chapter we will discuss how credit transactions recorded in the day books are posted to the accounts in the ledger. The ledger is the main book of account. It is in this book that the rule of double entry must be applied. At the end of the exercise of posting entries to ledger accounts, the accounts are closed and balances extracted in the form of a trial balance. The trial balance is then used to prepare the Income Statement and Balance sheet.
TOPICS
1. Preparing ledger accounts 2. Summary
LEARNING OBJECTIVES
After you have studied this chapter, you should be able to:
Understand how to apply the rule of double entry to transactions Post the entries in the day books to the ledger
1.0 PREPARING LEDGER ACCOUNT
With the guidelines in the preceding section we will use an exercise to illustrate how the rule of double entry is applied to posting transactions to the ledger. First we will handle trading
activities and later on other operational activities. For convenience sake we have reproduced the transactions and the day books we prepared in the previous chapter.
1.1 ILLUSTRATION
Fix-it, a retired engineer, received interest on his fixed deposit account of K 8 000 000 and opened a business bank account. He immediately withdrew K 3 000 000 for office use. VAT is
April 1. Sold goods on credit to Chisakaila K540 000 net.
April 5. Sold goods on credit to Ngosa K800 000 net. The customer is entitled to less 2 % prompt discount if payment is made within 14 days.
April 7. Ngosa returned goods, K200 000 net (He is entitled to prompt discount of 2%)
April 12. Purchased goods on credit from Kunda K282 000. The invoice stated a tax inclusive amount.
April 13. Received an invoice for the 10 ton truck bought on credit from L-Stone Motors K40 000 000 gross
April 13. Issued an invoice to Mulota K400 000 net.
April 13 Returned goods worth K42 600 to Kunda. This is a tax inclusive figure. April 15 Sold goods on credit to Mambwe K750 000 net.
April 17. We sent a credit note to Mambwe, K150 000, net
April 18. Purchased Goods on credit from Mwape K270 000 gross value.
April 19. Received a bill for electricity from Zam Hydropower. The total of the invoice was K320 000
April 19. Received a credit note from Mwape for K35 700 (gross amount). SALES DAY BOOK
SALES RETURNS DAY BOOK
DATE PARTICULARS FOLIO TOTAL VALUE ADDED TRADE OTHER
TAX RECEIVABLE RECEIVABLE
April K K K K 2005 1 Chisakaila 634 500.00 94 500.00 540 000.00 5 Ngosa 937 200.00 137 200.00 800 000.00 13 Mulota 470 000.00 70 000.00 400 000.00 15 Mambwe 881 250.00 131 250.00 750 000.00 TOTAL 2 922 950.00 432 950.00 2 490 000.00
DATE PARTICULARS FOLIO TOTAL VALUE
ADDED
TRADE OTHER
TAX RECEIVABLE RECEIVABLE
April K K K K
2005
7 Ngosa 234 300.00 34 300.00 200 000.00
17 Mambwe 176 250.00 26 250.00 150 000.00
PURCHASES DAY BOOK
PURCHASES RETURNS DAY BOOK
1.2 LEDGERS
Explanatory notes follow after all the accounts have been written. Note: All amounts on Debits and Credits are in Kwacha Currency.
TRADE RECEIVABLES
K K
Sales 2 922 950.00 Sales Returns
410 550.00
DATE PARTICULARS FOLIO TOTAL VALUE
ADDED TRADE OTHER
TAX PAYABLE PAYABLE
April K K K K 2005 12 Kunda 282 000.00 000.00 42 240 000.00 13 L-Stone Motors Ltd 40 000 000 . 00 40 000 000.00 18 Mwape 270 000.00 40 212.76 229 787.24 19 Zam Hydropower 320 000.00 320 000.00 TOTAL 40 872 000.00 82 212.76 469 787.24 40 320 000.00
DATE PARTICULARS FOLIO TOTAL VALUE
ADDED TRADE OTHER
TAX PAYABLE PAYABLE
April K K K K
2005
13 Kunda 42 600.00 6 344.68 36 255.32
19 Mwape 35 700.00 5 317.02 30 382.98
SALES Trade Receivables 2 490 000.00 SALES RETURNS Trade Receivables 350 000.00 TRADE PAYABLE
Purchases Returns 78 300.00 Purchases 552
000.00
OTHER PAYABLE - (Non Current Asset) Motor Vehicles 400 000.00
OTHER PAYABLE - (Electricity)
Electricity 320 000.00 PURCHASES Trade Payable 469 787.24 MOTOR VEHICLES Other Payable 40 000 000.00 ELECTRICITY Other Payable 320 000.00
VALUE ADDED TAX
Payables 82 212.76 Payables 11
661.70
Trade Receivable 60 550.00 Trade Receivable 432
1.3 COMMENTS
In the accounts above credit transactions have been posted to the ledger. What was
given/received were goods. The names of the outside entities were given (see the day books reproduced here also).
Sales on credit
The trade receivables account is debited with K 2 922 950.00 because it represents customers who received the goods. The sales account represents the business we are doing accounts for and it gave the goods. The credit is split between sales account and Value Added Tax account. The Trade receivables are debited with the gross amount because the customers are expected to pay the total amount of both the net value of goods and the Value Added Tax on them. The cash is eventually received the Value Added Tax becomes payable to the Govt whereas the net amount is kept by the business.
Sales Returns
The customers gave the goods they returned to us and so the trade receivable account is credited with the gross amount of K 410 550.00. We received the goods and the account representing our business, sales returns account, has been debited with the net amount whereas the associated tax is debited to the Value Added Tax account as amount not payable to the govt.
Purchases on credit
The term ‘purchases’ conventionally refer to goods bought for re-sale and so excludes purchases of non current assets.
The double entry can be represented in the following journal:
DR (K) CR(K)
Purchases 469 787.24
Value Added Tax 82 212.76
Electricity 320 000.00
Trade Payable (for goods) 552 000.00
Other Payable –(Electricity) 320 000.00
The amount in the other payables –electricity account is the gross amount because Value Added Tax on this purchase has been ignored for simplicity’s sake
The journal for the non current asset is : Debit the Motor Vehicles account (representing the business, or the activity done) and credit the Other Payable –Non Current asset account (representing the giver, L-Stone Motors). The cost of the motor vehicle is gross because the Value Added Tax component is not passed on to the customer. The vehicle is not for re-sale. 2.0 CHAPTER SUMMARY
By now you should have learnt that
The implication of the entity concept is important if you are to apply the rule of double entry correctly
Proper accounting entries are made by applying the rule of double entry to transactions without exception
Closing accounts is dependent on whether something is continuing about the fund in the account or not
What can continue on an account is either the physical existence of an asset or the future receipt/payment of cash.
EXERCISES
Refer to the Question bank at the end of Chapter 11.