55

Chapter 5

The classification of accounts

and division of the ledger
This chapter covers part of syllabus section AS Level 1.3

LEARNING INTENTIONS
In this chapter you will learn how to:
• classify ledger accounts into assets, liabilities, income, expenses, capital and drawings
• sub-divide assets into non-current assets and current assets; sub-divide liabilities into non-current liabilities
and current liabilities
• group accounts in terms of personal accounts and impersonal accounts
• divide the accounts into several ledgers, each containing transactions of a similar nature
• classify accounts and divide the ledger to improve the organisation of accounting information and reduce the
likelihood of errors.

56

ACCOUNTING IN CONTEXT

Anyone for coffee?

Nisha owns and runs a mobile coffee business. She set up five years ago with a van that she fitted with storage,
fridge and coffee making equipment. She sells many types of coffee and other hot and cold drinks and snacks.
She started with one van in a market in town that she operated herself. It is successful with lots of regular
customers who enjoy her coffee and excellent service. Nisha has steadily grown the business. She now owns
several similar vans operated by employees in neighbouring towns. The vans can also sell its products at shows
and events.
Nisha is well organised. When the business first started, she only needed a few accounts, which were kept in one
ledger. As the business grew, she found that the number of transactions and accounts needed also grew. Eventually
Nisha bought an accounting software package that kept all the supplier accounts together in a purchases ledger.

Figure 5.1: Nisha has steadily grown her mobile coffee business and now owns several similar vans in
neighbouring towns.

Discuss in a pair or a group:

• List items that Nisha’s business is likely to own. Split your list into those items the business will keep for
more than one year and those items the business will keep for one year or less.
• What ledger accounts might Nisha’s business use?
• Why might it be useful for a business to keep all its supplier accounts together?
 56

5.1 Classification of accounts

Businesses have many ledger accounts. Accounts that have transactions of a similar nature will be treated in a similar
way in the ledgers.

TIP

It is useful to learn which types of account typically have debit balances and which have credit balances. This will
help with your double-entry skills.

It can be helpful to group accounts together into categories that have similar features.
The main groups are:

57

Assets

Assets including vehicles can be owned by a business; trade receivables owe money to a business.
Assets are further subdivided into:
• Non-current assets, for example property, machinery, vehicles, office furniture and equipment. These assets are
intended to be used in the business for more than one year.
• Current assets, for example inventory and trade receivables. These assets will be turned into cash within one
year.
Asset accounts have debit balances.

Liabilities
Liabilities, for example loans, trade payables and overdrafts, are split into:
• Non-current liabilities, i.e. amounts owing that do not have to be paid within one year, such as a long-term loan.
• Current liabilities, i.e. amounts owing that must be paid within one year, such as trade payables and bank
overdrafts.
Liability accounts have credit balances.

Income

This group includes revenue from sales and other income. Other income can be from rent receivable, discounts
received and interest receivable.
Income accounts have credit balances.

Expenses

Expenses accounts are items such as rent, wages, salaries, heating and lighting, postage and stationery. These are costs
that are incurred in running the business on a day-to-day basis.
Expense accounts have debit balances.

Capital and drawings

The owner’s capital and drawings accounts do not fit neatly into these categories but are equally important.

58

The capital account will have a credit balance and the drawings account will have a debit balance.
The balances for the types of account are summarised as follows:

Types of account with debit balances Types of account with credit balances
Expenses Liabilities
Assets Income
Drawings Capital

ACTIVITY 5.1

Complete the table, ticking the boxes that describe the given accounts in the books of a business.
The first one is completed for you.
 Account Asset Liability Revenue or other Expense
income
Delivery vehicles ✓
Rent
Loan
Interest received
Interest paid
Trade receivables
Inventory
Discounts allowed
Postage
Bank
Rent receivable
Trade payables
Computers
Wages
Discounts received

KEY CONCEPT LINK

A true and fair view: Organising the information in the accounts makes it easier to work out the value of a
business’s assets, liabilities and other types of account. This helps owners, lenders, accountants or anyone else
who sees the information to get a true and fair view of the business.

