- Definition
- Rules of Recording Transactions in Ledger Accounts
- The Concept of Double Entry
- Recording Business Transaction In The Ledger Accounts.
- Balancing Ledger Accounts
- Trial Balance
- Types of Ledgers
- Past KCSE Questions on the Topic
Definition
- An account (A/C) is a chronological record of all the transactions affecting a particular item.
- The book of accounts where the transactions are recorded is referred to as the ledger.
- All transactions pertaining to a particular item are recorded in one account, and all the accounts are kept in the ledger. An account has the shape of capital letter “T “.
- An account has three basic features:
- Title
- This is the name of the account, usually centered on the top of the account. - Debit side
- This is the name given to the left – hand side of an account and it is usually abbreviated “Dr” - Credit side
- This is the name given to the right- hand side and it is abbreviated “Cr”
- Title
Note;
- Each side of an account has four columns:
- Date column in which the date of the transaction is recorded.
- Particular (details) column in which short description of the transaction is recorded.
- Folio column which is for cross referencing
- The amounts column in which the figures in money terms are recorded.
- The pages of a ledger are called folios.
- The accounts in the ledger are called ledger accounts.
Rules of Recording Transactions in Ledger Accounts
- Transactions resulting in increased in a particular item are recorded on one side of the account while those resulting in decrease are recorded on the other side as follows;
Assets
- An increase in asset is recorded on the debit side (debited) while a decrease is recorded on the credit side (credited).
Example
- Buying a motor car has an effect of increasing assets and would be recorded in the motor car account on the debit side.
- Cash paid out in buying the car reduces the assest cash and would be credited in the cash account.
Liability
- An increase in liablity is credited while a decrease is debited.
Example
- A payment to a creditor has the effect of reducing liablities and its debited to the creditors account.
- If goods are bought on credit they will have the effects of increasing the creditors and would be recorded on the credit side of the creditors account.
Capital
- An increase in capital would be recorded on the credit side of the capital account while the decrease in capital would be recorded on the debit side.
Example
- If the owners of the business bring money from their personal belongings to the business this has the effect of increasing capital and would then be credited in the capital account.
Expenses
- These are costs incurred in running a business such as salaries and insurance. An increase in expenses is recorded on the debit side of the affected account while a decrease would be credited.
Example
- Payments of insurance premium would increase the insurance expense and would therefore be debited in the insurance expense accounts.
Revenues
- Revenues refers to incomes earned from sources other than the normal trading activities.
- An increase in a revenue is credited in the affected revenue account while a decrease would be debited.
Example
- Discounts received would have the effect of increasing the discounts revenues and would therefore be credited in the discounts received account.
The Concept of Double Entry
- Book keeping is based on the principle of country entry. For example, for every debit made there must be a corresponding credit entry.
- In other words ,for every transaction, there is an account to be debited and an account to be credited.
Recording Business Transaction In The Ledger Accounts.
- The following steps are followed when recording transactions in the ledger:
Step 1
- Take each transaction one by one
Step 2
- Check the items that are affected by the transactions, name them and every transaction must affect at least two items.
Step 3
- Classify each of the affected items as either assets, liability, capital, expenses or revenue.
Step 4
- Determine whether each of the items affected has increased or decreased. One item may increase while the other decrease or both increases or both decreases.
Step 5
- Decide the side of the account on which to make the record. This is whether to debit or to credit.
Note
Once the account to be debited has been identified, the other one will obviously need to be credited and vice–versa.
Example
Record the following transactions in ledger accounts.
- Received Ksh. 20,000 cash in respect of rent paid
- Purchased goods worth 30,000 on credit from crown traders.
Solution
| Cash Account | |
| Dr. | Cr. |
| Kshs. 20,00 | |
| Rent Account | |
| Dr. | Cr. |
| Kshs. 20,00 | |
| Purchases Account | |
| Dr. | Cr. |
| Kshs. 20,00 | Kshs. 20,00 |
| Creditors Account | |
| Dr. | Cr. |
| Kshs. 30,000 | |
Example
1st February 20 3 Mathai started a business with sh 70,000 cash.
