BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material
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BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material
It is an important part of the auditor’s duty to vouch for the Impersonal Ledger which contains accounts from which the Trading and Profit & Loss Account and the Balance Sheet are prepared. The Impersonal Ledger has two kinds of accounts, viz., Nominal Accounts and Real Accounts. Nominal Accounts relate to the Trading and Profit & Loss Account and Real Accounts record assets.
It is clear, therefore, that if the accounts in General Ledger are incorrect, they will affect the Profit and Loss Account and the Balance Sheet. The auditor can conveniently check these accounts in detail as their number is not very large even in big business concerns.
Earlier, transactions relating to purchases, purchases returns, sales and sales returns, salary, wages, etc., which appear in the trading account have already been dealt with. The remaining transactions which appear in the Impersonal Ledger but relate to the Profit & Loss Account will now be dealt with. The Impersonal Ledger will be vouched as follows:
- The auditor should check the postings of cash transactions to the Impersonal Ledger. The Journal should be carefully vouched and it should be ensured that each entry is supported by sufficient evidence. Their postings to the Impersonal Ledger should also be checked.
- He should carefully check the totals of the various other books of original entry and the postings thereof to the Impersonal Ledger.
- Direct entries are sometimes passed from one account to another in the Impersonal Ledger. In such cases, the auditor should vouch for the direct transfers in the manner in which he examines those items which pass through the Journal.
- He should check very carefully the adjustments which are usually done at the end of the year when the final accounts are prepared. Such adjustments relate to outstanding assets and liabilities, depreciation, etc. As these adjustments pass through the Journal their postings to the Impersonal Ledger should be checked. Special attention should be paid to these adjustments as they ultimately affect the position shown by the nine accounts. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
Outstanding Assets and Liabilities
If correct profit or loss of business concern for a certain period is to be found out, it is very much desirable that (1) all income and expenditure which relate to that period should be brought into the Profit & Loss Account, and (2) no income and expenditure which do not pertain to that period should be brought to the Profit & Loss Account. To record these, adjusting entries are passed so as to arrive at a correct Profit & Loss Account and to prepare a proper Balance Sheet. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
As a matter of practice, an outstanding Memorandum Book is maintained in some business concerns for this purpose. This book can help the auditor to know exactly what the outstandings are for which adjusting entries have been passed during the year. The book is useful for the auditor for comparing the outstanding of two periods. Such balances are to be shown as debit or credit balances in the Impersonal Ledger and ultimately shown as assets and liabilities in the Balance Sheet.
There may be an expenditure already incurred for which the corresponding benefit could not be made available for the business during the period or some portion of this pertains to the period subsequent to the date of the Balance Sheet. Besides this, there may be some items accruing or due which may not have been recorded in the books. Examples of such items are—Prepaid Expenses, Accrued Income, and Deferred Revenue Expenditure. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
1. Prepaid Expenses. Prepaid expenses are the expenses that actually pertain to the next financial year but have been paid this year, i.e., in advance. If the whole of the amount is charged to the Profit & Loss Account of the current year, it will be unduly burdened and the profit or loss thus arrived at will not be correct. Hence that part of the expenditure which relates to the next financial year will have to be shown separately and should be deducted from the total expenditure. Their examples are insurance premiums, rent, rates, telephone charges, subscriptions, etc. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
The auditor should examine the nominal accounts, the demand notes, receipts, etc., and ensure that proper adjustments have been made in the books at the date of the Balance Sheet. He should also satisfy himself that a correct calculation has been made for the part of the expenditure which is unexpired on that date. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
2. Accrued Income. There might be certain items of income that ought to have been received at the date of the Balance Sheet but have not actually been received, e.g., rent might not have been received for a part of the current year: interest, dividend, commission might have been receivable but not received before that date of Balance Sheet, etc. To arrive at the current profit or loss, such items of income must be accounted for in the Profit & Loss Account. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
The auditor should go through the records very carefully and see that accrued income which actually relates to the current year has been brought into account. He should check the adjusting entries passed for this purpose at the date of the Balance Sheet and also scrutinize that they appear as correct figures on the assets side of the Balance Sheet.
3. Deferred Revenue Expenditure. Deferred Revenue Expenditure is a non-recurring item of expenditure that is incurred with a view to having a financial benefit for many accounting years. The entire amount, as such, should not be charged to the Profit and LOSS Account of the year in which it is incurred. The expenditure will have to be carried forward and spread over a number of years, otherwise, it will bring an undue and extra burden on the Profit & Loss Account of the current year.
