What are Self Balancing Ledgers and Why are they used.

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Many students I encounter tell me that they get confused with the concept of Self Balancing Ledger (also called the Self Balancing System). This fact astonishes me as the concept of Self Balancing Ledger is a very simple and basic concept which is super easy to understand.

So if you too are unaware of the concept then read on as I will be discussing the following common queries relating to the Self Balancing Ledger

  • What is a Self Balancing System?
  • What is a Self Balancing Ledger?
  • Which Ledgers are kept under the Self Balancing System?
  • How entries are made under the Self Balancing System?
  • Why Self Balancing system?

What is a Self Balancing System?

Consider a small business having limited number of transactions. For them, it is possible to open a single ledger with all the accounts in it. This single ledger is known as the General Ledger.

However, when the size of the business is large, a considerable number of accounts become involved. It is difficult to maintain all the accounts in a single General Ledger then.

Thus, for proper book-keeping, large businesses opt for the Self Balancing System where the following ledgers are maintained:

  1. Debtors or Sales or Sold Ledger: It contains personal accounts of all trade debtors to whom goods are sold on credit.
  2. Creditors or Purchases or Bought Ledger: It contains personal accounts of trade creditors from whom goods are purchased on credit.
  3. General or Nominal Ledger: Contains all other accounts except the debtors and creditors.

The division of the Ledger into the three ledgers shown above eases the process of book keeping but also brings some problems which we will discuss below. These problems will help you understand why the Self Balancing System was developed.

Why Self Balancing Ledger?

Consider the following transaction: Sold goods to Mr. A on credit worth Rs. 1000/-

The journal entry for the above transaction will be

Mr. A (Debtor) Account – Debit1000
To Sales Account1000

 

Now if we maintain a single general ledger then both aspects of the transaction can be entered in the same ledger as all the accounts are incorporated in the same ledger.

However, when the ledger is divided into three ledgers mentioned above, no single ledger can complete the double entry of the above transaction because

  • Mr A (Debtor Account) will be maintained in the Debtors ledger
  • Sales Account will be maintained in the General Ledger

This will lead to errors in the books of accounts as different persons are usually made responsible for maintaining the different ledgers.

Thus to detect and correct errors quickly and to maintain an internal control system to prevent errors, these ledgers were converted into Self Balancing Ledgers.

What is a Self Balancing Ledger?

To prepare a Trial Balance, balances are required to be extracted from all the 3 ledgers. It cannot be prepared from a single ledger as it does not contain all the accounts.

Under Self Balancing system, each of the above ledgers is arranged in such a way that it contains sufficient information for preparation of an independent Trial Balance. Each ledger is made capable of balancing itself. This is why it is called a Self Balancing Ledger.

But How?

A separate and additional account is opened at the end of each ledger. It is called an Adjustment account or a Control account. Under Self Balancing System following adjustment accounts are opened in the three ledgers:

  • In Sales/Debtors Ledger: A General Ledger Adjustment Account
  • In Purchase/Creditors Ledger: A General Ledger Adjustment Account
  • In General Ledger: (a) A Debtors Ledger Adjustment Account & (b) A Creditors Ledger Adjustment Account

So now the transaction “Sold goods to Mr. A on credit worth Rs. 1000/-“ would be recorded as follows:

In the Debtors Ledger the following entry will be made

AccountDebitCreditRemarks
Mr. A (Debtor) Account – Debit1000As Mr A Account is maintained in the Debtors Ledger itself
To General Ledger Adjustment Account1000As Sales Account is not maintained in here but in the General Ledger

 

In the General Ledger the following entry will be made

AccountDebitCreditRemarks
Debtors Ledger Adjustment Account – Debit1000As Mr. A Account is not maintained here but in Debtors Ledger
To Sales Account1000As Sales Account is maintained here in General Ledger itself

 

Similarly, for a credit purchase transaction involving creditors like “Purchased goods worth Rs. 5000/- from Mr. C on credit

Normal Journal entry would be

Purchase Account – Debit5000
To   Mr C (Creditor) Account5000

 

Under Self Balancing Ledgers the entries would be:

In the Creditors Ledger

General Ledger Adjustment Account – Debit5000
To Mr C (Creditor) Account5000

 

In the General Ledger

Purchase Account – Debit5000
To Creditors Ledger Adjustment Account5000

 

So you can see that by establishing the Adjustment Account in each ledger we can complete double entry of each transaction in every ledger.

A separate and independent Trial Balance can be prepared from each ledger. It helps to detect errors easily as the equality of debits and credits can be proved in each ledger.

Advantages or Uses of Self Balancing Ledger

We implement the Self Balancing System for the following advantages:

  • Errors are detected locally and quickly
  • If errors creep into a particular ledger, only that ledger is required to be checked. Other ledgers need not be compared.
  • Serves as a basis for internal check system
  • A number of persons are engaged for different ledgers. Unless all of them enter into any collusion, frauds can be minimised. It ensures accountability of the persons maintaining the ledgers.
  • Volume of work of a particular ledger remains manageable

So that was all about the Self Balancing Ledger

I hope this post helped you in understanding the concept, uses and advantages of the Self Balancing Ledger.

If you have any doubts, feel free to ask me in the comments below. Also subscribe to our email newsletter for getting our posts delivered straight to your inbox instantly.

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