Which one of the following statements is correct ?

Correct — D, (d) A ledger is known as the principal book of accounts. This is the standard description of the ledger and the only statement of the four that is accurate.

The ledger is called the principal book — liber, the book — because it is where the effect of every transaction finally comes to rest, classified by account. The journal and the subsidiary books (purchases day book, sales day book, returns books, bills books, cash book) are books of ORIGINAL ENTRY: a transaction is recorded there first, in chronological order, as it happens. From them the entries are posted to the ledger, where they are grouped by account — one account for each customer, each supplier, each asset, each expense and each item of income. Only in the ledger can a business see what it owes any particular supplier, or what it has spent in total on wages, and only from the ledger can a trial balance and then the final accounts be prepared. That is what makes it principal, and the journal and the subsidiary books subsidiary.

The other three statements each fail on a specific point of doctrine, and the distractor notes set out why. It is worth noticing the structure of the paper here: this stem is word for word the stem of the item that follows it, apart from a bold 'not' — so the two questions on the page are told apart by that single emphasised word, and a candidate who reads the stem at speed can answer the wrong question with a correct piece of knowledge.

Why the others are wrong

• (a)Agreement of trial balance is a conclusive proof of the accuracy. — An agreed trial balance is prima facie evidence of arithmetical accuracy and nothing more; it is not conclusive proof. A trial balance lists the ledger balances and tests only whether total debits equal total credits, so any error that leaves that equality undisturbed passes through it unnoticed. Four classes of error do exactly that: a transaction omitted from the books altogether, since neither side is recorded; an error of principle, where a capital item is debited to a revenue account with the amounts correct on both sides; compensating errors, where two mistakes cancel; and an error of original entry where the wrong amount was entered in the book of original entry and posted consistently to both accounts. To those may be added a posting to the wrong personal account of the right class, which is an error of commission the trial balance cannot see. So the books may balance and still be wrong.
• (b)Suspense account opened in a trial balance is a permanent account. — A suspense account is temporary by definition. When a trial balance does not agree and the difference cannot be traced before the final accounts are prepared, the difference is placed in a suspense account so that the trial balance can be closed and the accounts drawn up. As each error is located it is rectified through the suspense account, and when the last of them has been found the suspense account balances to nil and disappears. It is not intended to survive into the next period, and a suspense balance persisting in a balance sheet is a sign that errors remain untraced. Note the related but different use of the term for a suspense account opened on an incomplete transaction; that too is a holding account, closed as soon as the position is resolved.
• (c)At the end of the accounting year, all the nominal accounts of the ledger book are balanced. — Nominal accounts are CLOSED at the end of the accounting year, not balanced. This is one of the few genuinely mechanical differences between classes of account. Real accounts, which record assets, and personal accounts, which record persons and entities, are balanced at the year end and their balances carried forward into the next period, appearing in the balance sheet. Nominal accounts, which record expenses, losses, incomes and gains, are transferred in full to the trading account and the profit and loss account, so that each begins the new year with no balance at all. That is why a ledger balance can never be an expense: expenses have been closed off into the profit and loss account. A candidate who says nominal accounts are 'balanced' has missed the reason the trial balance carries both kinds of item while the balance sheet carries only one.

The book-keeping cycle runs in a fixed order and the vocabulary attaches to the stages. A transaction is first recorded in a BOOK OF ORIGINAL ENTRY — the journal proper for items with no special book, and the subsidiary books for the recurring classes: purchases day book for credit purchases, sales day book for credit sales, purchases returns and sales returns books, bills receivable and bills payable books, and the cash book, which is both a book of original entry and a ledger account for cash and bank. From these the entries are POSTED to the LEDGER, the principal book, where they are classified into accounts. Under the traditional approach those accounts are of three kinds — personal, real and nominal — and the golden rules follow the classification: debit the receiver and credit the giver; debit what comes in and credit what goes out; debit all expenses and losses and credit all incomes and gains. At the year end real and personal accounts are balanced and carried forward, while nominal accounts are closed by transfer to the trading and profit and loss accounts. The balances are then listed in a TRIAL BALANCE, which tests arithmetical equality only, and from it the FINAL ACCOUNTS are prepared. A difference in the trial balance that cannot be traced goes to a SUSPENSE ACCOUNT until the errors behind it are found. Each of the four statements in this item picks one stage of that cycle, which is why a candidate who can recite the cycle can adjudicate them without any further knowledge.

Key facts

• The ledger is the principal book of accounts; the journal and the subsidiary books are books of original entry.
• The ledger classifies transactions by account, which is what makes a trial balance and the final accounts possible.
• A trial balance tests only the arithmetical equality of debits and credits and is not conclusive proof of accuracy.
• Errors a trial balance cannot detect: complete omission, errors of principle, compensating errors, errors of original entry made consistently on both sides, and posting to the wrong account of the right class.
• A suspense account is a temporary account opened for an untraced difference in the trial balance and closed as the errors are rectified.
• Real and personal accounts are balanced at the year end and their balances carried forward; nominal accounts are closed by transfer to the trading and profit and loss accounts.
• The cash book is both a book of original entry and a ledger account for cash and bank.
• Under the traditional approach the golden rules are: debit the receiver, credit the giver; debit what comes in, credit what goes out; debit all expenses and losses, credit all incomes and gains.

Common traps

• Reading this stem as the 'not correct' stem printed beside it. The two differ by one emphasised word.
• Treating an agreed trial balance as proof of correctness. It proves arithmetical equality alone.
• Calling the suspense account permanent. It exists only until the errors are traced.
• Saying nominal accounts are balanced. They are closed to the trading and profit and loss accounts; real and personal accounts are balanced.

• practice — not a real PYQ

  At the end of the accounting year, which class of accounts is closed by transfer to the trading and profit and loss accounts rather than balanced and carried forward ?

  • (a)Personal accounts
  • (b)Real accounts
  • (c)Nominal accounts
  • (d)All ledger accounts

  Answer(c) Nominal accounts

• practice — not a real PYQ

  The cash book is :

  • (a)Only a book of original entry
  • (b)Only a ledger account
  • (c)Both a book of original entry and a ledger account
  • (d)Neither, being a memorandum record

  Answer(c) Both a book of original entry and a ledger account