Self-Balancing Ledgers - Commerce PDF Download

Self-balancing system is a system whereby separate Trial Balance can be taken out from each ledger. “General Ledger Adjustment Account” will be maintained in each of the sales and bought ledger. It is the reverse of the Total Debtors Account in Sales Ledger and Total Creditors Account in Bought Ledger.

Under this system ledgers are made self-balancing by opening adjustment accounts. When goods of Rs 1,000 sold to Ram, then Ram’s Account is debited with Rs 1,000 in Sales Ledger and Goods Account is credited with Rs 1,000 in General Ledger.

In order to balance Sales Ledger Rs 1,000 should be credited in it, hence at the end of this ledger a General Ledger Adjustment Account is opened and Rs 1,000 is credited in it. In the same way, in all the ledgers adjustment accounts are opened.

1. At the end of Bought Ledger, a General Ledger Adjustment Account is opened, and whatever has been debited in Bought Ledger in various accounts, is credited in General Ledger Adjustment Account and whatever has been credited in Bought Ledger, is debited in General Ledger Adjustment Account.

2. At the end of Sales Ledger, General Adjustment Account is opened and all debits of Sales Ledger are recorded in the credit of General Ledger Adjustment Account.

3. At the end of General Ledger, two Adjustment accounts are opened i.e. Debtors’ Ledger Ad­justment Account and Creditors’ Ledger Adjustment Account.

Objects:

In General Ledger:

(1) Sales Ledger Adjustment Account (same as Total Debtors A/c)

(2) Purchase Ledger Adjustment Account (same as Total Creditors A/c)

In the Sales Ledger:

(3) General Ledger Adjustment Account (shadow of sales ledger adjustment account with the sides transposed)

In the Purchase Ledger:

(4) General Ledger Adjustment Account (shadow of purchases ledger adjustment account with the sides transposed)

To comply with the double entry principle, debit in one adjustment account is made by a corre­sponding credit to another adjustment account.

The relevant entries are:

1. For the items debited to customers in Debtors’ Ledger:

Debit Sold Ledger Adjustment Account (in General Ledger)

Credit General Ledger Adjustment Account (in Sold Ledger)

2. For the items credited to customers in Debtors’ Ledger:

Debit General Ledger Adjustment Account (in Sold Ledger)

Credit Sold Ledger Adjustment Account (in General Ledger)

3. For the items debited to suppliers in Creditors’ Ledger:

Debit Bought Ledger Adjustment Account (in General Ledger)

Credit General Ledger Adjustment Account (in Bought Ledger)

4. For the items credited to suppliers in Creditors’ Ledger:

Debit General Ledger Adjustment Account (in Bought Ledger)

Credit Bought Ledger Adjustment Account (in General Ledger)

The following journal entries are passed to make the Purchase Ledger self-balancing:

Illustration:

Prakash has three ledgers in use, viz. Debtors Ledger, Creditors Ledger and a General Ledger, which is all kept on the self-balancing system.

From the following particulars, prepare:

(a) Total Debtors and Total Creditors Accounts,

(b) Journal entries under self-balancing system and

(c) Write up the adjustment accounts as they will appear in each of these ledgers:

Note:

In the above illustration, we have prepared rough Total Debtors’ Account and Total Creditors’ Account. We can see that the Total Debtors Account is similar to Debtors’ Ledger Adjustment Account in the General Ledger. The Total Creditors’ Account is similar to Creditors’ Ledger Adjustment Account in the General Ledger.

To be clearer, items debited in the rough Total Debtors have been debited in the Debtors’ Ledger Adjustment account and corresponding credit being given in the General Ledger Adjustment Account.

The items credited in the rough total Debtors’ Account have been credited in the Debtors’ Ledger Adjustment Ac­count and corresponding debit being given in the General Ledger Adjustment Account.

Similarly, items debited in the rough Total Creditors’ Account have been debited in the Creditors’ Ledger Adjustment Account and corresponding credit being given in the General Ledger Adjustment Account. Items credited in the rough Total Creditors’ Account have been credited to Creditors’ Ledger Adjustment Account and corresponding debit being given in the General Ledger Adjustment Account.

When the students become acquainted, they may dispense with the preparation of rough ‘Total Debtors Account and Total Creditors’ Account. Here, they have been prepared only to give a clear picture of self- balancing system.

Advantages:

1. Speedy detection of errors is possible.

2. Balancing is done quickly and thus saves time, labour and money.

3. The system helps reducing fraud.

4. Final Accounts can be prepared easily and quickly.

5. It acts as an effective internal check.

6. It is very useful when there is a large number of debtors and creditors.

7. It is easy to prepare periodical final accounts.

8. Efficient office control is possible.

9. It promotes specialisation and increases efficiency.

10. It facilitates division of work among different employees.

11. Arithmetical accuracy can be proved by drawing a Trial Balance.

12. Ledger keeping can be decentralised.