- Accounts affected
- cash in hand a/c
- Capital a/c - Nature of the a/c
– Cash in hand a/c – Asset
- Capital a/c – (special liability) - Effect
- Cash in hand increased by sh 70,000
- Capital increased by sh 70,000 - Action
- Debit cash in hand a/c with sh 70,000
- Credit Capital a/c with sh 70,000
4th February purchased office equipment for sh 20,000 in cash
- Accounts affected
- Office equipment a/c
- Cash in hand a/c - Nature of the a/c
– Office equipment – Asset a/c
- Cash in hand – Asset a/c - Effect
- Equipment increased by sh 20,000
- Cash in hand reduced by sh 20,000 - Action
- Debit equipment a/c with sh 20,000
- Credit cash in hand a/c with sh 20,000
6th February purchased motor vehicle for sh 350,000 on credit from Chama motors on credit
- Accounts affected
– Motor vehicle a/c
- Creditors ; Chama motors a/c - Nature of the a/c
– Motor vehicle a/c – Asset a/c
Creditor; Chama motors – Liabilities a/c - Effect
- Motor vehicle increased by sh 350,000
- Creditor ; Chama motors increased by sh 350,000 - Action
- Debit motor vehicle a/c by sh 350,000
- Credit creditor ; Chama motor a/c with sh 350,000
14th February opened a bank a/c and deposit sh 40,000 from cash till.
- Accounts affected
– Cash at Bank a/c
- Cash in hand a/c - Nature of the a/c
– Cash at Bank a/c – Asset a/c
- Cash in Hand a/c – Asset a/c - Effect
- Cash at Bank increased by sh 40,000
- Cash in Hand reduced by sh 40,000 - Action
- Debit Cash at Bank a/c with sh 40,000
- Credit ; Cash in Hand a/c with sh 40,000
Solution
| Capital Account | ||||||||
| Dr. | Cr. | |||||||
| Date | particulars | Folio | Amount Sh |
Date | Particulars | Folio | Amount Sh |
|
| 20_3 Feb 1 |
cash in hand | 70,000 | ||||||
| Cash in Hand Account | ||||||||
| Dr. | Cr. | |||||||
| Date | particulars | Folio | Amount Sh |
Date | Particulars | Folio | Amount Sh |
|
| 20_3 Feb 1 |
capital | 70,000 |
20_3 |
cash in hand Cash at bank |
20,000 40,000 |
|||
| Office Equipment Account | ||||||||
| Dr. | Cr. | |||||||
| Date | particulars | Folio | Amount Sh |
Date | Particulars | Folio | Amount Sh |
|
| 20_3 Feb 4 |
Cash in hand | 20,000 |
|
|
||||
| Motor Vehicle Account | ||||||||
| Dr. | Cr. | |||||||
| Date | particulars | Folio | Amount Sh |
Date | Particulars | Folio | Amount Sh |
|
| 20_3 Feb 6 |
Chama motors | 350,000 |
|
|
||||
| Creditors Chama Motors Account | ||||||||
| Dr. | Cr. | |||||||
| Date | particulars | Folio | Amount Sh |
Date | Particulars | Folio | Amount Sh |
|
| 20_3 Feb 6 |
motor vehicle | 350,000 | ||||||
| Cash at Bank Account | ||||||||
| Dr. | Cr. | |||||||
| Date | particulars | Folio | Amount Sh |
Date | Particulars | Folio | Amount Sh |
|
| 20_3 Feb 14 |
Cash in hand | 350,000 | ||||||
Recording of Stock In Ledger Accounts
- Increase and reduction in stock are not recorded in the stock account, but in other accounts.
Increase In Stock
- Stock may increase due to either of the following two causes:
- Purchase of more goods.
- Customers returning goods previously sold to them
Reduction In Stock
- Assuming that there is no wastage or losses, stock may reduce due to either:
- Sale of goods.
