Learning Outcomes
After reading this article, you will be able to explain the purpose and layout of ledgers, demonstrate how to enter and balance opening figures, distinguish between casting and cross-casting, and apply folio referencing to keep accurate and traceable records for the ACCA FA1 exam.
ACCA Recording Financial Transactions (FA1) Syllabus
For ACCA Recording Financial Transactions (FA1), you are required to understand the structure and operation of ledgers and the essential techniques for checking arithmetic and maintaining audit trails. In particular, revision for this topic should focus on:
- The purpose and format of general, sales, and purchases ledgers
- How to record opening balances in ledger accounts
- The difference between casting and cross-casting in understanding ledgers
- Using folio referencing to track and verify ledger entries
- The importance of arithmetic accuracy in recording and checking ledger totals
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the main purpose of folio referencing in bookkeeping systems?
- When recording balances carried forward in a ledger account, what is the correct procedure?
- Which best describes "cross-casting" in a columnar ledger?
a) Adding the account total both vertically and horizontally for agreement
b) Transferring figures from one account to another
c) Posting the total from a journal to a ledger
d) Adding only the debit column of a ledger - Why is it necessary to check both casting and cross-casting totals in ledgers?
Introduction
Ledgers form the backbone of any bookkeeping system, providing a structured record of all financial transactions. To keep these records reliable, accurate arithmetic and systematic referencing are essential. This article explains not only how to set up and record opening balances in ledger accounts, but also how to use casting, cross-casting, and folio referencing to maintain control and accuracy. These skills are frequently tested in the ACCA FA1 exam under recording financial transactions.
Key Term: ledger
A book or digital file that contains a record of all financial transactions for specific accounts within a business.
LEDGERS AND OPENING BALANCES
Every ledger account records increases and decreases to an item such as cash, sales, expenses, or liabilities. At the start of a new accounting period, opening balances must be brought forward from the previous period.
Recording Opening Balances
When a new period begins, each account should show a "balance brought forward" (b/f or b/d), which matches the "balance carried forward" (c/f or c/d) from the previous period. Asset and expense accounts usually have debit balances, while liability, capital, and income accounts usually have credit balances.
Key Term: opening balance
The amount in an account at the start of an accounting period, brought forward from the closing balance of the previous period.
Posting Opening Balances
Entries are made as follows:
- For an account with a debit balance, enter "balance b/d" on the debit side.
- For an account with a credit balance, enter "balance b/d" on the credit side. This becomes the starting point for further transactions throughout the period.
CASTING AND CROSS-CASTING
Arithmetic checking is essential for ledger accuracy. Two main methods are used: casting and cross-casting.
Casting
Casting refers to adding together the amounts within a single column (e.g., totalling all debits or all credits in an account) to determine the column total.
Key Term: casting
The process of adding the figures within a single column to calculate the total.
Cross-casting
Cross-casting involves checking the total for each row across multiple related columns (e.g., in a three-column cash book: cash, bank, and discount columns). This confirms that the sum of all columns for each row matches the total for that transaction.
Key Term: cross-casting
The process of adding figures horizontally across columns for each entry to check if their totals agree with the row totals.
FOLIO REFERENCING
To trace the path of each transaction and maintain a clear audit trail, every entry should include a folio or reference. This connects the record in one ledger to the source in another record or book.
Key Term: folio referencing
Assigning a reference number or code to a ledger entry, linking it to its originating entry or related record elsewhere.
Folio referencing is usually shown in a special 'Folio' (or 'Ref') column in the ledger and on the originating source, such as a journal or cash book. This practice keeps records traceable for checking, correction, or audit.
Worked Example 1.1
A cash book receipt of $800 is posted to the bank column and referenced as "GJ5". When posting this to the bank ledger account, what reference should be recorded, and how does folio referencing help?
Answer:
The entry in the bank ledger should include "CB1" in the folio column, indicating the entry comes from page 1 of the cash book. Similarly, the cash book entry should be marked 'GJ5' if it originated from General Journal page 5, allowing anyone to check back and trace both related records.
Worked Example 1.2
A petty cash book is structured into columns for postage, stationery, and sundry expenses. At month-end, each column is added up, and then the totals are checked both per column and per row. What process is being performed, and why?
Answer:
The bookkeeper is performing casting (adding each column) and cross-casting (checking row totals equal the sum of that row's columns). This reduces the risk of arithmetic errors before posting to ledger accounts.
THE IMPORTANCE OF ACCURACY
Regular casting, cross-casting, and proper folio referencing ensure that entries are posted to the correct accounts and that the totals are reliable. When discrepancies are found, they often point to arithmetic mistakes or errors in posting that require correction.
Exam Warning
Mixing up casting and cross-casting is a common mistake. Remember: casting is vertical (columns), cross-casting is horizontal (rows). Both must be checked independently.
Summary
Ledgers are maintained by entering opening balances, recording each transaction correctly, and totaling columns and rows to confirm accuracy. Folio referencing helps trace and verify entries between books of prime entry and ledgers, which is essential for audit trails.
Key Point Checklist
This article has covered the following key knowledge points:
- Explain the purpose and format of ledgers and opening balances
- Record and bring forward opening balances on ledger accounts
- Distinguish casting (column addition) from cross-casting (row addition)
- Use folio referencing to track and verify transactions across records
- Recognize routine control steps to ensure ledger accuracy
Key Terms and Concepts
- ledger
- opening balance
- casting
- cross-casting
- folio referencing