The journal provides a
complete listing of the daily transactions of a
business. But it does not provide information about
a specific account in one place. For example, to
know how much cash balance we have, the accounting
clerk would have to check all the journal entries in
which cash is involved, and this is very laborious
job; because there are hundreds or even thousands of
cash transactions recorded on different pages of
journal. To avoid this difficulty, the debit and
credit of journalized transactions are transferred
to ledger accounts. Thus all the changes for a
single account are located in one place - in a
ledger account. This makes it easy to determine the
current balance of any account.
Contents:
The book in which
accounts are maintained is called ledger.
Generally, one account is opened on each page of
this book, but if transactions relating to a
particular account are numerous, it may extend to
more than one page. All transactions relating to
that account are recorded chronologically. From
journal each transaction is posted to at least two
concerned accounts - debit side of one account and
credit side of another account. Remember that, if
there are two accounts involved in a journal entry,
it will be posted to two accounts in the ledger and
if the journal entry consists of three accounts
(compound entry) it will be posted to three
different accounts in the ledger. The process of
transferring information from journal to ledger
accounts is known as posting. The goal of all
transactions is ledger. Ledger is known as the
destination of entries in journal but it must be
remembered that transactions cannot be recorded
directly in the ledger - they must be routed through
journal. This concept is illustrated below:
Transaction |
↓ |
Journal |
↓ |
Ledger |
So, the books in which
all the transactions of a business concern are
finally recorded in the concerned accounts in a
summarized form is called ledger.
The ledger has the
following main characteristics:
- It has two
identical sides - left hand side (debit side)
and right hand side (credit side).
- Debit aspect
of all the transactions are recorded on the
debit side and credit aspects of all the
transactions are recorded on credit side
according to date.
- The difference
of the totals of the two sides represents
balance. The excess of debit side over credit
side indicates debit balance, while excess of
credit side over debit side indicates the credit
balance. If the two sides are equal, there will
be no balance.
- Generally the
balance is drawn at the year end and recorded on
the lesser side to make the two sides equal.
This balance is know as closing balance.
- The closing
balance of the current year becomes the opening
balance of the next year.
There are two forms
of ledger accounts. These are:
- Standard form
- Self-balancing
form
Standard Form of Ledger Account:
To understand
clearly as to how to write the accounts in ledger,
the standard form of an account is given below with
two separate transactions:
Date |
Particulars |
J.R |
Amount |
Date |
Particulars |
J.R |
Amount |
2005
Dec. 17 |
Cash A/C |
|
1,200 |
2005
Dec. 17 |
Purchases A/C |
|
2,000 |
It appears that
each account in the ledger has two similar sides -
left hand side is called debit side (briefly Dr.)
and right hand side (briefly Cr.) side. Now a days
these two words are not used, because it is obvious
that the left hand side is debit side and right hand
side is credit side.
Posting Procedure:
Transferring
information i.e. entries from journal to ledger
accounts is called posting. The procedure of posting
from journal to ledger is as follows:
- Locate the
ledger account from the first debit in the
journal entry.
- Record the
date in the date column on the debit side of the
account. The date is the date of transaction
rather than the date of the posting.
- Record the
name of the opposite account (account credited
in entry) in the particular (also know as
reference column, description column etc)
column.
- Record the
page number of the journal in the journal
reference (J.R) column from where the entry is
being posted.
- Record the
amount of the debit in the "amount column"
- Locate the
ledger account for the first credit in the
journal and follow the same procedure.
Balancing An Account:
The difference
between the two sides of an account is its balance.
The balance is written on the lesser side to make
the two sides equal. The process of equalizing the
two sides of an account is known as balancing.
The rules for
balancing an account are stated as below:
- Add up the
amount columns of both the sides of an account
and write the totals in a separate slip of
paper.
- Find out the
difference of the two totals.
- Write down the
difference on the lesser side of the account.
- Now total up
both the sides and write the totals and draw
double lines under them.
- Again write
the difference on the opposite side below the
double line.
If the debit side
of an account is heavier, its balance is known as
debit balance. and if the credit side of an account
is heavier its balance is know as credit balance. If
the two sides are equal, that account will show zero
balance. The rules for determining the balance is as
follows:
Total debit |
= |
More than
total credit |
= |
Debit balance |
Total credit |
= |
More than
total debit |
= |
Credit balance |
Total debit |
= |
Total credit |
= |
Nil balance |
It may be noted
that at the time of balancing an account debit
balance is placed on the credit side and credit
balance on debit site. This balance is known as
closing balance. What is closing balance in this
year, is the opening balance of the next year.
Example:
Enter the following
transactions in journal and post them into ledger:
2005 |
|
Jan. 1 |
Mr. Javed
started business with cash $100,000 |
2 |
He
purchased furniture for $20,000 |
3 |
He
purchased goods for $60,000 |
5 |
He sold
goods for cash $80,000 |
6 |
He paid
salaries $10,000 |
Solution:
Journal
Date |
Particular |
L.F |
Amount |
Amount |
2005 |
|
|
|
|
Jan. 1 |
Cash A/C
.....................................................Dr.
Capital
(Being capital brought in) |
9
11 |
100,000 |
100,000 |
2 |
Furniture
A/C.................................................Dr.
Cash A/C
(Being furniture purchased for cash) |
13
9 |
20,000 |
20,000 |
3 |
Purchases
A/C...............................................Dr.
