Vouching of Impersonal Ledger - Vouching, Auditing & Secretarial practice | Auditing and Secretarial Practice - B Com PDF Download

Vouching Of Impersonal Ledger

impersonal ledger contains two kinds of accounts viz., (i) nominal accounts like rent, salaries, cartage etc. and (ii) real accounts like machinery, furniture etc. You know that balances of nominal accounts are transferred to Trading and Profit and Loss Account while balances of real. accounts are shown in the Balance Sheet. We will now study the vouching of items which appear in the impersonal ledger and relate to Profit and Loss Account.

The Impersonal Ledger will be Vouched as Follows :

1. The auditor should check postings of various cils11 payments and receipts in respect of nominal accounts in the impersonal ledger. These transactions can be salaries, wages, rent, etc, paid in cash or dividends, interest, etc. received in cash.
2. The auditor should check the totals of all the subsidiary books, and their postings in the relevant nominal accounts in the impersonal ledger.
3.  In the case of transfer and adjustment entries from one impersonal account to another which have been passed through the journal, the auditor should see that every entry is supported by sufficient documentary evidence.
4. The auditor should check various adjustment entries made at the end of the year when final accounts are prepared. Such adjustments relate to outstanding assets and liabilities and depreciation etc.

Outstanding Assets and Liabilities

Arithmetical accuracy of impersonal ledger is no proof that the profit or loss has been correctly arrived at. If we omit certain expenses which have become due but have remained unpaid, the profit shown will be more. It is, therefore, necessary that all the expenses which have been incurred during the current year must be debited to Profit and Loss Account and shown as a liability in the Balance Sheet. Similarly, there may be certain incomes which might have accrued in the current year but not yet received. To ascertain the profits correctly, such incomes should be credited to the Profit and Loss Account and shown as an asset in the Balance Sheet. It is. advisable that a 'Mernorandum Book' containing details of outstanding assets and liabilities is maintained. This book should be signed by a responsible officer. With the help of this book, the auditor can easily ascertain the outstanding and accrued items for which the adjusting entries should have been passed. Through this book, the auditor can compare outstandings and accruals of two different periods. We will now discuss some of $&outstanding assets and liabilities and the auditors duties about them.

Outstanding Assets

An expenditure which has been incurred during the current year but the benefit of which will be enjoyed during the next year is called an outstanding asset. Outstanding assets can be of three types. These are: 1. prepaid expenses, 2. incomes receivable (accrued incomes), and 3.deferred revenue expenditure.

1. Prepaid Expenses: Prepaid expenses are those expenses which have been paid in the current year but the benefit of which will be received in the forthcoming year. For example, if we pay an insurance premium of Rs. 12,000 for one year on 1st April, 1989, then one - fourth of this expenditure (Rs. 3,000) relates to the next year (from January to March 1990). Thus, Rs. 3,000 should not be charged to the Profit and Loss Account of the year 1989. If we do so, the profits for 1989 will unjustifiably get reduced by Rs. 3,000. To arrive at correct profit for the current year this amount of Rs. 3,000 should be deducted from total expenditure,. Examples of prepaid expenses are: insurance premium, rent, rates and taxes, telephone bills, etc., which are generally paid in advance.

For vouching the prepaid expenses, the auditor should scrutinize the relevant nominal accounts,the-demand notes. Thedw.aat receipts, etc. and make sure that proper adjustments have been made in the account books. Ile should ensure that calculations in respect of prepaid expenses are correct.

1. Incomes Receivable or Accrued Incomes: These are incomes earned or accrued or become due in the current year but not yet received. For example, till the end of the year on 31st December, rent for December might not have been received. Similarly, a borrower of a loan might not been paid interest for the last three months of the accounting year. As these incomes have accrued in the current year, it is but natural that such incomes should be credited to current year's Profit and Loss Account. About such incomes, the auditor would make sure that they will be duly received, and that the calculations are correct.
2. Deferred Revenue Expenditure: According to Prof. Arnold Johnson deferred revenue expenditures are those "non-recurring expenditures which are expected to be of financial ': benefits to several accounting periods of indeterminable total length". The benefit of deferred revenue expenditure is likely to be enjoyed not only in the current year but also In some more years to come. Examples of such expenditures are heavy expenses on special advertisement campaign for introducing a new product, research and development expenditure, heavy expenditure on repairs of machinery, discount allowed on issue of shares, etc. Full amount of such expenditure is not debited to the Profit and Loss Account for the year in which it ?s incurred. On the other hand, it is spread over the number of years during which the benefit is likely to be enjoyed and only a proportionate amount is debited to the Profit and Loss Account. For example, if Rs. 40,000 have been spent on heavy repairs to a machine which will continue to be useful for coming four years, every year 114 of Rs. 40,000 i.e., Rs. 10,000 should be debited to the Profit and Loss Account. For vouching deferred revenue expenditures, the auditor should check the details of computation of the amount carried forward and see that the charge made to current years' Profit and Loss Account is reasonable. He should scrutinize the basis on which the estimates have been prepared and satisfy himself that these are reasonable.

