The ledger is the main book of accounting system. It contains different accounts where transactions relating to that account are recorded.
A ledger is a collection of all the accounts, debited or credited in the given journal and various special journals. A ledger may be in the form of a bound register, or cards, or separate sheets may be maintained in a loose leaf bounder. In the ledger, each account is opened preferably on a separate page or card.
According to J.R.. Batliboi, “Ledger is the chief book of accounts, and it is in this book that all the transactions would automatically find their place under their accounts in a duly classified form.” In the words of L.C. Cropper, “The book which contains a classified and permanent record of all the business transactions is called ledger.”
Utility of Ledger
Its utility or need is as follows :
Full information : Ledger helps in keeping complete information at a glance of each account.
Preparation of Final Accounts : Ledger accounts supply information for the preparation of Trading, Profit and Loss Account and the Balance Sheet.
Reduced Possibility of Errors : Maintenance of ledger accounts reduces the possibility of errors and mis appropriation of funds.
Preparation of Trial Balance : Trial balance can be prepared easily with the help of ledger accounts to ensure arithmetical accuracy.
Any type of information regarding the business can be obtained from the ledger.
Format
The ledger account is conventionally in ‘T’ shape and, thus, sometimes called ‘T’ account. The left side of the ‘T’ account is called the debit side and the right is called the credit side.
Column Information
1. The date on which a transaction is recorded.
2. Particulars relating to a transaction.
3. The journal folio column (J.F.), a reference made to the page number of the book of original entry.
4. The amount related to the transaction is entered in this column.
Distinction between journal and ledger
1. Journal is called the book of original entry. Ledger is called the book of secondary entry.
2. Journal entries are written on day-to-day basis. Ledger entries are posted at regular intervals.
3. Journal entry is written with narration. It is not required in ledger.
4. Recording of transactions in journal is called journalising. Recording of entries in ledger is called posting.
5. Debit and credit are recorded together in journal. A particular ledger account records the debit and credit entries on different pages.
6. There is no cross reference in journal. Ledger provides cross reference.
7. In journal two columns are totalled. In ledger, two sides are balanced.
Advantages of ledger
Financial Information : Ledger provides information about various assets and liabilities to judge the financial position of an enterprise.
Information of Debtors & Creditors : Ledger provides information about debtors and creditors of the enterprise.
Account wise Information : All the transactions pertaining to an account are available at one place in the ledger.
Trial Balance can be Prepared:
Trial balance can be prepared with the help of ledger balances to ascertain arithmetical accuracy of the accounts.
Preparation of Trading & Profit & Loss Account : Trading and profit and loss account can be prepared with the help of ledger.
Rules of posting
Posting is the process of transferring entries from journal or Cash book or subsidiary book to the ledger.
1. All transactions relating to an account should be entered at one place.
2. The word ‘To’ is written for the entries on the debit side of ledger accounts.
3. The word ‘By’ is written for the entries recorded on the credit side of ledger accounts.
4. If an account has been debited in the journal entry, the posting in the ledger should also be made on the debit side of such an account. In the particulars column, the name of the other account which has been credited in the journal should be written for reference.
5. If an account has been credited in journal entry, the posting in the ledger should also be made on the credit side of such an account. In the particulars column, the name of the other account should be written for reference.
6. Similar amount which has been posted on debit side of an account should also be posted on the credit side of an account.
7. It is not necessary to write the word ‘A/c’ after personal accounts.
Posting of compound entries
When in a journal entry, two or more accounts are debited and only one account has been credited or vice versa, the entry is termed as compound journal entry. In case of posting of a compound journal entry, posting has to he made in all the accounts whether debited or credited in the entry.
Balancing of accounts
The ledger accounts are balanced after a certain period in order to ascertain the exact position of an account. If the total of the credit side is bigger than the total that of the debit side, the difference is known as credit balance. Similarly if the total of an account on the debit side is bigger than that of the total of credit side, the difference is known as debit balance.
Different accounts are balanced as under:
All assets accounts are balanced. The debit balance shows increase in assets and credit balance shows decrease in assets.
Liabilities : All liabilities accounts are balanced. Credit balance shows increase in liabilities and debit balance shows decrease in liabilities.
Capital : Capital account always shows credit balance.
Expenses & Revenue : These accounts are not balanced but are simply totalled. They are transferred to Trading & Profit and Loss Account. If both the side are equal, there will be no balance.
Significance of balances relating to accounts
1. Debit balance of a nominal account shows loss or expenditure.
2. Credit balance of a nominal account shows gain or income.
3. Debit balance of real account shows the value of an asset in the book of the firm.
4. Usually real accounts do not indicate credit balances.
5. Debit balance of a personal account indicates the amount which is owing to the firm by a person. In other words, he is the debtor of the firm.
6. Credit balance of personal account indicates the amount which is owing to the person concerned. In other words, he is the creditor of the firm.
7. Bank account is a personal account and not a real account because bank account is the account of some banking company which is an artificial person. If the bank account indicates debit balance, it will indicate balance of cash at bank. On the other hand, if it shows credit balance, it would indicate an overdraft balance.
It is concluded from the above that…
(i) A debit balance is either an asset or an expense.
(ii) A credit balance shows capital, liability or the income earned.
Ledger posting of opening entry from journal
First entry in each year’s journal records the opening balance of various assets and liabilities of the new year. It is called as ‘Opening entry’.
