Ledger Accounts
Ledger is the main book or
principal book of account. The entries
into ledger accounts travel through the route of journal and subsidiary
books. The ledger book contain all accounts
viz. assets, liabilities, incomes or gains, expense or losses, owner’s capital
and owner’s equity. The ledger is the book of final entry and hence is a
permanent record. There is a systematic way in which transactions are posted
into a ledger account. Once the
transactions are posted for an accounting period, the ledger accounts are
balanced (i.e. the difference between debit side and credit side is
calculated). These balances are used to ultimately prepare the financial
statement like profit and loss a/c and balance sheet. The ledger may also be divided as general
ledger and sub-ledger. While the general ledger will have all ledger accounts,
the sub-ledgers will have individual accounts of customers and suppliers. If there are 10 customers, the general ledger
will not have 10 individual accounts for each customer, instead, these 10
customer account will exist in what is called as ‘Receivable or Debtors Ledger’
and the general ledger will have only one account that represents the
customers. This is named as Debtors
Control Account. Similar is the case of supplier accounts. Such sub-ledgers are necessary for better
control over individual accounts. Also,
this will avoid the general ledger from becoming too big, especially when
number of customers and suppliers is large.
The specimen of a typical ledger
account is given below
Ledger
–Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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Ledger Posting
As and when the transaction takes
place, it is recorded in the journal in the form of journal entry. This entry is posted again in the respective
ledger accounts under double entry principle from the journal. This is called ledger posting.
The rules for writing up account
of various types are as follows
Assets: increases
on the left hand side or the debit side and decreases on the credit side or the
right hand side.
Liabilities: increases
on the credit side and decreases on the debit side
Capital: the
same as liabilities
Expenses: increases
on the debit side and decreases on the credit side
Incomes or
gains: increases on the credit side
and decreases on the debit side.
The student
should clearly understand the nature of debit and credit.
A debit denotes
a.
In the
case of a person that he has received some benefit against which he has already
rendered some service or will render service in future. When a person becomes liable to do something
in favour of the firm, the fact is recorded by debiting that person’s account: (relating
to personal account)
b.
In case
of goods or properties, that the value and the stock of such goods or
properties has increased (relating to real accounts)
c.
In case
of other accounts like losses or expenses, that the firm has incurred certain
expenses or has lost money (relating to nominal account)
A Credit denotes:
a.
In case
of person, that some benefit has been received from him, entitling him to claim
from the firm a return benefit in the form of cash or goods or service. When a person becomes entitled to money or
money’s worth for any reason. The fact
is recorded by crediting him (relating to personal account)
b.
In the
cash of goods or properties, that the stock and value of such goods or
properties has decreased. (relating to real accounts)
c.
In case
of other accounts like interest or dividend or commission received or discount
received the the firm has made a gain (relating to Nominal account)
At a glance:
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Dr. (Debit side)
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Cr. (Credit side)
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DESTINATION where the economic benefit reaches / is received
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SOURCE of each economic benefits
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Receiver
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Giver
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What comes in
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What goes out
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All expenses and losses
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All incomes and gains
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Let us now understand the
mechanism of posting transaction into the ledger account. Consider the transaction: Rent paid in cash
for Rs.10,000. The journal entry for this transaction would be:
Jan 15 Rent A/c Dr. 10000
To
Cash A/c 10000
We will open two ledger accounts
namely rent a/c and cash a/c. let us see how the posting is made
Rent
–Account
Dr Cr
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Date
|
Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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Jan 15
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To Cash A/c
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10000
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Cash
–Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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Jan 15
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By Rent A/c
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10000
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Please observe the following
conventions while posting a transaction into ledger accounts. Note that both the effects of an entry must
be recorded in the ledger accounts simultaneously.
Let us now see how we can create ledger
account for the following seven journal entries
Let us illustrate the journal entries for the following transactions:
2014
April
1 Mr. Vikas and Mrs.Vaibhavi who are husband and wife start consulting
business by bringing in their personal cash of Rs.5,00,000 and 250000
respectively.
