A ledger is a book or record in which classified transactions relating to different accounts are maintained. The entries are posted into the ledger from journals, making it a central place for organizing financial data.
In a small business, one ledger may be sufficient to record both personal and impersonal accounts. Personal accounts relate to debtors and creditors, while impersonal accounts include assets, liabilities, income, and expenses.
However, in large-scale businesses, the ledger is divided into different parts for better control and efficiency. One ledger is maintained for debtors who purchase goods on credit, another for creditors who supply goods on credit, and a third ledger is used for all other accounts. This third ledger is commonly known as the general or impersonal ledger.
Entries from purchase and purchase return journals are posted to the purchase (creditors) ledger, while entries from sales and sales return journals are posted to the sales (debtors) ledger. The remaining accounts are recorded in the general ledger. The auditor must ensure that all postings are complete and accurate.
Types of Ledger Used in Auditing
Purchase Ledger
1. Opening Balance
The opening balances of creditor accounts are brought forward from the previous year. The auditor should verify each balance to ensure accuracy.
2. Creditors Schedule
The schedule of creditors should be compared with entries in the purchase ledger. This helps confirm that all accounts are properly recorded.
3. Verification from Creditors
The auditor may send confirmation letters to creditors to verify the exact amounts payable. External confirmation strengthens reliability.
4. Provision for Disputes
The auditor should check whether adequate provision has been made for disputed amounts in creditor accounts.
5. Advance Payments
Some creditor accounts may show debit balances due to advance payments. Supporting documents such as orders, invoices, and correspondence should be examined.
6. Goods in Transit
Goods in transit should not be recorded unless both goods and invoices are received. The auditor should verify correct treatment.
7. Bills Accepted
Bills accepted for payment should be verified through the bills payable book and related accounts.
8. Goods Returned
Returns recorded in the purchase returns journal should be verified and correctly posted to creditor accounts.
9. Discount Received
Cash discounts allowed by creditors should be verified through the cash journal, discount account, and purchase ledger.
10. Cash Paid
Payments made to creditors should be checked with receipts, cash book entries, and ledger postings to ensure consistency.
11. Allowances
Allowances given by suppliers should be verified through notes and properly recorded in accounts.
12. Self-Balancing System
If a self-balancing system is used, the purchase ledger adjustment account should agree with individual creditor accounts.
Sales Ledger
1. Opening Balance
Opening balances of debtors should be verified with figures from the previous year.
2. Debtors Schedule
The auditor should compare the schedule of debtors with the sales ledger to confirm outstanding balances.
3. Examine Journals
Sales, sales returns, bills receivable, and cash journals should be examined to verify entries.
4. Check Posting
The auditor should ensure that postings from journals to the ledger are regularly and correctly made.
5. Confirmation from Debtors
Confirmation letters may be sent to debtors to verify balances shown in the ledger.
6. Disputed Amounts
Overdue accounts should be reviewed to identify disputed or doubtful amounts.
7. Bad Debts
The auditor should examine bad debts in detail and understand reasons for non-payment.
8. Reconciliation Statement
Differences between ledger balances and confirmations should be reconciled to identify errors or fraud.
9. Bills Renewal
Renewed bills should be examined, as frequent renewals may indicate doubtful debts.
10. Cheques Dishonoured
Dishonoured cheques should be investigated to assess customer reliability.
11. Outstanding Debts
Long outstanding debts should be examined carefully to determine their recoverability.
12. Self-Balancing System
The adjustment account should agree with individual debtor accounts if the system is used.
General Ledger
1. Posting of Cash Transactions
The auditor should verify that all cash transactions are correctly posted in the general ledger.
2. Vouching Journal Entries
Each journal entry must be supported by a valid voucher. Entries without proper evidence should not be accepted.
3. Check Posting
The auditor should ensure that totals from journals are correctly posted to the ledger.
4. Check Totals
Ledger totals should be verified to identify any errors in posting or calculation.
5. Accuracy of Accounts
The auditor should ensure that all accounts are accurate and supported by proper documentation.
6. Direct Posting
Entries posted directly from vouchers should be verified in the same manner as regular entries.
7. Check Adjustments
Adjustments such as outstanding expenses, prepaid expenses, accrued income, and unearned income should be properly recorded.
8. Trial Balance Accounts
Ledger balances should agree with the figures shown in the trial balance.
9. Trading Account Items
Items used in preparing the trading account should be verified from ledger balances.
10. Profit and Loss Items
The auditor should compare general ledger balances with the profit and loss account to ensure accuracy.
11. Balance Sheet Items
Items appearing in the balance sheet should be verified with ledger balances.
12. Casting of General Ledger
Totals of the general ledger should be checked for correctness.
13. Postings
All entries must be correctly posted to their respective accounts to avoid errors and fraud.
Outstanding Assets
1. Prepaid Insurance
The auditor should examine insurance agreements and verify the portion of insurance relating to future periods.
2. Prepaid Rent
Advance rent payments should be verified with rental agreements and properly recorded.
3. Prepaid Tax
Taxes paid in advance should be compared with actual tax liability to ensure correct recording.
4. Rent Receivable
The auditor should verify rent receivable based on agreements and ensure proper recording.
5. Interest Receivable
Interest due but not yet received should be calculated and recorded correctly.
6. Dividend Receivable
Dividend income should be verified based on investments and declared rates.
Outstanding Liabilities
1. Wages Unpaid
Unpaid wages should be verified with employee records.
2. Carriage Outstanding
Outstanding carriage expenses should be checked with supporting documents.
3. Rent Payable
Rent due but unpaid should be verified through agreements.
4. Tax Payable
Tax liability should be properly calculated and recorded.
5. Commission Payable
Commission payable should be verified through agreements and entries.
6. Interest Payable
Interest payable should be calculated based on loan terms.
7. Unearned Income
Income received in advance should be properly adjusted and recorded.
Contingent Liabilities
1. Bills Discounted
Bills discounted should be confirmed with banks and disclosed as contingent liabilities.
2. Loan Guarantee
Guarantees given for loans should be verified and disclosed properly.
3. Court Cases
Pending legal cases should be reviewed, and provisions should be made where necessary.
4. Debtors Sold
Sale of debtors should be verified through agreements.
5. Deferred Taxation
Pending tax matters should be reviewed, and proper provision should be made.
6. Forward Delivery Contracts
Expected losses from forward contracts should be disclosed.
7. Gratuity to Employees
Potential gratuity liabilities should be estimated and disclosed.
8. Dividend in Arrears
Unpaid dividends should be disclosed in financial statements.
9. Partly Paid Shares
Liability on partly paid shares should be properly disclosed.
Contingent Assets
A contingent asset is not a present asset but may become one in the future. For example, a company may have the option to purchase shares or may be involved in a legal case where it expects to receive compensation.
If the company wins the case or exercises its rights, the asset becomes real. Such assets are generally disclosed in notes rather than recorded in the accounts, as their realization is uncertain.
Conclusion
The ledger plays a central role in accounting by organizing financial transactions into meaningful categories. Proper maintenance of different types of ledgers ensures accurate recording and reporting of financial data.
From an auditing perspective, careful examination of purchase, sales, and general ledgers helps detect errors, prevent fraud, and ensure that financial statements present a true and fair view. Accurate posting, proper classification, and thorough verification are essential for maintaining reliable accounting records.
See Also: What is an Auditor | Appointment & Removal of an Auditor