An alternative way that accounts can be classified is to put them into one of two classes: a personal account or an
impersonal account.
a Personal accounts include:
59

• accounts for trade receivables

• accounts for trads payables
• the owner’s capital and drawings accounts.
b Impersonal accounts include:
• asset accounts including both non-current and current assets
• nominal accounts, which include expenses accounts, revenue accounts or accounts with credit balances.
 59

5.2 Division of the ledger

It was explained in Chapter 1 that a ledger is a book (or computer file) containing accounts. Except in very small
businesses, there are too many accounts to be kept in a single ledger. It is usual to divide the accounts among several
ledgers.

Ledger Use
Sales ledger For the accounts of customers that buy on credit.
Purchases ledger For the accounts of suppliers from whom the business buys on credit.
General (or nominal) For assets, liabilities, revenue and other income, expenses and capital.
ledger
Private ledger For accounts of a confidential nature, such as the owner’s capital and drawings accounts and
loan accounts; also the statements of profit or loss and statements of financial position (see
Chapters 7 and 8).
Cash book For the bank and cash accounts.
Businesses do not need to use all the ledgers listed. Businesses will choose to use the ones that are useful to them. For
example, the business owners might want to keep a private ledger as they would not want their employees to know how
much the business had borrowed, or how much profit the business makes and how much the owner has taken from the
business as their private drawings. Other business owners choose not to have a separate private ledger but will keep
these accounts within the general ledger.
The division of the ledger is essential in a business that employs several bookkeepers, as the work may be divided
between them so that they do not all need to be working on the same ledger at the same time. It makes sense to group
items of a similar nature, for example all sales are together in one ledger, the sales ledger. This allows staff to be trained
in different aspects of the business. Most importantly, it helps to detect and prevent errors occurring in the books of
account. It may also help to detect and prevent fraud by the accounts staff. This is a form of internal control.

TIP

Although individual customer accounts are in the sales ledger, the sales account itself is in the general ledger.
Equally, supplier accounts are in the purchases ledger, but the purchases account is in the general ledger.

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ACTIVITY 5.2

In which ledger would you expect to see the following accounts?

The first one is completed for you.

Ledger
Motor vehicles General
Capital
A customer who buys goods on credit
Supplier of office equipment
Bank
Wages
Sales

REFLECTION

When answering Activity 5.2, how did you decide on the correct ledger? Explain to another learner how you
made your choices. Was your knowledge of classifying accounts into assets or liabilities etc. useful when
choosing the appropriate ledger?

ACTIVITY 5.3

Complete the following sentences by inserting the correct word from the following list:

non-current expense purchases general sales

a The ________ ledger contains the accounts of suppliers from whom the business buys on credit.
b The heating and lighting account is stored in the ________ ledger and is an example of a ________ account.
c Goods bought on credit are recorded in the ________ ledger.
d A ________ asset is bought for use in the business for a long period of time.

THINK LIKE AN ACCOUNTANT

It’s good to be organised

Classifying accounts into types with similar features helps with their organisation. This makes it easier to track the
value of a business’s assets and liabilities and to assess whether its revenue is greater than its expenses.
Grouping information into types is not just done in accounting; it’s done in many ways that people come across in
both their personal and working lives. Examples of organising information include books in a library, clothes of
different size and style in a shop and organising your study notes into topics.
Imagine being in a book shop or library where the books were not organised. What might be the consequences?
Think of three more examples of information that you have seen grouped into types. What possible advantages
come from organising information? Can you think of any disadvantages?

Figure 5.2: Classifying accounts can make it easier to track the value of a business’s assets.
 61

PRACTICE QUESTIONS
1 Which account is most likely to be kept in a private ledger?
A drawings
B interest received
C rent
D sales [1]
2 How should cash discounts be classified?
Discounts allowed Discounts received
A asset liability
B expense income
C income expense
D liability asset [1]
3 Explain why it can be useful to group accounts into different categories. [4]
4 Discuss why a business may use more than one ledger. [6]
 61

SELF-EVALUATION CHECKLIST
After studying this chapter, complete a table like this:

Needs
Almost Ready to
You should be able to: more
there move on
work
Classify ledger accounts into assets, liabilities, income, expenses, capital and
drawings.
Sub-divide assets into non-current assets and current assets; sub-divide
liabilities into non-current liabilities and current liabilities.
Group accounts in terms of personal accounts and impersonal accounts.
Divide the accounts into several ledgers, each containing transactions of a
similar nature.
Classify accounts and divide the ledger to improve the organisation of
accounting information and reduce the likelihood of errors.
 62

Chapter 6

The trial balance

This chapter covers part of syllabus sections AS Level 1.2 and 1.4

LEARNING INTENTIONS
In this chapter you will learn how to:
• demonstrate that a trial balance is a list of the balances on each account extracted from the ledgers at a
particular date
• ensure that in any trial balance, the total of the debit balances equals the total of the credit balances
• work out that if the debit and credit totals are not equal then there must be at least one error
• demonstrate that if the debit and credit totals are equal then the trial balance may be correct
• make checks to help find trial balance errors.