Like the outstanding assets, outstanding liabilities should also be included in the Profit & Loss Account. If it is not done, the final accounts will not reveal the correct position of profit or loss and also of financial affairs of the business concern. To verify such items of outstanding liabilities is a bit difficult for the auditor but it is his important duty and he is likely to be held liable if he does not do so. He should realize that if the actual liabilities are not brought into account, the profits shown by the Profit & Loss Account will be more than the actual profits and in that case, the dividends will be paid out of capital.
However, it will not be easy for the auditor to ensure whether some of the exp might have been suppressed or concealed. As such, it will be better on his part to a certificate from a responsible official that there are no expenses that relate to the current year but have been omitted from being recorded in the Books of Accounts. examples of such liabilities are unearned income, unpaid expenses, purchases made at the close of the year, liabilities for rent, and taxes, electricity charges, wages and salaries, freight and carriage, travelers’ and agents’ commissions, etc. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
1. Unearned Income. Unearned income is that income that has been actually received during the current year but does not relate to this year. It will be earned in the next year, e.g., rent or interest received in advance. For example, a concern receives Rs. 75,000 for rent in a particular year but actually, Rs. 60,000 relates to the current year. In such a case, Rs. 15,000 should be treated as rent received in advance as it is an item of unearned income. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
The auditor should examine such items very carefully and see that a part of such income which pertains to the next financial year has been treated as unearned income and shown separately in the liability side of the Balance Sheet.
2. Unpaid or Outstanding Expenses. The expenses which have been incurred during the year but their payments are wholly or partly outstanding are known as unpaid expenses. In such cases, the total amount of such expenditure whether unpaid in part or in toto should be charged to the Profit & Loss Account and included also as a liability in the Balance Sheet.
The auditor should examine nominal accounts, demand notes, receipts, invoices, and other relevant vouchers and note the period covered by such payment. He should ascertain with their help that the expenses unpaid have been debited to the Profit & Loss account of the current year and shown separately in the liabilities side of the Balance Sheet. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
3. Purchases made at the Close of the Year. Purchases made at the close of the year have been received and entered in the Stock Book but no entry has been passed in the Purchase Book as the relevant invoice has not been received.
The auditor should call for a schedule of such purchases and see that their total is debited to the Purchases Account and credited to the Outstanding Liabilities Account. The Goods Inward Book should be compared with the Purchase Book for the few days of the closing month of the year. He should also compare the creditors’ statements with their accounts in the Bought Ledger.
Liability for Rent, Rates, and Taxes, Electricity Charges
To calculate correct profits or losses of the current year, provisions should be made for all liabilities for rent, rates, and taxes. If it is not done, the Profit & Loss Account will not reveal the correct position. This is a liability for expenses payable which have become due for payment during the current year. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
The auditor’s duty is to inspect the relevant accounts in the ledger, demand notes receipts, etc., and find out what period is covered. The accounts should be adjusted for the amount, which has become due but has not yet been paid.
1. Wages and Salaries. There is a usual practice in business concerns that the accounts are closed on the 1st day of the month, and wages or salaries are paid on the first of the following month. Since no payment has been made, wages and salaries will not be debited to the Profit & Loss Account of the year. The profits thus revealed by the Profit & Loss Account will not be shown as correct figures.
It is proper, therefore, that such outstanding salaries and wages should be brought into the books for the purpose of arriving at the correct or actual profits. An entry should be passed to debit the Wages and Salaries Account and credit the Outstanding Liabilities Account.
The auditor should see that the Profit & Loss Account has been debited with the amount of 12 months’ wages and salaries every year.
2. Other Liabilities. The auditor should examine other liabilities relating to freight and carriage, travelers, and agents’ commission as he has done in the case of unpaid expenses discussed above. For checking liability for freight and carriage, he should scrutinize the Statement of Accounts rendered by the clearing and forwarding agents and ensure that they are correct.
To vouch for the travelers’ and agents’ commission, he should examine Commission Accounts received from travelers and agents. He should ensure that provision has been made in the books of accounts for a part of such commission unpaid at the date of the Balance Sheet. He should ensure what amount is due to travelers and agents at the date of the Balance Sheet after deducting the advance.
Only that part of it should be shown as an outstanding liability. If the advance is more than the amount of commission due, it should be shown as a loan to the traveling agents on the asset side. For Such a loan, it will be advisable to make a reserve for doubtful debts as some of the traveling agents do not clear their accounts and give up their jobs. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
3. Apportionment of Expenditure between Capital and Revenue. When a business concern incurs some expenditure, it may be of capital or revenue in nature. It is, therefore, quite important to make an apportionment between capital and revenue so as to arrive at correct figures of profit or loss. As a matter of rule, all revenue expenditures should be charged to the Profit & Loss Account and all capital expenditures should be shown in the Balance Sheet. (BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material)
BCom 3rd Year Vouching of Impersonal Ledger Notes Study Material