CHAPTER 10
SELF-BALANCING LEDGERS AND SECTIONAL BALANCING
WHERE numerous Ledgers are utilized by a concern, it will naturally follow that it may be of the utmost difficulty to trace book-keeping errors which disturb the agreement of the Trial Balance and consequently impede the construction of the Final Accounts. To minimize the effort and time required to locate errors, the system of Self-balancing Ledgers, also known as Sectional Balancing, is utilized. The two terms are often employed synonymously, but strictly the former applies to one method only (see footnote p. 1004). The advantages of Sectional Balancing are:
1. It provides a proof of the total arithmetical accuracy of the hook- keeping entries in any Ledger. It must be appreciated, however, that the proof of a Ledger by means of sectional balancing provides only such proof of its accuracy as does the Trial Balance of the accuracy of the complete set of books. Thus, compensating errors, posting to the correct side of the Ledger but to wrong accounts, and errors in the books of original entry continued through the Ledgers, will not be disclosed.
2. In conjunction with other precautionary measures employed in a system of internal check, it may serve as a check on the honesty of the Ledger-keepers,
3. It is of material assistance in the location of errors which, causing the books to be out of balance, may impede the preparation of the Final Accounts and may take a considerable amount of time to discover. particularly where there are many Ledgers in use, as the Ledger in which the error is located may not be checked until all the others have been scrutinized.
4. The preparation of draft annual or periodical accounts pending the extraction of the schedules of debtors and creditors may be proceeded with.
The Construction of Total or Adjustment Accounts. The systems desig nated by these titles are extremely simple in principle, though it must be admitted that care and patience are demanded where there are numerous Ledgers in use.
A total account is a replica in summarized form of all the detailed entries in the Ledger to which it refers. The balance of such Account should be similar to the total of the detailed balances of the Ledger. Should the balance of the Total Account not agree with the total of the individual balances in the Ledger, it will be known that a mistake has been made in the compilation of the Total Account or that errors have been made in the casting of books of original entry or in the posting of the individual items to the Ledger.
The practice of Sectional Balancing is generally confined to the Purch- ases and Sales Ledgers although theoretically the principle may he ex- tended to all the Ledgers.
Analysis of Subsidiary Books or Journals. It is essential, where it is desired to construct Total Accounts, that every entry in the Ledger shall have a complementary entry in some book or journal of original entry which is capable of analysis. The way in which the subsidiary books or journals are analysed will depend upon the number of Ledgers in use and the number of entries to be posted to each Ledger in each particular concern. Obviously, the system must be adapted to fit particular needs. In cases where there are few Ledgers in use, each subsidiary book or journal will have columns for the different Ledgers so that an amount posted to a particular Ledger will be inserted in the appropriate column As a result, the total of the postings to a particular Ledger will be shown in total form in the column used for that purpose in each subsidiary book or journal.
However, where the items posted to the Ledgers are few in number it may be considered unnecessary to have the subsidiary books or journals specially ruled with analysis columns. Bold index letters may be written beside the folio number against each item, if necessary in different coloured inks for different Ledgers, and at the end of suitable periods all the individual items posted to different Ledgers may be summarized into their respective groups.
On the other hand, where the items to be posted are very numerous it may be advisable to employ completely separate books or journals for each Ledger, thus dispensing with the analysis columns.
In the case of mechanized accounting, analysis is simplified by the fact that the required totals can be produced by the machine as the postings are made.
The individual subsidiary books will now be considered.
(a) Cash Book. Besides the usual three columns for Discount, Cash and Bank, it will be necessary to provide columns for the different Ledgers for which it is desired to prepare Total Accounts. The total amount of Cash plus Discount, or of Bank plus Discount, posted to individual accounts will be extended into the analysis columns.
Illustration 1
The following customers have made cash payments:
I £24, discount £1. Sales Ledger A-1.
E £140,
R £ 45.
B£71.
S £220,
£3.
£2.
£2.
£6.
A-L
M-Z
A-L
M-Z
There are two Sales Ledgers, A-L and M-Z.
The debit side of the Cash Book will be as follows:
SETE BALANCING LEDGERS AND SECTIONAL BALANCING
Ledgers
Discount Cash
Bank
AI
M/
25
143
47
73
220
£14
1500
£241
The total of the discount column will be dealt with in the ordinary manner, and the Cash will be balanced off as usual. The totals of the A-L Ledger column and of the 'M-Z Ledger column will be carried to the credit of the Adjustment (or Total) Accounts maintained for those Ledgers, in addition to crediting the individual personal accounts with the items Where it is not possible to have sufficient columns in the Cash Book itself, subsidiary Cash Received Books will be used, the totals of which will be entered periodically in the Main Cash Book and posted to the relative Total Accounts.