- Goods previously bought being returned by the business to the suppliers.
Purchase of Goods
- Purchase of stock would increase the asset stock.This would be recorded in the purchases account instead of stock a/c.
- Only those goods that are bought for purpose of resale are recorded in the purchases account.Stock may be recorded either in cash or on credit.
Purchase of Stock on Credit
- Purchase of stock on credit would increase the asset stock and debited in purchases a/c and the liability creditor is increased and credited on Creditors a/c Biashara Stores which is created.
Sale of Stock
- Sale of stock would reduce the asset stock and would be recorded in the sales account.
- This is an account in which goods previously bought for resale are recorded when they are sold.
Sale of stock for cash
- When stock are sold in cash, the asset cash is increased and debited on cash account while the asset stock is reduced and credited on sales account.
Sale of stock on credit
- When stock are sold on credit, the asset debtor is increased and a debtor account is created and debited while the asset stock is reduced and credited on the sales account.
Purchase Returns
- They are goods that were previously bought that are returned to the supplies. Goods returned to the suppliers are also called return outwards and they are recorded in purchase returns or returns outwards account.
Sales Returns
- These are goods that were previously sold that are returned to the business by customers.
- Goods returned by customers are also referred to as returns inwards and recorded in sales returns account.
- Closing stock is obtained from actual stock taking at the end of the trading period and the amount obtained will be recorded in stock account as the closing stock. The closing stock is the opening stock for the next accounting period.
Recording of Expenses in the Ledger Account
- Payments for expense is recorded in the particular expense account such as stationery, wages, advertising and insurance. For example payment made on electricity bill increases electricity expense and the transaction is recorded by debiting electricity expense account. While the cash asset is reduced and credited on the cash account with sh 300.
Recording of Revenues in the Ledger Accounts
- Revenue are income obtained and they include, commission received, rent received and discount received. Receipt of a revenue is credited in the particular income account.
Recording of Drawings in the ledger Account
- Assets taken out inform of goods or cash are referred to us drawings.
- The transaction on drawings is recorded as follows:
- The drawings account is debited with the value of the assets withdrawn from the business. While the cash account reduces and its credited.
Balancing Ledger Accounts
- A ledger account is balanced by finding the differences between the two totals of the debit and credit sides of an account. If the debit side total is more than the credit side total, the difference is called a debit balance.
- If the credit side total exceeded the debit side total, the difference would be called a credit balance.
Steps Followed When Balancing an Account.
- Find the total on each side.
- Subtract the total of the smaller side from the total of the bigger side.
- Insert the difference (account balance) on the side with the smaller total as a balance carried down.( c/d ) to make the two sides equal.
- Confirm that the totals of the two sides are equal by writing the totals at the same level and double underscoring them.
- The account balance should be recorded on the opposite side below the totals as balance brought down ( b/d)
Note;
- Balance carried forward ( c/f) and balance brought forward ( b/f) may be used instead of balance carried down and balance brought down respectively. However consistency should be maintained.
- If an account has one entry, it is not necessary to insert the total as the figure is the total
Example
Record the following transaction in the affected accounts and balance them off on 10th January 2015. (10mks)
2015, January
1: Start business with furniture worth Sh.130,000
2: Bought goods for Sh.50,000 on credit from Nyamwea.
4: Sold stock of goods for Sh.40,000 cash
5: Opened a bank account and deposited Sh.20,000 from cash till.
6: Obtained a loan from K.I.E Sh.30,000 by cheque.
7: Paid Nyamwea Sh.30.000 by cheque.
8 : Withdraw cash Sh.60,000 from bank for office use.
