Self Balancing Ledger ( Simplified )

These days, accounting software has become so advance. With this, when different person will pass different entries, these entries will record in ledgers and accounting software automatically self balanced without any error.  Self balance means to complete double aspect of any transaction. Two accounts must be affected with a single transaction with in a ledger. OK.  Self balancing ledger's theory  has been  included in CA- IPCC exam., so I am sharing this topic with  students in very simple words.

What is self balancing ledgers? 


Self balancing ledgers is system in which two or more ledgers are balanced through making general or nominal  ledger.

Importance and Basics of Self Balancing Ledgers

Suppose, a big company has 10,000 customers. They buy from company, they pays their credit buying, they return goods and do many more transaction with our company. Just making one ledger is not enough to record all the transactions. So, different persons are appointed to maintain the accounts of customers. Like this, we also deal with our suppliers or creditors. These creditors may be 20000. We may have also other transactions with other parties. So, to record all transactions, we make three ledgers.

(A) Debtor Ledgers for recording all transactions of our customers.

In this ledgers, we have all customers account. For example

i) Ram account

ii) Sham account

iii) Sita account

iii) Gita account

iv) Sima account

v) Vinod account

................

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so we have 10,000 name of customer accounts

in which debit side we showed opening balance of each account, credit sale and credit side we show cash received, discount allowed, bad debts and closing balance. But we did not keep sale account, cash account, discount account because all these accounts will keep in General Ledger. It means in Debtor ledger we just complete 50% of Double Entry System.

Now, in this ledger, we will open a account and its name is General Ledger Adjustment Account, this account  will be just opposite of total debtors account for completing 50% of double entry system. Suppose we have counted that we have to take Rs. 1,00,000 from ram, sham, sita, gita and other 10,000 debtors. It means we already debit this account in each debtor account but in General ledger adjustment account, we credit by writing balance b/d with Rs. 100,000. Like this, we total credit sale, cash received and other other and will show opposite side of General Ledger account. Only after this, our ledger will become double entry system. In your text books, all individual debtors account are not shown. Due to this, you may be in confusion. Now, relax. Understand why we have made General Ledger Account just opposite of Total Debtors account in Debtors Ledger. By following entries, we records

For Credit sale, 

Debtor ledger adjustment account Dr.

General Ledger adjustment account Cr.

For Cash received, bad debts, discount allowed

General ledger adjustment account Dr.

Debtor ledger adjustment account Cr.

(B) Creditor Ledgers for recording all transactions of our suppliers.

In creditors ledgers, we only maintain each and every creditor account like sohan account, mohan account, Rohan account, Vijay account and other our 20000 creditors account. We record their their opening balance, credit purchase in the credit side of individual creditor account and in the debit side, we show cash paid and closing balance payable to each creditor. But we do not make credit purchase account, cash account and other accounts related to each creditor account. So, these creditors accounts' credit  balance in trail balance show more  and trail balance will not be matched. For matching, we open one more account in creditor ledger and its name is general ledger adjustment account.

For making General Ledger Adjustment account, we will pass following journal entries

For credit purchase

General Ledger Adjustment Account Dr.

Creditor ledger adjustment account Cr.

For cash paid to creditors, discount received

Creditor ledger Adjustment account Dr.

General Ledger Adjustment account Cr.

(C) General Ledger for recording all transactions except relating to debtors or creditors.

General Ledger is made for recording and showing all the accounts except debtors and creditors account. Due to not showing debtors and creditor accounts in it, our General Ledger will not fulfill with double entry system. For completing it under double entry system, we will make two more account in it. One is debtor ledger adjustment account and other is creditor ledger adjustment account.

For Credit sale, 

General  ledger adjustment account Dr.

Debtor Ledger adjustment account Cr.

For Cash received, bad debts, discount allowed

Debtor ledger adjustment account Dr.

General ledger adjustment account Cr. 

For Credit Purchase 

General Ledger Adjustment Account Dr.

Creditor Ledger Adjustment Account Cr.

For cash paid to creditor, discount received 

Creditor Ledger Adjustment Account Dr.

General Ledger Adjustment Account Cr. 

Related : CA- IPCC Accounting Notes