(b) Day Books or Journals. The Day Books or Journals (Purchases and Sales. Purchases Returns and Sales Returns, Allowances, etc.) will be analysed in a manner similar in principle to the Cash Book, viz. by the use of an extra column for cach Ledger employed, or by the use of separate books or journals for each Ledger or group of Ledgers.
(c) General Journal. Items of an extraordinary nature which are re- corded in none of the other books or journals of original entry must be recorded in the General Journal, which must be analysed just as the other books or journals for the purpose of the preparation of Total Accounts. Items such as Bad Debts written off. Interest charged on accounts, and transfers from one Ledger to another must all be recorded in some book or journal of original entry, and since they are not to be found in any other book or journal will be entered in the General Journal. The General Journal is usually referred to simply as the Journal.
Where transfers are of frequent occurrence. it is sometimes found that a special Transfer Journal is employed to record them, as great confusion is likely to arise where transfers are improperly recorded.
The Journal may be ruled with analysis columns, or may be analysed by the medium of index letters, etc.
Illustration 2
Robertson keeps three Sales and two Purchases Ledgers. Johnson both buys from and sells to Robertson, and it is agreed to set off a debt of £30 due by Johnson to Robertson against an amount owing by the latter to Johnson. Johnson's debit appears in Sales Ledger 3 and his credit in Purchases Ledger 2. Furthermore, an amount of £40 has been credited to Williams in Sales Ledger 3 instead of to Williamson in Sales Ledger 2. Show the Transfer Journal in Robertson's books in respect of these
matters.
Robertson's Books:
TRANSFER JOURNAL
Debits
Credits
Sales
1 edger
Purchases Ledger
Sales Ledger
Purchases Ledger
Date
Details
Fol
1
2
2
3
1
2 Fol.
£
£
£
£
£
£
30
30
Johnson-Set-off
Williamson-
Correcting entry
posted to Wil-
liams in error
40
40
When the books are closed off the balances of the Total Accounts will be equal to the sum of the balances in the Ledgers to which they relate, provided that:
(a) Whatever entry is made in a Ledger hnds its way to the correct side in the Total Account;
(b) Whatever entry is made in the Total Account of a Ledger has been correctly recorded in the Ledger itself.
Balancing Methods. There are three methods of dealing with Sectional Balancing:
1. To prepare a Total Account for each Sales and Purchases Ledger by way of Memorandum only, serving to prove in total the separate balances in each Ledger. The Total Account includes the component items on the SAME side as in the Ledger to which it relates. Such a Total Account does not appear as an item in the Trial Balance.
2. To prepare Total Accounts as an integral part of the Double Entry system, such accounts displacing in the Trial Balance the individual personal balances of the Ledgers to which they relate. The Total Account being the epitome of the Ledger to which it refers will include the component items on the SAME side as that on which the separate items appear in the Ledger.
3. In order to incorporate in the Double Entry system both the bal- ances of the Ledgers and the balances of the Total Accounts, two Total Accounts are prepared, the component items being exactly opposite.'
'The term 'Self-balancing Ledgers' is particularly applied to this method.
SELF-BALANCING LEDGERS AND SECTIONAL BALANCING
The Total Accounts will appear.
(a) At the back of each Ledger, the items being written up on the OPPOSITE side to the detailed entries in the personal accounts in the
Ledger: and
(b) In the Nominal Ledger, the items being written up conversely to (a), Lc. on the SAME side as the detailed entries in the personal accounts in the Ledger.
Istration 3
Assuming that sundry balances are: Debits, £1,200; Credits,-£1,930 excepting Sales Ledger balances amounting to £730, the Trial Balance will
Purchases Ledger
be
METHICOS
2.
D
O
Dr.
Sundry Debita Sundry Credi
E
1.200
1,200
-
1.200
1.930
1.930
Sustry Debsons (per Sales Ledger)
Noti
730
Tr
Balance
Mno
Total Account in Nominal Lager
730
Trial
6-8 23 R
a
1,930
Total Arenunt in Sales L
0.14 B
Accounts will they relate.
Je in the Total)
tly receded in
ch Sectional
-Ledger by me balances ems on the Count does
uble Entry individual I Account clude the ate items
the bal- wo Total site."
730 (B)
41.930 41.930 41.930 41.930 (2.660 CL560
In method (3) the Sales Ledger is 'Self-balancing' in that the credit of the Total Account (b) balances the total of the individual Ledger balances in that Ledger (a).