Outstanding Liabilities:

The expenses which have become due for payment and should have been paid during thecurrent year but have not been actually paid are called 'outstanding liabilities'. For example, $ the rent of the building for the ninth of December, 1990, should have been paid during the j year 1990, but has not actually been paid during the same period. Since rent for the month of December, 1990 relates to the accounting year 1990, it must be debited to the Profit and 1 Loss Account and shown as a liability in the Balance Sheet. If outstanding liabilities are not charged to the Profit and Loss Accounts, the final account will not show the correct amount I of profit or loss, and the Balance Sheet will also be erroneous. It is the duty of the auditor to 1 verify all items of outstanding liabilities. If he fails to do so, he will be held liable fornegligence as was held in the case of Westminster Road Construction and Engineering Vuuchirtg of Trading Transactions Company Ltd. and Impersonal Ledger Ascertaining all outstanding liabilities is a bit difficult sic for the auditor because some items may have been suppressed or may not be clear from books of accounts. Experience of [he auditor can be the main guide in such circumstances:He can find these liabilities by inspecting the payment side of the Cash Book of a few., months after the close of the ;financial year. If he finds entry for payment of rent I:(. December last, he can presume that it ;,was outstanding at the close of the year. The auditor, .. !n ask some responsible officer to furnish a certificate stating that no expense relating to. Current year remains unpaid and the expenses which have not been paid, have been properly: counted for. The auditor should himself scrutinize various nominal accounts like wages and salaries, rent interest, discount, taxes, etc., and compare them with figure!, of the last year. If the difference is large the matter should be investigated further. Following are some of the outstanding liabilities:

1. Incomes received in advance: It refers to that income which has been received in the current year by way of an advance, but relates to the next year. For example, a tenant may pay advance rent in the current year for January. This rent, no doubt, has been received in the current year, but it relates to the next year and hence it should not be credited to the current year's Profit and Loss Accrued. The auditor should carefully scrutinize such items and ensure that all receipts which pertain to the next year should be treated as on earned income and are shown as a liability in the Balance Sheet.
2. Unpaid or outstanding expenses: Expenses which pertain to the current year and should have been paid but have not actually been paid during the same year are called unpaid or 'outstanding expenses'. All such expenses should be charged to the current year's Profit and Loss Account and shown as a liability in the Balance Sheet. To find out the outstanding expenses, the auditor should examine all nominal accounts, receipts, invoices, demand notes, etc. He should ensure that these have been charged to Profit and Loss Account and shown as a liability in the Balance Sheet.
3. Purchases made at the close of the year: Many a times, it happens that purchases made at the close of the year are received and entered in the stock register, but no entry is made in the Purchases Book with the result that purchases are understated and profit gets inflated. The auditor should call for a schedule of such purchased and ensure that Purchases Account is debited with their total amount and the amount is shown as a liability in the Balance Sheet. To check unrecorded purchases, the auditor should compare Goods Inwards Book with Purchases Book for few days before the close of the year.
4. Outstanding Rent, Rates and Taxes: If rent, rates and other taxes relating to the current year have not been paid by the time the books are closed, these must be I 1 ascertained and debited to the Profit and Loss Account and shown as a liability iliihe 1 Balance Sheet. Failure to do so will inflate the profit for the current year. The auditor I should inspect the ledger accounts, the demand notes, the receipts, etc, in order to ascertain such outstanding expenses. He can also make comparison of the current year's I figures of the preceding years to assess the amounts payable.
5. Outstanding Wages and Salaries: It so happens that accounts are closed on the last day of the last month of the year but the wages and salaries for that month are paid on the first day of the next month in the next year. For example, the accounts may be closed on 31st March but the wages and salaries for March may be paid on 1st April. If this is done, current year's Profit and Loss Account will be debited with wages and salaries for eleven months and not twelve months. The profit revealed by Profit and Loss Account will thus get inflated. Hence, it is necessary to include the wages and salaries for March while debiting this item to the current year's Profit and LossAccount and to show wages and salaries for March in the Balance Sheet as a liability.

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1. Audit Fee: There are two opinions on showing audit fee for auditing current year's accounts as an outstanding liability. Some say it should not be shown as current year'sexpenditure because the audit work of current year's account is done in the next year and so it is next year's expense. Others say that audit fee is paid for the work of the current year and hence, it should be charged to the current year's Profit and Loss Account and shown as a liability in the Balance Sheet. Both these arguments appear to be sound. Now it is an accepted principle that if the audit work starts in the current year the audit fee should be debited to Profit and Loss Account of the current year and if the audit work commences in the succeeding year, the audit fee should be charged to that year and not shown as an outstanding liability of the current year.
2. Other Liabilities: There can be various other outstanding liabilities for expenses like freight and carriage, travelers and agents' commission, etc. The treatment of these liabilities should be the same as that of the outstanding wages and salaries, if the expenses relate to the current accounting year these must be debited to the Profit and Loss Account of the current year, whether they have been paid or not.