Financial Accounting - Ledger

Financial Accounting – Ledger

Now let us try to understand how a journal works. With the help of journal entries, we book each and every financial transaction of the organization chronically without considering how many times the same type of entry has been repeated in that particular accounting year or period.

Journal entries in any organization may vary from hundreds to millions depending upon the size and structure of the organization. With the help of a journal, each of the transactions might be recorded; however, we can conclude nothing from a journal. Let us consider the following cases. Suppose we want to know:

  • the total sale value or purchase value
  • the total of any particular income or expenses
  • the total of amount payable to any particular creditor or receivable from a debtor

In such cases, it might be a tedious job for any bookkeeper or accountant. Hence, the next step is ledger accounts.

The ledger helps us in summarizing journal entries of same nature at single place. For example, if we pass 100 times a journal entry for sale, we can create a sales account only once and post all the sales transaction in that ledger account date-wise. Hence, an unlimited number of journal entries can be summarized in a few ledger accounts. Transferring journal entries into a ledger account is called ‘posting’.

Ruling of Account in Ledger Account

Let us see various formats of ledger accounts:

Format-1

In the books of M/s. ABC Company
Ledger account of M/s XYZ LTD.
Dr. Cr.
Date Particulars F Amount Date Particulars F Amount
xxxx To Balance b/d xxx Xxxx By Balance b/d xxx
xxxx To Name of the debit account xxx Xxxx By Name of Credit account xxx
xxxx To Balance c/d xx xxxx By Balance c/d xx
Total xxxx Total xxxx

Format-2

Nowadays, the handwritten books are being replaced by computerized accounts. The companies majorly use a six-column format to maintain ledger accounts of their customers. It looks as follows:

In the books of M/s. ABC Bank Ltd.
Ledger account of M/s XYZ Ltd.
Date Particulars LF Amount Balance
Debit Credit Dr. / Cr. Amount

Format-1 is used for academic purpose. Hence, this format is useful to learn the basics and principles of accounting.

Format-2 is used by banking and financial organization as well as well as by most of the business organizations.

Important Points Regarding Ledger

  • Each side of a journal entry is posted in the same side of the ledger. It means the debit entry of a journal is posted in the debit side and vice-a-versa.
  • Balance c/d refers to the balance carried down and balance b/d refers to the balance brought down.
  • After posting in ledger, balancing of ledger is done. In the column named Total, the figure comes on the basis of ‘whichever is higher’. Means, if the total of debit side is Rs 10,000 and the total of credit is Rs 5,000, we write Rs 10,000 in the column named Total of both, the debit and the credit side.
  • The difference of both sides (in this case, it is Rs 5,000) is written in the last row of the credit side as ‘balance c/d’. This balance is called the debit balance of account or vice-a-versa.
  • All expenses and assets represent debit balance.
  • All the income and liabilities represent credit balance including capital account.
  • Debit balance of personal account represents ‘Amount Receivable’. This comes under the category of assets. For example debtors.
  • Credit balance of personal accounts signifies ‘Amount Payable’. This comes under liabilities side and represents that we need to pay this amount which is credited due to goods, service, loan, or advance received.
  • Debit side of real account means stock in hand or any kind of assets. Credit balance of Real account is not possible.
  • Debit balance of nominal account means expenses of organization.
  • Credit balance of nominal accounts means income earned.
  • Debit balance of cash book means cash in hand.
  • Debit side of Bank book means balance at bank.
  • Credit balance of Bank book indicates ‘Bank Overdraft’.
  • Debit and credit balances of nominal account (Expenses and income will be nil, because these balances get transferred to trading, and profit & loss account to arrive at profit and loss of the company.
  • Balances of real and personal account appear in balance sheet of the company and to be carried forward to next accounting years.

Illustration

Journalize the following transactions and post them in to ledger account:

S.No. Transactions Amount
1 Commenced business and introduced cash 400,000.00
2 Goods purchased for cash 50,000.00
3 Goods purchased from Mr.Abdul 135,000.00
4 Freight charges paid on purchases 1,500.00
5 Computer purchased-cash 35,000.00
6 Freight charges paid on purchases of computer 500.00
7 Sale made to Mr.Ram 200,000.00
8 Rent paid 12,000.00
9 Salary paid 15,000.00
10 Cash received from Mr.Ram 150,000.00
11 Cash deposited in bank 75,000.00
12 Office Expenses paid 25,000.00

Journal Entries

S.No. Particulars L.F. Amount
Debit Credit
1 Cash A/c Dr.

To Capital A/c

(Being capital introduced)

** 4,00,000 4,00,000
2 Purchase A/c Dr.

To Cash A/c

(Being cash purchase made)

** 5,00,000 5,00,000
3 Purchase A/c Dr.

To Abdhul A/c

(Being goods purchase from Abdhul)

** 135,000 1,35,000
4 Inward Freight Charges A/c Dr.

To Cash A/c

(Being freight charges Paid)

** 1,500 1,500
5 Computer A/c Dr.

To Cash A/c

(Being computer purchased on cash)

** 35,000 35,000
6 Computer A/c Dr.

To Cash A/c

(Being freight charges on computer paid)

** 500 500
7 Ram A/c Dr.

To Sale A/c

(Being sold to Mr. Ram)

** 2,00,000 2,00,000
8 Rent A/c Dr.

To Cash A/c

(Being rent paid )

** 12,000 12,000
9 Salary A/c Dr.

To Cash A/c

(Being salary paid)

** 15,000 15,000
10 Cash A/c Dr.

To Ram A/c

(Being cash Received from Mr. Ram)

** 1,50,000 1,50,000
11 Bank A/c Dr.

To Cash A/c

(Being cash deposited in Bank)

** 75,000 75,000
12 Office Expenses A/c Dr.

To Cash A/c

(Being office expenses paid)

** 25,000 25,000