The headings employed are:
(a) Sales Ledger.
(i) At the back thereof. 'Nominal Ledger Adjustment Account' (Balance Credit).
(ii) In the Nominal Ledger. 'Sales Ledger Adjustment Account' (Balance Debit).
(b) Purchases Ledger.
(i) At the back thereof. Nominal Ledger Adjustment Account' (Balance Debit).
(i) In the Nominal Ledger. 'Purchases Ledger Adjustment Account' (Balance Credit).
It will be seen that the totals extracted from the subsidiary books will in each method be posted to the same side of the Total Account as if posted to the individual Ledger Account-and to the reverse side also if Method (3) be adopted, e.g. assuming that receipts from Debtors are £1,420, the postings of that Total (from the analysis column in the Cash Book) will be:
ACCOUNTANCY
1. To the Sales Ledger Adjustment Account in the Nominal Ledger (Credit side).
2. To 'Nominal Ledger Adjustment Account' in Sales Ledger (DEBIT side).
In the absence of errors, the balance as shown by the Total or Adjustment Account should equal the sum of the individual balances of the Ledger in question, but occasionally debit balances are found in the Purchases Ledger as well as credit balances; and credit balances in the Sales Ledger in addition to debit balances. The balance of the Total Account will then only equal the net balance of the Ledger. The usual practice is to bring down on the Total Account the totals of the debit balances and of the credit balances on the ledger to which it relates, but if the Trial Balance is prepared before the detailed balances of the Sales Ledgers are known, it is possible to bring down only the net balances of the Total Account. (The use of the reflective Total Accounts is extremely rare, and in fact the duplication of the Total Account in reverse is unnecessary.)
Illustration 4
Total Accounts are employed in the business of X in relation to the Sales Ledgers A and B. The following are the material details:
A.
B.
£
£
Opening Balances Dr. Cr.
Sales as per Sales Day Book Returns as per Returns Day Book Cash received as per Cash Book Discounts allowed as per Cash Book Bad Debts written off as per Journal Provision for Bad Debts as per Journal Bad Debts, previously written off, now received as per Cash Book Allowances as per Allowances Book Bills Receivable as per Bill Book
1,250 3,100
30
3.120 4,310
317
205
2,005
5,120
130
270
371
425
500
600
30
42
37
130
Bills dishonoured as per Cash Book Closing Credit Balances
50
72
21
The Transfer Journal includes a correcting entry for a £120 sales transaction that was mistakenly recorded in the A Ledger analysis column of the Sales Day Book, instead of the B Ledger analysis column. However, the transaction was correctly posted to the appropriate account in the B Ledger.
Prepare Total Accounts.
1. In the Nominal Ledger.
SELF-BALANCING LEDGERS AND SECTIONAL BALANCING
SALES LEDGER ADJUSTMENT ACCOUNTS
Λ
B
L
B.
Balances Sales
1.25u
£
3.100
Hulls Receivable dahon.
3.120
Balances
hid
301
4,310
Returns
317
205
oured
Transfers
50
Cash and Discount
2.135
5.390
Bad Debts
371
425
Halances
120
72
Allowances
42
37
21
Bills Receivable
130
Transfers
120,
Balances.
c/d 1.347
1,494
£4.492
£7,551
£4,492 £7.551
Balances
1.347
1,494』Halaces
b/d
72
21
2. At the back of the respective Sales Ledgers the above items will all be repeated on the reverse sides, e.g. in A Sales Ledger the balances on the Nominal Ledger Adjustment Account will be: Debit £72. Credit £1.347.
Notes. 1. The Bad Debts Provision does not concern the individual Ledger balances and the respective Total Accounts.
2. The receipt of Bad Debts written off is usually debited to Cash and credited direct to Bad Debts Received Account so that it does not affect the Total Account. Where. however, the receipt of such a Bad Debt written off is posted to a personal account the entries will be:
(a) Dr. Cash: Cr. Personal Account.
(b) Dr. Personal Account: Cr. Bad Debts.
There will then appear in the Total Account the Personal Account items, ie. the same amount on both sides: (a) from the analysis column in the Cash Book, (b) from the Transfer Journal.
An illustration of a Purchases Ledger Adjustment Account will now be shown.
Illustration 5
L
£
Opening Balances Cr.
6,000
Dr.
150
Purchases as per Purchases Day Book
9.000
Returns as per Returns Day Book
200
Cash paid as per Cash Book
8,700
Cash received ás per Cash Book Discounts received as per Cash Book Allowances as per Allowances Book
50
400
130
Bills Payable as per Bills Payable Book
250
Closing Debit Balances
100
Transfers of Purchases to another Ledger
20
Prepare Total Accounts.