63

ACCOUNTING IN CONTEXT

Big business needs accurate accounting

Unilever is one of the world’s largest producers of consumer goods. It manufactures a wide range of products
from food and refreshments to personal and home care. Unilever owns many well-known brands including
Magnum, Dove, Lipton and Lux. These goods are sold in over 190 countries.
Like other large companies, Unilever produces an annual report that summarises its finances. Unilever’s report for
2018 showed that its profit before taxation rose to over $13 billion and its total assets were worth about $66
billion. Many transactions and bookkeeping entries underlie these figures. Unilever requires a carefully thought-
through accounting system. This reduces the likelihood of errors and fraud, giving confidence that the figures in
the annual report provide a true and fair view of the finances for the business.
Producing a trial balance is an important part of any robust accounting system and can help to find some of the
most common mistakes that can occur when recording transactions.

Figure 6.1: Unilever owns many well-known brands including Magnum, Dove, Lipton and Lux.

Discuss in a pair or a group:

• What is fraud? Have a look in a dictionary or do an internet search to find out.
• What kind of errors do you think bookkeepers might make when entering transactions into books of prime
entry and ledger accounts?
• Why is it important that businesses of all sizes are concerned with avoiding errors in their accounts?
 63

6.1 What is a trial balance?

In Chapter 3, we saw that the documents used in transactions, such as invoices and credit notes, are recorded in the
books of prime entry and then posted to the accounts. This chapter introduces the next step: preparing a trial balance.

64

The principle of double-entry determines that the debit balances and credit balances should agree. If the totals do not
agree there must be an error somewhere in the bookkeeping.
The size of the business affects how often a trial balance is prepared. All businesses must prepare a trial balance at least
once a year so that it can be used to produce the financial statements (see Chapters 7 and 8). For a sole trader, once a
year is probably enough. For a large company it would be more usual to prepare a trial balance at least every month in
order to prepare monthly reports for managers that help in making decisions about the business.
If the accounts are kept using a computerised accounting system, a trial balance can be prepared easily at any time
simply by using the function in the accounting package.
 64

6.2 How to prepare a trial balance

The steps to prepare a trial balance are:

Step 1 Balance all the ledger accounts including the cash book (see Chapter 4).
Step 2 List all the accounts putting the debit balances in one column and the credit balances in another column.
Step 3 Add up the debit column and add up the credit column. The total of the debit balances should equal the
total of the credit balances. If the totals are equal, the trial balance agrees.

TIP

Any account that does not have a balance, where the value of the debit and credit entries are the same, is not
included in the trial balance.

WORKED EXAMPLE 1

Darsha has balanced the accounts in her ledgers at 31 March 2021.

The following accounts have debit balances:
motor vehicles $25 000; machinery $15 000; office furniture $8 000; purchases $22 000; sales returns
$1 000; rent payable $16 000; wages and salaries $12 000; heating and lighting $900; insurance $1 800;
cash $1 200; bank $4 700; drawings $6 000.
She also has total trade receivables of $4 600. This is the total of all the balances on the customer accounts in the
sales ledger.
The following accounts have credit balances:
sales $68 000; purchase returns $2 000; bank loan $12 000; capital $33 000.
She also has total trade payables of $5 000. This is the total of all the balances on the supplier accounts in the
purchase ledger.
Prepare a trial balance for Darsha at 31 March 2021.
Step 1
Balance the accounts. The balances have been provided in the question.

65
 TIP

It is vital that the correct date be given in the title of the trial balance. This confirms the date at which all the
accounts have been balanced and will be relied on when producing the financial statements (see Chapters 7 and
8).

