Financial
Accounting
Self Balancing
System
Part A: Discussion of basic theories in regard to (1) definition
of Self Balancing System, (2) Objective of Self Balancing System, (3) Mechanism
of Self Balancing System, and (4) Examples of Additional Journal Entries required
to be made under the Self Balancing System.
Part B: Four Illustrations with Solutions.
Part A
Basic concept about Ledgers under the Double Entry Book-Keeping System:
There are three types of ledgers
maintained under the Double Entry System of book-keeping as follows:
1. Debtors’
Ledger (also called Sales Ledger)
All the debtors’ accounts are maintained in this
ledger by the names of the individual debtors.
2. Creditors’
Ledger (also called Purchase Ledger)
All the creditors’ accounts are maintained in this
ledger by the names of the individual creditors.
3. General
Ledger (also called Nominal Ledger)
All the other accounts are maintained in this ledger.
For example, Sales A/c, Purchase A/c, Sales Return A/c, Purchase Return A/c,
Cash A/c, Bank A/c, Salaries A/c, Rent A/c, Bad Debt A/c, Provision for Bad and
Doubtful A/c, Wages A/c, Commission A/c, Discount A/c, Insurance Premium A/c,
Depreciation A/c, Capital A/c, Drawings A/c, Plant and Machinery A/c, Land and
Building A/c, Furniture and Fixture A/c, Investment A/c, etc.
Definition
of Self Balancing System:
Self Balancing System is a system whereby separate
Trial Balance can be prepared for each of the above three ledgers.
Objective of Self Balancing System:
Under the Self Balancing System, the objective is to
prepare the Trial Balances separately for the Debtors’ Ledger and the
Creditors’ Ledger in addition to the Trial Balance for the entire business
prepared taking all the ledger accounts into consideration following the usual
Double-Entry System of Book-Keeping.
Mechanism of Self Balancing System:
In order to prepare separate Trial Balances for the Debtors’ Ledger and
the Creditors’ Ledger, four new accounts are opened in different ledgers as
follows:
1.
General Ledger Adjustment A/c in Debtors’ Ledger (GLA A/c in DL),
2.
General Ledger Adjustment A/c in Creditors’ Ledger (GLA A/c in CL),
3.
Debtors’ Ledger Adjustment A/c in General Ledger (DLA A/c in GL), and
4.
Creditors’ Ledger Adjustment A/c in General Ledger (CLA A/c in GL).
Examples of Additional J.E. under self balancing
system for different transactions:
|
1.
Transaction: |
|
Goods sold on credit for Rs 60,000 |
|
J.E. under Double-Entry System: |
|
Debtor A/c
Dr Rs 60,000 |
|
To Sales A/c Rs 60,000 |
|
J.E. under Self Balancing System: |
|
DLA in GL Dr
Rs 60,000 |
|
To GLA in DL
Rs 60,000 |
|
2.
Transaction: |
|
Goods purchased on credit for Rs 40,000 |
|
J.E. under Double-Entry System: |
|
Purchase A/c
Dr Rs 40,000 |
|
To Creditor A/c
Rs 40,000 |
|
J.E. under Self Balancing System: |
|
GLA in CL Dr
Rs 40,000 |
|
To CLA in GL
Rs 40,000 |
|
3.
Transaction: |
|
Cash received from debtor Rs 30,000 |
|
J.E. under Double-Entry System: |
|
Cash A/c
Dr Rs 30,000 |
|
To Debtor A/c
Rs 30,000 |
|
J.E. under Self Balancing System: |
|
GLA in DL Dr
Rs 30,000 |
|
To DLA in GL
Rs 30,000 |
|
4.
Transaction: |
|
Cash paid to creditor Rs 20,000 |
|
J.E. under Double-Entry System: |
|
Creditor A/c
Dr Rs 20,000 |
|
To Cash A/c
Rs 20,000 |
|
J.E. under Self Balancing System: |
|
CLA in GL Dr
Rs 20,000 |
|
To GLA in CL
Rs 20,000 |
|
5.
Transaction: |
|
Goods returned from debtor Rs 5,000 |
|
J.E. under Double-Entry System: |
|
Return Inward A/c
Dr Rs 5,000 |
|
To Debtor A/c Rs 5,000 |
|
J.E. under Self Balancing System: |
|
GLA in DL Dr
Rs 5,000 |
|
To DLA in GL
Rs 5,000 |
|
6.