1. In the Nominal Ledger.
ACCOUNTANCY
PURCHASES LEDGER ADJUSTMENT ACCOUNT
L
Balances
hid
150 Balances
Cash and Discount
9,100 Purchases
Returns
Allowances
Hills Payable
20) Cash
130 Balances
250
Transfers
Balances
Balances
20
</d
5.300
£15,150
b/d
100 Balances
£
b/d
6,1XXI
9,000
50
c/d
100
£15,150
b/d
5.300
2. At the back of the Purchases Ledger this account would appear in reverse form.
NOMINAL LEDGER ADJUSTMENT ACCOUNT
Balances
b/d
6,000
Balances
b/d
150
Purchases
9.000
Cash and Discount
9.100
Cash
50
Returns
200
Balances
c/d
100
Allowances
130
Bills Payable
250
Transfers
20
Balances
c/d
5,300
£15,150
£15,150
Balances
b/d
5,300 Balances
b/d
100
Although method (3) is theoretically the most correct as far as making the Ledgers self-balancing is concerned, one of the total accounts is obviously superfluous since it is merely a duplication of the other. This method is therefore rarely employed in practice. The most effective practical method is for a responsible official to keep a separate book, containing a Total Account for each Ledger, which is not accessible to the various ledger clerks. The Total Accounts will then serve as a good check on the work of the clerks.
Other Uses of Total Accounts. The use of Total Accounts is not confined to Debtors and Creditors Accounts but is found in many other branches of accounting.
Examples are: Share Capital Accounts; Dividend Accounts: Hire Purchase Accounts: Double Entry Cost Accounts; Goods on Sale or Return: Solicitors' Accounts. In all these cases there is (or may be) a Total Abcount prepared on the principles already outlined.
Secret Accounts. It is a frequent practice to keep certain accounts secret from all but a few responsible higher officials-such accounts being Capital, Fixed Assets, Reserves, Profit and Loss, Taxation, Directors Fees, Commissions, Dividends, and so on. This can be done by segregating the relevant accounts in the Private Ledger which is kept by one of the higher officials. It is obvious that, in order to maintain the secrecy, a separate or No. 2 Bank Account must be used and that a separate Cash
SELF-BALANCING LEDGERS AND SECTIONAL BALANCING
Book must be written up and the relevant vouchers kept away from the normal business ones. All these must be kept secret from the general staff. In order that a Trial Balance may be extracted by the general staff without revealing the detailed balances in the Private Ledger and Cash Book. the latter will be represented in the Nominal Ledger (in which the general accounts are kept) by a Total Account, called the Private Ledger Adjustment Account, a corresponding Nominal Ledger Adjustment Ac- count being kept in the Private Ledger. Provided that the two Adjustment Account balances agree (as they should do), the detailed Private Ledger balances may be substituted by one of the higher officials for the Private Ledger Adjustment Account balance appearing in the Trial Balance taken out by the general staff. Needless to say. a Trial Balance should first be extracted from the Private Ledger to ensure that the balances of the accounts therein equal the balance of the Adjustment Account.
When the system is first started, the asset and other debit balance accounts will be transferred to the Private Ledger by crediting the individual accounts in the Nominal Ledger and debiting Private Ledger Adjustment Account, then crediting Nominal Ledger Adjustment Ac- count and debiting the various accounts in the Private Ledger, and rice versa in respect of Capital, Reserves and other credit balance accounts. When transferring cash from the General Bank Account to the Private Bank Account, the entries will be as follows: Dr. Private Ledger Adjustment Account, Cr. General Bank Account, Dr. Private Bank Account, Cr. Nominal Ledger Adjustment Account. Directors' Fees. Dividends, etc.. will be paid by debiting the respective accounts in the Private Ledger and crediting Private Bank Account.
When accounts are prepared, the general accounts in the Nominal Ledger will be closed off to the Private Ledger Adjustment Account, the entries appearing on reverse sides in the Nominal Ledger Adjustment Account in the Private Ledger, whence they will be transferred, along with the balances of the Private Ledger Accounts to the Profit and Loss Account.
The system is sometimes operated with one bank account only, two or more Cash Books being used, one for secret entries and one or more for general transactions, the totals of the latter being periodically entered in the 'secret' Cash Book. The disadvantage of this method is that. it is obviously necessary to keep the Bank Statements away from the general staff, since otherwise the private receipts and payments will no longer be Secret, and therefore the checking of the Bank Statements must be done by one of the higher officials.
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