How TO Audit: Bought ledgers with debit balances.
How TO Audit: Bought ledgers with debit balances.
A bought ledger is a system of accounting by which business records and monitors its creditors. The purchase ledger contains the individual accounts of suppliers from whom the business has made purchases on credit.An account in the Bought Ledger may be in debit. The balance may represent the amount receivable on account of goods returned, rebate allowed by the supplier or advance paid against an order.
In accounting, a debit balance is the ending amount found on the left side of a general ledger account or subsidiary ledger account. A debit balance is normal and expected for the following accounts: Asset accounts such as Cash, Accounts Receivable, Inventory, Prepaid Expenses, Buildings, Equipment, etc. While a debit balance for bought ledger is rare, it's still possible.
Let's learn the main reasons for such debit balances of a bought ledger.
Main reasons for debit balances and their treatment.
On normal Business processes
The auditor should confirm that the advance against the order had been paid in pursuance of a recognised trade practice, also that subsequently goods have been received against the advance or will be received, for such an advance may represent a disguised loan to accommodate a business associate. The book balance also may represent the cost of goods purchased wrongly debited to the account of the supplier, instead of the Purchase Account.
In each such case, it should be ascertained that the book balance is good and recoverable and if it is not considered recoverable, a provision against the same has been made. The book balances should be appropriately classified for purposes of disclosure in the Balance Sheet.
As a loan from directors of the company
If the debit balance represents a loan to a director or officer of the company, either jointly or severally with another person or it is a debit due by a firm or a private company in which the director is a partner or a member, the same should be separately disclosed in the Balance Sheet in accordance with the provisions contained in Schedule III to the Act.
The maximum account due from the directors or other officers of the company at any time during the year and debts due from companies under the same management should also be disclosed alongwith the names of companies (Part I, Schedule III to the Companies Act, 2013).
That's all on Bought ledgers. If you have any queries, please comment.
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