Solution
| Capital A/C√ | |
| Dr | Cr |
| 2015 Sh. January 10 Balance c/d 130,000 |
2015 Sh January 1 Furniture 130,000 January 10 Balance b/d 130,000 |
| Furniture A/C | |
| Dr | Cr |
| 2015 Sh. January 1 Capital 130,000 January 10 Balance b/d 130,000 |
2015 Sh January 10 Balance b/d 130,000 130,000 |
| Purchase A/C | |
| Dr | Cr |
| 2015 Sh. January 2 Nywamwea 50,000 January 10 Balance b/d 50,000 |
2015 Sh January 10 Balance b/d 50,000 |
| Sales A/C | |
| Dr | Cr |
| 2015 Sh. January 10 Balance c/d 40,000 |
2015 Sh January 4 Cash 40,000 January 10 Balance b/d 40,000 |
| Bank A/C | |
| Dr | Cr |
| 2015 Sh. January 5 Cash 20,000 January 6 Loans(K.I.E) 30,000 January 10 Balance c/d 40,000 90,000 |
2015 Sh January 7 Nyamwea 30,000 January 9 Cash 60,000 90,000 January 10 Balance b/d 40,000 |
| Cash A/C | |
| Dr | Cr |
| 2015 Sh. January 4 Sales 40,000 January 9 Bank 60,000 100,000 January 10 Balance b/d 80,000 |
2015 Sh January 5 Bank 20,000 January 10 Balance b/d 80,000 100,000 |
| Loan from K.I.E. | |
| Dr | Cr |
| 2015 Sh. January 10 Balance c/d 60,000 60,000 |
2015 Sh January 6 Bank 60,000 January 10 Balance b/d 60,000 |
| Nywamwea A/C | |
| Dr | Cr |
| 2015 Sh. January 7 Bank 30,000 January 7 Balance c/d 20,000 50,000 |
2015 Sh January 2 Purchase 50,000 January 10 Balance b/d 20,000 |
Note;
- An account with b/d on the debit side is said to have a debit balance and the one with a balance b/d on the credit side has a credit balance.
Uses of Ledger Accounts
- Shows amount by which a particular item increases or decreases.
- Enables the computation of the balance of an account at any time.
- It can be used for reference.
Trial Balance
- A Trial balance is a statement prepared at a particular date showing all the debit balances in one column and all the credit balances in another column.
- To check on both the book keeping and the arithmetic accuracy of the ledger accounts. A trial balance is prepared using the account balances.
- After the various debit and credit balances are listed in the trial balance, the total of each side must balance. If the two sides are not equal then it means that there is an error or errors that may cause a trial balance not to balance.
- Some of these errors include:
- A transaction was recorded on only one account.
- Different amounts for the same transaction might have been entered in the accounts.
- Transferring (posting) a wrong balance to the trial balance.
- Failure to post a balance from the ledger account to the trial balance.
- Posting a balance to the wrong side of the trial balance.
- Recording a transaction on the same side of the affected accounts.
- Arithmetical mistakes might have been made when balancing the ledger accounts.
- Arithmetical errors in balancing the trial balance.
Rules for Preparation of Trial Balance
- While preparation of trial balances we must take care of the following rules/points
- The balances of the following accounts are always found on the debit column of the trial balance
- Assets
- Expense Accounts
- Drawings Account
- Cash Balance
- Bank Balance
- Any losses
- And the following balances are placed on the credit column of the trial balance
- Liabilities
- Income Accounts
- Capital Account
- Profits
- The balances of the following accounts are always found on the debit column of the trial balance
Purpose of a Trial Balance
- Checking the accuracy in the ledger accounts.
- The trial balance summarizes the information in the ledger accounts.
- Facilitates preparation of final account.
- A quick source of information for anyone who want to know the balance in any account.