Transaction: |
|
Goods returned to creditor Rs 2,000 |
|
J.E. under Double-Entry System: |
|
Creditor A/c
Dr Rs 2,000 |
|
To Return Outward A/c Rs 2,000 |
|
J.E. under Self Balancing System: |
|
CLA in GL Dr Rs
2,000 |
|
To GLA in CL
Rs 2,000 |
|
7.
Transaction: |
|
Discount allowed to debtor Rs 1,000 |
|
J.E. under Double-Entry System: |
|
Discount Allowed A/c Dr
Rs 1,000 |
|
To Debtor A/c Rs 1,000 |
|
J.E. under Self Balancing System: |
|
GLA in DL Dr
Rs 1,000 |
|
To DLA in GL
Rs 1,000 |
|
8.
Transaction: |
|
Discount received from creditor Rs 500 |
|
J.E. under Double-Entry System: |
|
Creditor A/c
Dr
Rs 500 |
|
To Discount Received A/c Rs
500 |
|
J.E. under Self Balancing System: |
|
CLA in GL Dr
Rs 500 |
|
To GLA in CL
Rs 500 |
|
9.
Transaction: |
|
B/R received from debtor Rs 10,000 |
|
J.E. under Double-Entry System: |
|
B/R A/c
Dr Rs 10,000 |
|
To Debtor A/c
Rs 10,000 |
|
J.E. under Self Balancing System: |
|
GLA in DL
Dr Rs 10,000 |
|
To DLA in GL Rs 10,000 |
|
10.
Transaction: |
|
B/P accepted and sent to creditor Rs 5,000 |
|
J.E. under Double-Entry System: |
|
Creditor A/c
Dr Rs 5,000 |
|
To B/P A/c Rs 5,000 |
|
J.E. under Self Balancing System: |
|
CLA in GL Dr
Rs 5,000 |
|
To GLA in CL
Rs 5,000 |
|
11.
Transaction: |
|
Bad debt Rs 4,000 |
|
J.E. under Double-Entry System: |
|
Bad Debt A/c
Dr Rs 4,000 |
|
To Debtor A/c Rs 4,000 |
|
J.E. under Self Balancing System: |
|
GLA in DL Dr
Rs 4,000 |
|
To DLA in GL
Rs 4,000 |
|
12.
Transaction: |
|
Set off between debtors and creditors Rs 6,000 |
|
J.E. under Double-Entry System: |
|
Creditor A/c
Dr Rs 6,000 |
|
To Debtor A/c Rs 6,000 |
|
J.E. under Self Balancing System: |
|
CLA in GL Dr
Rs 6,000 |
|
To GLA in CL
Rs 6,000 |
|
GLA in DL Dr
Rs 6,000 |
|
To DLA in GL
Rs 6,000 |
Following transactions are not relevant under the
self-balancing system. In other words, only regular journal entries will be
made for these transactions under the self-balancing system as made in the double
entry system. No additional journal entries are required to be made for these
transactions under the self-balancing system. Actually, additional
journal entries are required to be made under self balancing system only when a
transaction involves debtors or creditors or both.
Transactions not relevant under the self balancing
system:
1.
Any cash purchase or cash sales.
2.
Reserve for bad debts.
3.
Provision for bad and doubtful debts.
4.
Recovery of bad debt.
5.
Bills Payable matured and payment made.
6.
Bills Receivable matured and payment received.
7.
Bills Receivable discounted with bank.
8.
Trade discount allowed or received.
Part B
Financial Accounting
Self Balancing System
Selected Problems
Illustration: 1
From the following
information prepare
(1)
Debtors Ledger Adjustment Account in the
General Ledger, and
(2)
General Ledger Adjustment Account in the
Debtors Ledger.
