Journal proper & adjusted trial balance

Adjusted Trial Balance of 'A' Trading Concern

Adjustments made:

• (a) Prepaid office expenses Rs 3,000 are taken out of office expenses: $40{,}000 - 3{,}000 = 37{,}000$, and a prepaid asset of Rs 3,000 is created.
• (b) Land appreciation, taken as 10% of the Rs 4,00,000 land and building: $+40{,}000$, with the credit going to revaluation reserve (no separate land value is given).
• (c) Salary becomes $80{,}000 + 1{,}500 = 81{,}500$, and outstanding salary Rs 1,500 is a liability.
• (d) Bad debts Rs 2,500 are an expense, and debtors fall to $2{,}25{,}000 - 2{,}500 = 2{,}22{,}500$.
• (e) Insurance expense Rs 10,000; prepaid insurance falls to $15{,}000 - 10{,}000 = 5{,}000$.

Both totals agree at Rs 13,51,500, which confirms the adjustments are correct.

Adjusted Trial Balance of 'B' Trading Concern

Adjustments made:

• (a) Salary becomes $80{,}000 + 1{,}500 = 81{,}500$, and outstanding salary of Rs 1,500 is a liability.
• (b) Depreciation on plant and machinery is $10\% \times 4{,}00{,}000 = \text{Rs } 40{,}000$, so plant falls to $4{,}00{,}000 - 40{,}000 = 3{,}60{,}000$.
• (c) Insurance expense is Rs 10,000, and prepaid insurance falls to $15{,}000 - 10{,}000 = 5{,}000$.

Both totals agree at Rs 13,11,500.

An error of principle is a mistake in which a transaction is recorded in the wrong class of account, going against the basic accounting principles, even though the debit and credit amounts are equal. For example, recording the purchase of furniture as a purchase of goods (revenue item instead of a capital item), or treating repairs as an addition to machinery. Such an error does not affect the agreement of the trial balance, so it is not revealed by it.

Adjusted Trial Balance

Adjustments made:

• (a) Depreciation on furniture is $10\% \times 1{,}50{,}000 = \text{Rs } 15{,}000$. It is an expense, and furniture falls to $1{,}50{,}000 - 15{,}000 = 1{,}35{,}000$.
• (b) Rent outstanding Rs 5,000: rent becomes $25{,}000 + 5{,}000 = 30{,}000$, and outstanding rent of Rs 5,000 is a liability.

Both totals agree at Rs 7,55,000.

Rectifying Entries

(a) Cash sales were wrongly debited to Sharma's account, although he is not a debtor for this sale. The cash account must be debited and Sharma's account credited to cancel the wrong debit.

(b) Sale of machinery was credited to the sales account instead of the machinery account.

(c) A purchase from Pema was recorded as a sale, so Pema's account was debited and Sales credited by Rs 20,000. Correctly, Purchases should be debited and Pema credited. Both sides are reversed and corrected in one entry.

Rectifying Entries

(i) A credit purchase was recorded as a credit sale, so the supplier's account was wrongly debited and Sales credited by Rs 10,000. To correct it, Sales is reversed, Purchases is debited and the supplier is credited with the wrong debit cancelled plus the right credit ($10{,}000 + 10{,}000$).

(ii) Repairs are a revenue expense, but were debited to the machinery account.

(iii) The owner's withdrawal is drawings, not a selling expense.

Adjustments

• Depreciation on machinery: $10\% \text{ of } Rs\ 1{,}75{,}000 = Rs\ 17{,}500$, so machinery becomes $1{,}75{,}000 - 17{,}500 = Rs\ 1{,}57{,}500$.
• Outstanding wages Rs 2,000 is added to wages: $5{,}000 + 2{,}000 = Rs\ 7{,}000$. The Rs 2,000 is also a new liability (credit).

Adjusted Trial Balance

Both sides agree at Rs 9,22,000, which proves the adjustments were posted correctly.

Journal proper (also called the general journal) is a subsidiary book in which those transactions are recorded that cannot be entered in any of the other special journals or the cash book. Examples are opening entries, closing entries, adjustment entries, rectification of errors, and credit purchase or sale of assets.

A suspense account is a temporary account opened to hold the amount of difference in a trial balance when its debit and credit totals do not agree and the errors cannot be located immediately. The difference is entered on the lower side of the trial balance, and the account is closed once the errors are found and rectified.

Outstanding expenses are expenses that have been incurred during the accounting period but not yet paid, so they are a liability shown in the balance sheet. Prepaid expenses are expenses paid in advance for a benefit that will be received in a future period, so they are an asset.

An error of omission is a mistake in which a transaction is completely or partially left out of the books of account. In a complete omission the trial balance still agrees, but in a partial omission (for example, entered in the journal but not posted to one account) the trial balance does not agree.