The total of the debit balances and credit balances agree at $120 000. The trial balance balances. This means that
for every debit entry made in the ledgers, an equal and opposite credit entry has been made in the ledgers. This
helps to confirm the accuracy of the bookkeeping.
Note: the total trade receivables figure goes in the trial balance instead of all the individual customer account
balances, and the total trade payables figure goes in the trial balance instead of all the individual suppliers account
balances. This helps to reduce the number of accounts in the trial balance. This is explained further in Chapter 14.

66

KEY CONCEPT LINK

Duality: Double-entry means that for every debit entry made in the ledgers, an equal and opposite credit entry has
been made in the ledgers. As a result, a correctly drawn up trial balance will always show that the totals of the
debit balances and credit balances agree.

ACTIVITY 6.1

Prepare a trial balance from the following balances that have been extracted from the books of a small online
retailer at 31 December.

$
Property 100 000
Motor vehicles 18 000
Office furniture 14 000
Computer 2 000
Sales 40 000
Sales returns 600
Purchases 6 000
Purchases returns 500
Motor vehicle expenses 4 000
Advertising 1 600
Office expenses 1 000
Stationery 400
Cash 200
Bank 300 (credit)
Capital 110 000
Drawings 3 000

REFLECTION

When answering Activity 6.1, you were not told which accounts had debit balances and which accounts had credit
balances. Explain to another learner how you decided whether each account was debit or credit. You were told
that the bank account had a credit balance; why was this necessary?
 66

6.3 Benefits of a trial balance

The trial balance is an essential link between the ledger accounts and the financial statements of a business. The main
benefits of a trial balance are as follows:
1 To check that the total of the debit balances equals the total of the credit balances.
2 It will help to uncover many types of error in the ledger accounts and can make it easier to find and correct the
errors (see Chapter 15).
3 To provide a summary of all the ledger accounts and their balances in one document.
4 It is used for preparing the financial statements (see Chapters 7 and 8).
 66

6.4 Limitations of a trial balance

If the debit and credit totals in a trial balance do not agree (they are different), there must be at least one mistake
somewhere in the bookkeeping.

67

If the debit and credit totals in a trial balance do agree (they are the same), it proves that for every debit entry an equal
credit entry has been made. Unfortunately, there can still be errors!
There are six types of error that can occur even when the debit and credit totals in the trial balance agree. They are as
follows:

Type of error Explanation Example

Errors of omission A financial transaction omitted $100 of equipment is bought for cash. The transaction is
completely from the books results forgotten and not entered in the equipment or the cash
in there being neither a debit nor a account.
credit entry for the transaction.
This could happen if a transaction
is not entered in a book of prime
entry.
Errors of commission A financial transaction is posted The payment for stationery is posted in error to the
with the correct amount to the advertising account. Stationery and advertising are both
correct side of the wrong account, classed as expenses.
but the account is in the same
class.
Errors of principle A financial transaction is posted Payment for fuel for a vehicle has been debited to the
with the correct amount, to the motor vehicles account instead of the motor vehicles
correct side of a wrong class of running expenses account. Motor vehicles expenses are
account. classed as expenses while the motor vehicles are non-
current assets.
Errors of original A wrong amount is entered in a A purchase invoice for $100 is entered in the purchases
entry book of prime entry for a financial journal as $10.
transaction.
Complete reversal of An account that should have been A payment made to Sam is debited to the bank account
entries debited has been credited, and the and credited to Sam’s account.
account that should have been
credited has been debited.
Compensating errors Two or more errors that cancel An invoice for $1 200 in the sales journal is posted to the
each other out. customer’s account as $1 000. At the same time, the sales
journal total is underadded (too low) by $200. The debit
balance on the customer’s account and the credit balance
on sales account will both be underadded by $200.
Note: a number that is underadded is incorrect and is smaller than the correct figure. A number that is overadded is
also incorrect but is larger than the correct figure.
It is important to consider these six types of error. When errors are found they must be corrected using the journal (see
Section 3.7). If errors are not corrected, then they will result in inaccurate figures in the accounts.

68
 ACTIVITY 6.2

State which type of error each of the following represents:

Type of error
1 A customer’s invoice has been omitted from the sales journal.
2 A purchase of goods for $100 has been entered in the purchases journal as $1 000.
3 Discount received from Marie has been debited to Maya’s account.
4 Payment of advertising has been debited to the bank account and credited to the
advertising account.
5 Entries were $100 too high (overadded) on both the heating and lighting account and
the sales account.
6 Entries were $50 too high (overadded) on the heating and lighting account and $50
too low (underadded) on the rent payable account.
7 The purchase of office furniture has been debited to the office expenses account.