|
Particulars |
Rs |
|
Op. Bal. of
Sundry Drs. (Debit) |
40,000 |
|
Op. Bal. of
Sundry Drs. (Credit) |
2,000 |
|
Cash and cheques
receipts |
1,60,000 |
|
Credit sales as
Sales Day Book |
2,00,000 |
|
Discount allowed |
6,000 |
|
Returns inward |
4,000 |
|
Bad debts |
3,000 |
|
Bills receivable
received |
20,000 |
|
Bills receivable
discounted |
2,000 |
|
Provision for bad
debts |
2,000 |
|
Cl. Bal. of
Sundry Drs. (Credit) |
6,000 |
|
Transfer from
Drs. Ledger to Crs. Ledger |
1,000 |
|
Transfer from
Crs. Ledger to Drs. Ledger |
1,200 |
Illustration:
2
Prepare the
Creditors Ledger Adjustment Account as it would appear in General Ledger and
General Ledger Adjustment Account as it would appear in Creditors Ledger for
the year ended 31st March, 2013 from the following particulars.
|
Particulars |
Rs |
|
Sundry Creditors as
on 1.4.2012 (Cr.) |
10,000 |
|
Sundry Creditors
as on 1.4.2012 (Dr.) |
1,000 |
|
Purchases
(including cash purchase of Rs 10,000) |
50,000 |
|
Returns outward |
2,000 |
|
Cash paid to
creditors |
20,000 |
|
Discount allowed
by creditors |
3,000 |
|
Trade discount |
1,000 |
|
Bills receivable
endorsed to creditors |
2,000 |
|
Bills payable
issued during the year |
4,000 |
|
Bills payable
dishonoured |
2,000 |
|
Bills payable
renewed |
1,000 |
|
Interest on bills
payable renewed |
100 |
|
Sundry charges
paid for dishonour of bills payable |
100 |
|
Total of set-off
in Debtors Ledger |
3,000 |
|
Sundry Creditors
as on 31.3.2013 (Dr.) |
4,000 |
Illustration:
3
From the following
particulars, which have been extracted from the book of Ghanshyam & Co., for the
year ended 31.12.2013, prepare General Ledger Adjustment Account in the Creditors
ledger and Debtors Ledger Adjustment Account in the General Ledger.
|
Particulars |
Rs |
|
Debtors balance
as on 1.1.2013 (Dr.) |
20,000 |
|
Debtors balance
as on 1.1.2013 (Cr.) |
300 |
|
Creditors balance
as on 1.1.2013 (Dr.) |
200 |
|
Creditors balance
as on 1.1.2013 (Cr.) |
15,000 |
|
Purchases
(including cash Rs 4,000) |
12,000 |
|
Sales (including
cash Rs 6,000) |
25,000 |
|
Cash paid to
suppliers in full settlement of claims of Rs 9,000 |
8,500 |
|
Cash received
from customers in full settlement of claims of Rs 15,000 |
14,100 |
|
B/P accepted
(including renewals) |
2,000 |
|
B/P withdrawn
upon renewals |
500 |
|
Interest on bills
payable renewed |
20 |
|
Bills receivable
received |
3,000 |
|
Bills receivable
endorsed |
800 |
|
B/R as endorsed
dishonoured |
300 |
|
Bills receivable discounted |
1,400 |
|
Bills receivable dishonoured |
400 |
|
Interest charged
on dishonoured bills |
30 |
|
Transfer from one
ledger to another ledger |
600 |
|
Returns outward |
700 |
|
Debtors bal. as
on 31.12.2013 (Cr.) |
450 |
|
Creditors bal. as
on 31.12.2013 (Cr.) |
10,870 |
Illustration:
4
The following
information is available from the books of Dadabhoy Traders for the period 1st
Jan. to 31st March, 2013:
(1)
Total Sales amounted to Rs 70,000 including
the sale of old furniture for Rs 10,000 (book value is Rs 12,300). The total cash
sales were 80% less than total credit sales.
(2)
Cash collection from Debtors amounted to
60% of the aggregate of the opening Debtors and Credit sales for the period. Discount
allowed to them amounted to Rs 2,600.
(3)
Bills receivable drawn during the period
totalled Rs 7,000 of which bills amounting to Rs 3,000 were endorsed in favour
of suppliers. Out of these endorsed bills, a Bill receivable for Rs 1,600 was
dishonoured for non-payment, as the party became insolvent and his estate
realised nothing.
(4)
Cheques received from customer of Rs 5,000
were dishonoured; a sum of Rs 500 is irrecoverable.
(5)
Bad Debts written-off in the earlier
year realised Rs 2,500.
(6)
Sundry debtors on 1st January
stood at Rs 40,000.
You are required to
show the Debtors Ledger Adjustment Account in the General Ledger.
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