10 Bought office furniture of Rs.25000 for cash bill no.2014/f/3
11 Opened a current account with Punjab National Bank by depositing
Rs.100000
15 paid office rent of Rs.15000 for the monthby cheque to M/s Realtors
proprieties. Voucher No.3
20 Bought a motor car worth Rs.450000 fro Millennium Motors by making a
down payment of Rs.50000 by cheque and the balance by taking a loan from HDFC
bank. Voucher No.M/13/7
25 Vikas and Vaibhavi carried out a consulting assignment for Avon
Pharmaceuticals and raised a bill for Rs.1000000 as consultancy fees. Bill no.B13/4/1 raised. Avon Pharmaceuticals have immediately settled
Rs.250000 by way of cheque and the balance will be paid after 30 days. The cheque received is deposited into bank.
30 Sale of one receptionist @ Rs.5000 per month and one officer @
Rs.10000 per month. The salary for the
current month is payable to them.
Solution:
The entries for these transactions in a journal will look like:
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Date
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Particulars
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Voucher Number
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Ledger folio
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Debit amount
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Credit amount
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01.04.14
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Cash A/c
Dr.
To Vikas’s Capital A/c
To Vaibhavi’s Capital A/c
(Being capital brought in by the partners)
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1
2
3
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750000
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500000
250000
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10.04.14
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Furniture A/c Dr.
To Cash A/c
(Being furniture purchased in cash)
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2014/F/3
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4
1
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25000
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25000
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11.04.14
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Punjab National Bank A/c Dr.
To Cash A/c
(Being current account opened with Punjab national bank by depositing
cash)
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5
1
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100000
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100000
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15.04.14
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Rent A/c Dr.
To Punjab National Bank A/c
(Being rent paid to realtors properties for the month)
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3
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6
5
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15000
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15000
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20.04.14
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Motor Car A/c
Dr.
To Punjab National bank A/c
To Loan from HDFC Bank A/c
(Being car purchased from Millennium motors by paying down payment and
loan arrangement)
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M/13/7
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7
5
8
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450000
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50000
400000
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25.04.14
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Punjab National Bank A/c Dr.
Avon Pharmaceuticals A/c Dr.
To Consultancy Fees A/c
(Being amount received and revenue recognized for fees charged)
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B13/4/1
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5
9
10
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250000
750000
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1000000
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30.04.14
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Salary A/c
Dr.
To Salary Payable A/c
(Being the entry to record salary obligation for the month)
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11
12
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15000
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15000
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Folio No. 1
Cash
–Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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01.04.14
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To Vikas’s Capital A/c
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1
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500000
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10.04.14
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By Furniture A/c
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1
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25000
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01.04.14
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To Vaibhavi’s Capital A/c
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1
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250000
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11.04.14
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By Punjab National Bank A/c
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1
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100000
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30.04.14
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By Balance C/d
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625000
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750000
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750000
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01.05.14
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To Balance b/c
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625000
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Folio No. 2
Mr.Vikas’s
Capital Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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1.04.14
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By cash A/c
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1
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500000
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Folio
No.3
Mrs.Vaibhavi’s
Capital Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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01.04.14
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By Cash A/c
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1
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250000
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Folio
No. 4
Furniture
Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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10.04.14
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To Cash A/c
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25000
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Folio
No. 5
Punjab
National Bank Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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11.04.14
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To Cash A/c
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1
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100000
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15.04.14
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By Rent A/c
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1
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15000
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25.04.14
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To Consultancy Fees A/c
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1
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250000
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20.04.14
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By Motor Car a/c
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1
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50000
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Folio
No. 6
Rent
Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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15.04.14
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To Punjab National Bank A/c
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1
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15000
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Folio
No.7
Motor Car Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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20.04.14
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To Punjab National bank a/c
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1
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50000
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20.04.14
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To Loan from HDFC Bank A/c
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1
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400000
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Folio
No. 8
Loan
from HDFC Bank Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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20.04.14
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By Motor Car A/c
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1
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400000
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Avon Pharmaceuticals Account Folio no. 9
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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25.04.14
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To Consultancy fee A/c
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1
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750000
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Folio
No. 10
Consultancy
Fees Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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25.04.14
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By Punjab national Bank A/c
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1
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250000
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25.04.14
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By Avon Pharmaceuticals a/c
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1
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750000
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Folio
No. 11
Salary
Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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30.04.14
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To Salary Payable a/c
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1
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15000
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Folio
No. 12
Salary Payable Account
Dr Cr
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Date
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Particulars
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J.F
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Amount
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Date
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Particulars
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J.F
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Amount
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30.04.14
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By Salary A/c
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15000
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Please carefully observe the posting of
journal entries into various ledger accounts.
