Fa1 Notes Chapter Four PDF

CHAPTER FOUR:COMPLETING LEDGER
ACCOUNTS AND THE FINANCIAL

STATEMENTS
Balancing ledger accounts
Steps to follow when balancing the accounts
1. Calculating totals for both sides

2. Find the difference
3. Insert a difference as balance carried forward on the lower sides
4. Check that the totals are now the same
5. Insert the c/d as the b/d on the bigger side
Trial balance; This is a list ledger accounts shown in the debit and credit columns.
Trial balance as at 31 December 20X6
Dr Cr
Name of account $ $
Sales X
Purchases X
Receivables X
Payables X
Capital X
–––– ––––
X X
Steps to follow when drawing trial balance;
1. Collect together the ledger

2. Balance the ledger accounts
3. Collect balances on the ledger accounts
The trial balance will balance if for every debit made, an equal credit entry was also made
Journal;
A book of prime entry which keeps a record of unusual movements between the accounts. They are
used to record;
 Adjustments to the final accounts
 Acquisition and disposal of non current assets
 Opening balances for statements of financial position items
 Correction of errors.
Debit Credit
Date Debit(a/c to be debited) x
Credit(a/c to be credited) x
Being……( Narrative of journal)
Narration indicates the purpose & authority of a transaction recorded in the journal.
Journals are also used for correction of errors made when recording ledger accounts.
 Errors where the trial balance still balances(DR=CR)

 Errors where the trial balance does not balance(DR CR)
Six errors not revealed by the trial balance:
1.Error of Omission; A transaction have been completely omitted from the accounting records
Example-Payment of electricity bill was not recorded.
2.Error of commission; A transaction has been posted in the correct ledger but in the wrong
account.
Example-Credit purchase of goods from Joy has been credited to Joyce account , another supplier.
3.Error of principle; A transaction has conceptually been recorded incorrectly

Example-Cost of a new motor vehicle of M5000 has been debited to Motor expenses account.
4.Compensating error-Two different errors made has coincidentally cancelled out each other
Example-The balance on the receivables account has been overstated by M200,the cash .sale of
M1000 has also been mistakenly recorded as M1200.
5.Error of original entry; The correct double entry has been made but with the wrong amount.
Example-M2500 cash purchase of machinery has been debited to machinery and credited to cash
with M2050.
6.Reversal of entries; The correct amount has been posted to the correct accounts but on the wring
sides.
Example-A cash sale of M200 has been debited to sales and credited to cash
Six errors exposed by the trial balance:

1.Single sided entry- a debit entry has been made but no correspondence credit entry has been
made, or vice versa.
2.Debit and credit entries have been made but at different values
3.An incorrect addition has been made in any individual ledger accounts
4.Opening balances have not been brought down
Extraction error-the balance in the trial balance is different from the balance in the relevant account.
Suspense account
This is a temporary account used to record difference in the trail balance.
It is only used to correct errors that are exposed by the trail balance.
For correction of errors ,ask yourself the following questions;

 What wrong entry has been made?
 What entry should have been made?
 What correction is necessary?
Financial Statements
This are the books of accounts which shows and reflects the financial performance of the business,
as well as its financial position.
Profit and Loss and other comprehensive income account; It assesses the business financial
performance .It comprises of
Incomes; Revenue earned by the business.
Expenditure; Costs incurred in the process of generating income
Financial Position; it shows the financial position of the business by showing the list of its assets and
liabilities including the Proprietors’ capital and any profits earned at any point in time
Assets; Resources used in generating the entity’s income
Liabilities; amounts owed by the business to the third partied

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CHAPTER FOUR:COMPLETING LEDGER

ACCOUNTS AND THE FINANCIAL

Steps to follow when balancing the accounts

1. Calculating totals for both sides

Trial balance as at 31 December 20X6

Steps to follow when drawing trial balance;

1. Collect together the ledger

 Errors where the trial balance still balances(DR=CR)

Six errors not revealed by the trial balance:

3.Error of principle; A transaction has conceptually been recorded incorrectly

Six errors exposed by the trial balance:

4.Opening balances have not been brought down

For correction of errors ,ask yourself the following questions;

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