Common Mistakes

Common Mistakes: The Ledger

The Ledger chapter tests your grasp of account classification, double-entry rules, balancing off accounts and control accounts. Learn the common mistakes below and how to avoid them to strengthen your exam answers.

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Classifying Accounts and Choosing the Right Ledger

Mistake: confusing Real Accounts with Nominal Accounts. Avoid it by remembering that Real Accounts are assets (buildings, vehicles, cash, stock, debtors) whose balances carry forward to the next period, while Nominal Accounts are revenues and expenses (sales, rent received, salaries) that are closed to the Profit and Loss Account and hold no permanent balance.
Mistake: placing individual debtors' and creditors' personal accounts only in the General Ledger. Avoid it by remembering that individual debtor accounts belong in the Sales (subsidiary) Ledger and individual creditor accounts in the Purchases (subsidiary) Ledger, while the General Ledger holds the control accounts, assets, liabilities, revenues and expenses.
Mistake: failing to state the purpose of the ledger precisely in structured questions. Avoid it by writing the full purpose: the ledger collects and summarises the effect of all transactions by account so that each account's balance can be determined, serving as the source for preparing the Trial Balance and financial statements.

Double-Entry Rules and Normal Balances

Mistake: reversing the debit and credit sides. Avoid it with the fixed rule: debit records increases in assets and expenses; credit records increases in liabilities, owner's equity and revenue. Every transaction must be debited to one account and credited to another for the same amount.
Mistake: stating the wrong normal balance. Avoid it by memorising: assets and expenses have debit balances; liabilities, owner's equity and revenue have credit balances. For example the Motor Vehicle Account has a debit balance while the Capital Account and Rent Received Account have credit balances.
Mistake: recording only one entry or recording both entries on the same side. Avoid it by first identifying the two accounts involved in each transaction, then ensuring one is debited and one is credited so the accounting equation always stays balanced.
Mistake: not understanding the consequences if the Double-Entry System is not used. Avoid it by stating the effects: errors are hard to detect, a Trial Balance cannot be prepared, and the true position of the business's assets, liabilities and profit or loss cannot be determined accurately.

Balancing Off Ledger Accounts

Control Accounts, Minority Balances and Contra Entries

Mistake: placing items on the wrong side of the Trade Receivables Control Account. Avoid it by remembering the debit side records the opening balance, credit sales, dishonoured cheques, discounts cancelled and interest on late payment; the credit side records receipts, discounts allowed, sales returns, bad debts and contra entries.
Mistake: putting discounts on the wrong side of the Trade Payables Control Account, or entering bad debts in it. Avoid it by remembering the credit side records the opening balance, credit purchases and interest charged; the debit side records payments, discounts received, purchases returns and contra entries with the debtor. Bad debts belong only in the Trade Receivables Control Account.
Mistake: being unable to explain minority balances. Avoid it by stating that the Trade Receivables Control Account can show a credit balance due to overpayment or advance payment by customers, while the Trade Payables Control Account can show a debit balance due to overpayment or returns after full settlement to suppliers.
Mistake: failing to handle a debtor who is also a creditor. Avoid it by identifying the smaller of the two mutual debts as the Contra Entry, then crediting the Trade Receivables Control Account and debiting the Trade Payables Control Account by the same amount to avoid a double payment.

Normal Balances by Account Group

Account Group	Example Accounts	Normal Balance
Assets	Buildings, vehicles, cash, debtors	Debit
Liabilities	Creditors, loans, bank overdraft	Credit
Owner's Equity	Capital	Credit
Revenue	Sales, rent received, commission received	Credit
Expenses	Salaries, rent paid, rates	Debit

Assets and expenses carry debit balances; liabilities, owner's equity and revenue carry credit balances.

Sides of Entry in the Trade Receivables Control Account

Debit Side	Credit Side
Opening balance (b/d)	Receipts from debtors
Credit sales	Discounts allowed
Dishonoured cheques	Sales returns
Discounts cancelled	Bad debts
Interest on late payment	Contra entry

The Trade Payables Control Account is the mirror image: opening balance, credit purchases and interest charged on the credit side; payments, discounts received, purchases returns and contra on the debit side.

What is the difference between Balance c/d and Balance b/d?

Balance c/d (carried down) is the balancing figure written on the smaller side on the last date of the period to make both sides equal. Balance b/d (brought down) is the account's actual balance brought down on the opposite side on the first day of the next period, becoming the opening balance.

Why can the Trade Receivables Control Account have a credit balance?

A minority credit balance can arise when a customer overpays, pays in advance before the sale, or returns goods after fully settling the debt. In these situations the business owes the customer, so a small credit balance appears in an account that normally carries a debit balance.

When is a contra entry used in control accounts?

A contra entry is used when the same person is both a debtor and a creditor to the business. The smaller of the two debts is offset by crediting the Trade Receivables Control Account and debiting the Trade Payables Control Account by the same amount, so that only the net balance needs settling and a double payment is avoided.

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