Dou you see some further calculation in the cash a/c and Mr.Vikas’s
capital a/c? what is done is that after posting all transactions to these
accounts, the difference between the debit and credit sides is calculated. This difference is put on the side with
smaller amount in order to tally grand totals of both sides. The convention is
to write “To Balance c/d” or “ By Balance c/d” as the case may be. This
procedure is normally done at the end of an accounting period. This process is called as “balancing of
ledger accounts”.
Once the ledgers are
balanced for one accounting period, the balance needs to be carried forward to
the next accounting period as a running balance. This is done by writing “To Balance b/d” or
“By balance b/d” as the case may be after the grand totals. This is also shown in the cash A/c.
Important Note: please
remember that the balances of personal and real accounts only are carried down
to the next accounting period as they represent resources and obligations of
the business which will continue to be used and settled respectively in
future. Balances of nominal accounts
(which represent incomes or gains and expenses or losses ) are not carried down
to the next period. These balances are
taken to the profit and loss account (or income statement) prepared for the
period. The net result of the P & L
Account will show either net income or net loss which will increase or decrease
the owner’s equity.
In the above
example, please note that the balances of rent a/c, consultancy fees account
and salary account will not be carried down to the next period, but to the P
& L account of that period.
Posting To Ledger
Accounts from Subsidiary Books
In the above
section, we explained posting to ledger accounts directly on the basis of
journal entries. In practice, however,
we know that use of subsidiary books is in vogue. Let us see how the posting to ledger accounts
is done based on these records.
For each of the
subsidiary books, there is a ledger account e.g. for purchase book, there is
purchase account, for sales book there’s sales A/c, for cash book there will be
cash a/c as well as bank a/c and so on.
Typical ledger
Account Balances
We have seen how to
balance various ledger accounts. It can
be seen that while some accounts will show debit balance, while the other will
show credit balance. Is there any
relationship between the type of account (whether it is the account of asset,
liability, capital, owner’s equity, incomes or gain, or expenses or losses) and
the kind of balance (debit or credit) it should show?
The answer is
generally ‘Yes’. You may test to find the following are typical relationships.
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Type of Account
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Type of Balance
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All asset accounts
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Debit balance
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All liability accounts
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Credit balance
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Capital & Owner’s equity
account
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Credit balance
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Expenses or loss accounts
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Debit balance
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Incomes or gain accounts
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Credit balance
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Let us test these
possibilities for confirmation. How does
one go about testing this? Consider ‘Cash A/c’ whenever business receives cash
we debit it, and whenever it is paid we credit it. Is it possible to see a situation that
credits to cash are more than debits? In other words could we have negative
cash in hand? No. Cash account will therefore always show a debit balance. So is true for all real asset accounts. After solving problems, if the contrary is
observed, there is every chance that an error has been made while passing the
accounting entries.
The Structure of
Ledger
In practice, for the
sake of convenience and ease of operations, the ledger is subdivided as follows
a) General Ledger: This contains all main ledger accounts excepting individual accounts of
customers, vendors and employees. For
these categories there will be only one representative account in the general
ledger e.g. for customers –Trade debtors A/c ( or Trader Receivables control
a/c), for suppliers – Trader creditors A/c ( or Trade payables a/c) etc.
b) Sub-Ledgers:
These are primarily, Customers’ ledger, suppliers’ ledger,
employees’ ledger etc. The customer
ledger will have all individual accounts of all customers. Suppliers’ ledger will have all individual
accounts of all suppliers. Employee
ledger will have individual accounts of all employees.