Accrued income is income that has been earned during the accounting period but has not yet been received in cash by the end of it. It is shown as a current asset in the balance sheet, for example interest receivable or rent receivable.

Outstanding wages are an expense of the current period that has been incurred but not yet paid. The expense is recorded and a liability is created.

Rectifying Entries

(a) Furniture is a fixed asset but was debited to the purchases account. Furniture A/c must be debited and Purchases A/c credited.

(b) Credit sales of Rs 18,000 were recorded as Rs 8,000, so Hari's account and Sales are both short by $18{,}000 - 8{,}000 = \text{Rs } 10{,}000$.

(c) Repairs are a revenue expense but were debited to the machinery account. Repairs A/c must be debited and Machinery A/c credited.

Rectifying Entries

(a) The sale to Ananta Traders was recorded in the purchase book, so Purchases A/c was debited and Ananta's A/c credited. The correct entry is a debit to Ananta's A/c and a credit to Sales A/c. The wrong entry is cancelled and the correct entry is made in one entry.

(b) Wages paid for installing a machine are a capital expenditure and must be added to the cost of the machine.

(c) The rent was debited to the rent account but the credit to the cash account was omitted, so the trial balance differs by Rs 15,000 and the difference is held in a suspense account. Cash is credited to complete the entry.

Rectifying Entries

(i) Sales to Hira were entered in the purchase book, so Purchases A/c was debited and Hira's A/c credited by Rs 15,000. The correct entry is a debit to Hira's A/c and a credit to Sales A/c. Hira's account therefore moves from a credit of Rs 15,000 to a debit of Rs 15,000, a change of Rs 30,000.

(ii) Wages for installing machinery are a capital expenditure and are added to the cost of machinery.

(iii) Rent is an expense. It was debited to Mr. Hem's personal account instead of Rent A/c.

Rectifying Entries

(i) Cash sales are not credit sales, so Sonu's account should not have been debited. The cash account must be debited and Sonu's account credited to cancel the wrong debit.

(ii) Sale of old furniture is the sale of a fixed asset, not trading sales. Sales A/c is debited to cancel the wrong credit and Furniture A/c is credited.

(iii) The purchase from Hari was recorded in the sales book, so Hari's A/c was debited and Sales A/c credited by Rs 30,000. Correctly, Purchases A/c should be debited and Hari's A/c credited. Hari's account moves from a debit of Rs 30,000 to a credit of Rs 30,000, a change of Rs 60,000.

Rectifying Entries

(i) Goods purchased from Ram for Rs 63,000 were recorded as Rs 36,000, so both Purchases A/c and Ram's A/c are short by $63{,}000 - 36{,}000 = \text{Rs } 27{,}000$. This is an error of commission affecting both accounts equally, so it does not affect the trial balance.

(ii) The payment to Ram was credited to Cash A/c but the debit to Ram's A/c was not posted. Because only one side was posted, the trial balance does not agree and the difference is held in a suspense account. Ram's account must be debited, and Suspense A/c is credited to clear it.

(iii) Salary was recorded as rent, an error of commission within the same type of expense. Salary A/c is debited and Rent A/c is credited.

(d) Purchase of machinery on credit

The journal proper is used for transactions that no subsidiary book covers. A credit purchase of machinery is a credit purchase of an asset, not of goods dealt in, so it cannot go in the purchase book — it is recorded in the journal proper. Cash sales go in the cash book, credit purchase of goods in the purchase book, and goods returned to the supplier in the purchase return book.

Calculation of Capital:

Total Assets = Cash in hand + Cash at bank + Sundry debtors + Stock + Furniture
= Rs. 25,000 + Rs. 80,000 + Rs. 45,000 + Rs. 60,000 + Rs. 50,000
= Rs. 2,60,000

Capital = Total Assets − Liabilities
= Rs. 2,60,000 − Rs. 30,000
= Rs. 2,30,000

Journal of Shree Ram Traders

Thus, the opening journal entry records assets on the debit side and liabilities and capital on the credit side.

Adjusting Journal Entries (31 Chaitra 2080)

Effect on the Adjusted Trial Balance

Each adjustment has an equal debit and credit, so the adjusted trial balance still tallies.

(a) Journal Proper of Sunrise Store, Baisakh 2080

(In practice, entries 2 to 5 are recorded in the subsidiary books and 7 and 8 in the cash book; only 1 and 6 belong strictly to the journal proper. All are shown in journal form here.)

(b) Adjusted Trial Balance as on 31st Baisakh 2080

Adjustments: depreciation on machinery Rs 5,000; outstanding salary Rs 7,000. Closing stock (Rs 40,000) is not a ledger balance, so it appears in the Trading Account and Balance Sheet, not in the trial balance.