TIP
Learn the six types of error that do not affect the trial balance. You must be able to give examples of them.
 68

6.5 What to do if the trial balance fails to agree

If the debit and credit totals on a trial balance are not the same, then there must be an error. If errors are not corrected,
they will result in inaccurate figures in the financial statements.
There are many different possible reasons for errors. It is worthwhile carrying out some simple checks first before
spending a lot of time checking all your postings.
Simple checks to find trial balance errors:
1 Check the additions of the trial balance.
2 Check that all accounts have been entered in the trial balance and are correctly entered in the debit or credit
column.
3 If the difference between the debit and credit totals is divisible by nine, two figures may have been transposed in a
balance (e.g. $269 may have been copied as $296).
4 If you still haven’t found the cause of the imbalance, go back to the start and check the balances on each of the
accounts and that you have transferred them correctly to the trial balance.
69

ACTIVITY 6.3

An inexperienced bookkeeper has extracted the trial balance at 31 December 2021. It does not balance.
Rewrite the trial balance and correct the errors.

Trial balance at 31 December 2020

Account Debit balances Credit balances
$ $
Plant and machinery 50 000
Loan from David 10 000
Office equipment 10 000
Wages 9 400
Rent and rates 3 000
Cash 1 200
General expenses 2 200
Sales 97 000
Purchases 60 000
Discounts allowed 460
Discounts received 360
Bank 3 000
Trade receivables 11 000
Trade payables 6 000
Purchases returns 600
Sales returns 800
Rent receivable 1 400
Capital 70 000
Drawings _______ 34 300
157 960 212 760

THINK LIKE AN ACCOUNTANT

Attention to detail
When employers want to recruit new workers, they often provide a person specification to potential applicants as
well as other information about the job. A person specification states the personal qualities and skills that the
employer is seeking in the successful applicant.
The qualities sought when selecting a new bookkeeper or accountant will vary from business to business.
However, the nature of the work means that there are some qualities that are very commonly found in person
specifications for accounting staff. These include attention to detail, being well organised and having good
communication skills. Why do you think that attention to detail is an important skill for a bookkeeper? What other
skills do you think would be useful for a bookkeeper to have and why?

Figure 6.2: Attention to detail, organisation and communication are all highly valued skills in the field of
accounting.
 70

PRACTICE QUESTIONS
1 An invoice has been recorded in J. Smith’s account instead of A. Smith’s account. What type of error has
occurred?
A commission
B compensating
C original entry
D pinciple [1]
2 Discounts received of $100 for January have been posted to the debit of the discounts allowed account
instead. What effect has this had on the trial balance?
A $100 too little debit and $100 too much credit
B $100 too much debit
C $100 too much debit and $100 too little credit
D no effect on the trial balance [1]
3 Which of the following is not a reason to prepare a trial balance?
A to check that the total of the debit balances equals the total of the credit balances
B to help find errors in the accounts
C to increase the sales of a business
D to prepare monthly reports for managers [1]
4 The following balances at 31 December 2021 have been extracted from Lee’s books.

$
Sales 120 000

Sales returns 1 800

Purchases 76 000

Purchases returns 3 000

Wages and salaries 30 000

Heating and lighting 4 400

Rent payable 8 000

Rent receivable 2 000

Travelling expenses 3 400

Telephone expenses 2 400

Discounts allowed 1 000

Discounts received 700

Plant and machinery 60 000

Cash 400

Bank 3 200 (debit)

Trade receivables 18 000

Trade payables 15 500

 Loan from Ting 10 000

Drawings 6 000

Capital ?

Prepare a trial balance at 31 December 2021 for Lee’s business and calculate the balance on his
[8]
capital account.
 71

SELF-EVALUATION CHECKLIST
After studying this chapter, complete a table like this:

Needs
Almost Ready to
You should be able to: more
there move on
work
Explain that a trial balance is a list of the balances on each account extracted
from the ledgers at a particular date.
Ensure that in any trial balance, the total of the debit balances equals the total
of the credit balances.
Work out that if the debit and credit totals are not equal then there must be at
least one error.
Work out that if the debit and credit totals are equal then the trial balance may
be correct.
Make checks to help find trial balance errors.
 73

Part 2

Financial accounting