Since the account of all assets are debited in an opening entry, an account for each asset should he opened in the ledger and posting will he made on the debit side of the concerned accounts by writing the words ‘To Balance b/d’.
In the same way accounts of liability should be credited in an opening entry; An account for each liability will be opened in the ledger and the posting will be made on the credit side by writing the words ‘By Balance b/d’.
Closing of personal accounts
From the balancing of these accounts, it can be ascertained as to how much amount is owing from each individual customer and how much amount is owed to each individual creditor. In case a personal account indicates a debit balance, it shows the amount owing from him. On the opposite, when a personal account shows a credit balance, it indicates the amount owing to him.
When the total of debit side is more than that of the credit side, the difference between them is recorded on the credit side of the account to make their totals equal. The words ‘By Balance c/d’ i.e. balance carried down are written against the amount of the difference. In the next accounting year, the balance is brought down on the debit side by putting the words To Balance b/d.
On the opposite, when the total of the credit side exceeds the total of debit side, the difference between the two is written on the debit side of the account to make their totals equal. The words ‘To Balance c/d’ are written against the amount of the difference. In the subsequent year, the balance is brought down on the credit side by recording the words ‘By Balance b/d’.
Closing of Nominal accounts
Nominal accounts relates to expenses and income account of the enterprise. The chief aim of opening these accounts is to find out the net profit or losses of the organisation.
All these accounts are transferred to the Trading and Profit and Loss Account of the business as per the following rules:
(i) Accounts of all the incomes or nominal accounts which indicate a credit balance are closed by transferring them to profit and loss account inserting the words ‘To Profit and Loss A/C’ on the debit side.
(ii) Accounts of all the expenses incurred for the purchases and manufacturing of goods are closed by inserting the words ‘By Trading A/c’ on the credit side. These accounts include carriage outwards, salaries, office rent, selling and distribution expenses etc.
(iii) The remaining expenses which indicate a debit balance are closed by mentioning the words “By Profit & Loss A/c” on the credit side. These accounts include the accounts of factory rent, power, freight, carriage inwards, etc.
Closing of real accounts
Accounts of Cash in hand, Cash at Bank, Land, Building, Furniture, Investments etc, come in the category of real accounts. These accounts show debit balances when closed.
Goods relating accounts are classified into four account. They are transferred to trading account as follows:
Purchases Account always shows a debit balance. It is closed by inserting the words, “By Trading A/c”.
Sales Account always shows a credit balance. It is closed by mentioning the words, “To Trading A/c”.
Purchases Returns Account always shows a credit balance and is closed by writing the words ‘To Trading A/c’.
Sales Returns Account always indicates a credit balance and is closed by inserting the words, ‘By Trading A/c’.
Posting of single column cash book
The following rules should be taken into account while posting a cash book.
1. Opening and closing balance of Cash book will not be entered any where in the ledger.
2. Since the Cash book serves the purpose of cash account also, the recording of Cash transaction in the cash book means that posting of one aspect of cash transaction has been completed in the Cash book itself. Therefore, only the other aspect is to be posted.
Posting from the Debit Side of the Cash book : The other side of cash transactions are posted to the credit side of the respective accounts of in ledger by putting the words ‘By Cash A/c’.
Posting from the Credit Side of the Cash book : The entries appearing on the credit side of the Cash book are posted to the debit side of respective accounts in ledger by inserting the words ‘To Cash A/c’.
Posting of double and triple column cash book
The entries recorded on the debit side of the bank column are posted to the credit side of respective accounts in ledger by mentioning the words ‘By Bank A/c’. Similarly, entries written on the credit side of bank column of Cash book are posted to the debit side of respective accounts in a ledger by writing the words, ‘To Bank A/c’.
All Contra entries are ignored while posting from the Cash book to the ledger. Bank Account is not opened in the ledger.
Totalling and posting of discount columns
The discount columns are merely totalled and not balanced as they are simply memorandum columns. Discount Received A/c and Discount Allowed A/c are opened in the ledger. Their totals are written on the respective sides of the ledger by writing ‘To Sundries as per Cash book’ in the Discount Allowed account and ‘By Sundries as per Cash book in the discount received account.’
Posting of purchases book
Posting of the supplier’s account is done daily to their respective accounts with the relevant amount on the credit side by writing ‘Purchasing A/c’ in the particular column.
The total of the Purchases book is periodically posted to the debit of the purchases account as ‘To Sundries’, normally on a monthly basis. However, if the number of transactions is very large, the totals may be done and posted daily, weekly or fortnightly, as the need may be.
Posting of purchases returns book
The posting from the Purchases returns book requires that the suppliers’ individual accounts are debited with the amount of returns by writing ‘To purchases Returns A/c’ and the purchases returns by writing in the particulars column ‘By Sundries’.
Posting of sales book
The entries from this journal are posted to the debit side of Customer’s account by writing ‘By Sales A/c’ in the particulars column. The sales account is totalled daily, weekly, fortnightly or monthly as per need and posted in the ledger on credit side by writing ‘To Sundries’.
Posting of Sales returns book
The posting from the sales returns account is done by crediting the customer’s individual accounts and the sales returns account is debited with the periodical total by writing ‘To Sales Returns A/c’ on the debit side and ‘By Sundries’ on credit side.
Shopping Cart