Limitations of a Trial Balance
- Error of omissions
- No record/ entry of transaction is made in the ledger accounts - Error of commission
- A transaction is recorded in the wrong account but of the same class with the correct account in which the entry should have been made (NB: Accept an illustration as explanation) - Error of principle
- A transaction is recorded in the wrong account and also of the wrong class from that in which the entry should have been made (NB accept an illustration as explanation) - Error of compensation
- The effect of the error in the different accounts is such that it cancels out the other. (NB Accept on illustration as explanation) - Error of complete reversal of entries
- Where an account to be debited is credited and the one to be credited is debited - Error of original entry
- Where transposed figures of the correct amount are entered as debit and credit entries in the correct accounts
A TRIAL BALANCE
| Details ( Account title ) | Dr | Cr |
| Land and buildings | 50,000 | |
| Capital | 94,000 | |
| Plant and Machinery | 20,000 | |
| Motor Vehicles | 30,000 | |
| 10 year Bank loans | 20,000 | |
| 6 year ICDC loan | 10,000 | |
| Stock | 10,000 | |
| Debtors | 6,000 | |
| Creditors | 7,000 | |
| Rent owing | 1,000 | |
| Cash at bank | 10,000 | |
| Cash in hand | 2,000 | |
| Drawings | 4,000 | |
| TOTALS | 132,000 | 132,000 |
Types of Ledgers
- Sales ledger(Debtors Ledger)
- Contains account of individual debtors - Purchase ledger (creditors ledger)
- Contains accounts of creditors - The Cash Book
- Contains cash in hand and cash in bank - Nominal ledger
- Contains nominal accounts such as rent expenses account and commission income account - Private ledger
- Contains private accounts and balance sheet can also be kept here. - The general ledger
- Contains all the other accounts that are not kept in any account e.g building,stock etc.
Past KCSE Questions on the Topic
- The following trial balance of Onyati was incorrectly prepared in 30th June 1995. Prepare the correct Trial Balance.
Dr. Cr.
Capital 99,600 30,520
Debtors
Creditors 25,670 80,000
Motor vehicles
Cash 2,500
Stock 140,250 110,520 - Prepare a trial balance from the following balances extracted from the books of San enterprises on 30th April, 1995
Shs.
Capital 947,000
Cash 74,000
Premises 870,000
Debtors 36,520
Creditors 45,300
Stock 12,250 (4 marks) - The following account balances were obtained from the books of Kiboko Traders on 30th June 1999.
Motor vehicle 240,000
Current liabilities 440,000
Land + building 200,000
Current assets 420,000
Furniture 60,000
Capital 480,000
Prepare a trial balance for Kiboko traders as at 30th June 1999. - The following balances were extracted from the books of Dipa traders as at 31st
Shs
Buildings 100,000
Debtors 54,000
Capital 136,000
Sales 85,000
Purchases 48,000
Stock Jan 2000 25, 500
Creditors 37, 500
General expenses 31, 800
Bank overdrafts 2,500
Prepare a trial balance as at 31 December 2000 (5 mks) - The following balances were obtained from the books of Rah Traders
Shs.
Opening stock 50, 000
Sales 360,000
Gross profit 25% of sales
Closing stock 70,000
Calculate- Cost of goods sold
- Rate of stock turnover (5 marks)
- Enter each of the following transactions relating to Jokin Traders in the relevant 'T' A/c
- Deposited cash in hand shs. 5,000 into bank
- Bought a motor vehicle on credit on for 250,000 from Raji Traders
- Paid salaries sh. 2, 400 by cheque (3 marks)
- Balance the following ledger accounts. (5 marks)
Cash Account Dr Cr Shs.
Balance b/d 45700
Sales 35000Shs.
Salaries 4800
purchases 2000
Capital Account Dr Cr Shs. Shs.
Balance 20700
Salaries Account Dr Cr Shs.
Cash 4800Shs.
Capital Account Dr Cr Shs.
Balance 2000
Cash 2000Shs.
Sales Account Dr Cr Shs.
Balance b/d 45700
Sales 35000Shs.
Balance b/d 45700
Cash 35000 - For each of the following transactions state the account to be debited and credited. (4 marks)
Transactions A/c debited A/c credited- paid a creditor from private source
- proprietorship brought in cash from private sources
- Bought goods and paid by cheque
- Proprietor withdrew cash for personal use
- Record the following transactions in ledger accounts.
- Received Ksh. 20,000 cash in respect of rent paid
- Purchased goods worth 30,000 on credit from crown traders.
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