The
balances of all individual accounts must tally with the balance reflected in
the representative a/c in the general ledger.
For this a periodical reconciliation is a must.
For
example, if business has 3 customers A,B and C; then an A/c for each of them is
opened in the sub-ledger called customers ledgers and general ledger will have
only one A/c by the name of Trade Debtors a/c.
All the transactions with each of them will be recorded in the
individual accounts as well as the control ledger. See the following
Transaction
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Credit Sales to A Rs.10000
Credit Sales to B Rs.20000
Credit Sales to C Rs.15000
Customer’s
sub-ledger
A’s A/c – Debit
Rs.10000
B’s A/c – Debit
Rs.20000
C’s A/c – Debit
Rs.15000
General
ledger
Total Debitors
A/c – Debit Rs.45000
Such
separation is made for better control. A
person in charges of customer accounting is given responsibility of all
individual customer accounting in the customers’ sub-ledger, whereas another
person be given responsibility for supplier’s sub-ledger. In big organizations this division of labour
is an absolute necessity. The person
looking after general ledger is different.
Simultaneous
posting of transactions into sub-ledgers A/c s and respective a/c s in general
ledger may be quite tedious in manual accounting. But computerized accounting automates this
process as well.
Subdivisions of ledgers
Practically,
the ledger may be divided into two groups
a.
Personal
ledger and
b.
Impersonal
ledger. They are again sub-divided as:
Personal Ledger into two
1.
Debtors’
ledger.
2.
Creditors’
ledger
Impersonal ledger into two
1.
Cash book
2.
General Ledger
this is again divided into two as a) Nominal and b) Private ledger
Personal ledger: The
ledger where the details of all transactions about the persons who are related
to the accounting unit, are recorded, is called the personal ledger.
Impersonal ledger: The ledger where details of all transactions
about assets, incomes and expenses etc. are recorded is called Impersonal
ledger.
Again, personal ledger may be
divided into two groups:
a)
Debtors’ Ledger: The ledger where the details of transactions
about the persons to whom goods are sold, cash is received etc. are recorded,
is called Debtors’ ledger.
b)
Creditors’ ledger: The ledger where the details of transactions
about the personals from whom goods are purchased on credit, pay to them etc.
are recorded, is called Creditors’ ledger.
Impersonal ledger may, again be
divided into two group, viz, (a) cash book and (b) General ledger
a)
Cash Book: The book where all cash and bank
transactions are recorded is called cash book.
b)
General Ledger: The ledger where all transactions relating to
real accounts, nominal accounts, details of debtors’ ledger and creditors’
ledger are recorded is called general ledger.
General Ledger may, again be
divided into two groups, viz, Nominal ledger; & Private ledger.
a)
Nominal Ledger: The ledger
where all transactions relating to assets and liabilities are recorded is
called Nominal ledger.
b)
Private Ledger: The ledger where all transactions relating to
assets and liabilities are recorded is called private ledger
Advantages of sub- division of
ledger:
The advantages of sub-division of ledger are:
a)
Easy to Divide Work: As a result of sub-division, the division of
work is possible and records can be maintained efficiently by the concerned
employee.
b)
Easy to handle: As a result of sub-division, the size and
volume of ledger is reduced.
c)
Easy to Collect Information: From the different classes of ledger a
particular type of transactions can easily be found out.
d)
Minimizations of mistakes: As a
result of sub-division, chances of mistakes are minimized.
e)
Easy to Compute: As a result of sub-division, the accounting
work may be computed quickly which is very helpful to the management.
f)
Fixation of responsibility: Due to
sub-division, allotment of different types of work to different employees is
done for which concerned employee will be responsible.
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