Cash A/C
(Goods purchased for cash) |
15
9 |
60,000 |
60,000 |
5 |
Cash
A/C......................................................Dr.
Sales A/C
(Sold goods for cash) |
9
17 |
80,000 |
80,000 |
6 |
Salaries
A/C..................................................Dr.
Cash A/C Return
(Salaries paid) |
19
9 |
10,000 |
10,000 |
Ledger
Cash Account (No.9)
Date |
Particular |
J.R |
Amount |
Date |
Particulars |
J.R |
Amount |
2005 |
|
|
|
2005 |
|
|
|
Jan.1 |
Capital A/C |
1 |
100,000 |
Jan.2 |
Furniture A/C |
1 |
20,000 |
Jan.5 |
Sales A/C |
1 |
80,000 |
Jan.3 |
Purchases A/C |
1 |
60,000 |
|
|
|
|
Jan.6 |
Salaries A/C |
1 |
10,000 |
|
|
|
|
|
Balance c/d |
|
90,000 |
|
Total |
|
180,000 |
|
Total |
|
180,000 |
Capital Account (No.11)
Date |
Particular |
J.R |
Amount |
Date |
Particulars |
J.R |
Amount |
2005 |
|
|
|
2005 |
|
|
|
Jan.6 |
Balance c/d |
|
100,000 |
Jan.1 |
Cash A/C |
1 |
100,000 |
|
Total |
|
100,000 |
|
Total |
|
100,000 |
Furniture Account (No.13)
Date |
Particular |
J.R |
Amount |
Date |
Particulars |
J.R |
Amount |
2005 |
|
|
|
2005 |
|
|
|
Jan.2 |
Cash A/C |
1 |
20,000 |
Jan.6 |
Balance c/d |
|
20,000 |
|
Total |
|
20,000 |
|
Total |
|
20,000 |
Purchases Account (No.15)
Date |
Particular |
J.R |
Amount |
Date |
Particulars |
J.R |
Amount |
2005 |
|
|
|
2005 |
|
|
|
Jan.3 |
Cash A/C |
1 |
60,000 |
Jan.6 |
Balance c/d |
|
60,000 |
|
Total |
|
60,000 |
|
Total |
|
60,000 |
Sales Account (17)
Date |
Particular |
J.R |
Amount |
Date |
Particulars |
J.R |
Amount |
2005 |
|
|
|
2005 |
|
|
|
Jan.6 |
Balance c/d |
|
80,000 |
Jan.5 |
Cash A/C |
1 |
80,000 |
|
Total |
|
80,000 |
|
Total |
|
80,000 |
Salaries Account (19)
Date |
Particular |
J.R |
Amount |
Date |
Particulars |
J.R |
Amount |
2005 |
|
|
|
2005 |
|
|
|
Jan.6 |
Cash A/C |
1 |
10,000 |
Jan.6 |
Balance c/d |
|
10,000 |
|
Total |
|
10,000 |
|
Total |
|
10,000 |
Self Balancing Form of Ledger Accounts:
In practice the
standard form of the ledger account is not used.
But it is usually used for examination purposes.
In practice, the
self balancing form of ledger accounts is used. The
advantage of this type of ledger account is that the
balance of the account after each transaction is
available at a glance from the last column. So, much
time and labor is saved. In the following example
self balancing ledger accounts have been used.
Example:
Enter the following
transactions in journal and post them into the ledger and also
prepare a trial balance.
2005 |
|
Jan. 1 |
Mr. X started
business with cash $80,000 and furniture $20,000. |
Jan. 2 |
Purchased goods on
credit worth $30,000 from Y. |
Jan. 3 |
Sold goods for cash
$16,000. |
Jan. 4 |
Sold goods on credit
to S for $10,000 |
Jan. 8 |
Cash received from
S $9,800 in full settlement of his account. |
Solution:
Journal
Date
2005 |
Particulars |
L.F |
DR.
Amount ($) |
Cr.
Amount ($) |
Jan. 1 |
Cash A/C |
5 |
80,000 |
|
|
Furniture
A/C |
7 |
20,000 |
|
|
Capital A/C |
9 |
|
1,00,000 |
|
(Owner
invested cash and furniture) |
|
|
|
|
|
|
|
|
Jan. 2 |
Purchases
Account |
11 |
30,000 |
|
|
Y |
13 |
|
30,000 |
|
(Bought
goods on credit) |
|
|
|
|
|
|
|
|
Jan. 3 |
Cash A/C |
5 |
16,000 |
|
|
Sales A/C |
15 |
|
16,000 |
|
(Sold
goods for cash) |
|
|
|
|
|
|
|
|
Jan. 4 |
S
A/C |
17 |
10,000 |
|
|
Sales A/C |
15 |
|
10,000 |
|
(Sold
goods on credit) |
|
|
|
|
|
|
|
|
Jan. 8 |
Cash A/C |
5 |
9,800 |
|
|
Discount
A/C |
19 |
200 |
|
|
S A/C |
17 |
|
10,000 |
|
(Cash
received and discount allowed) |
|
|
|
Ledger
Cash Account
(No.5)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 1 |
Capital
A/C |
5 |
80,000 |
|
80,000 |
|
Jan. 3 |
Sales A/C |
5 |
16,000 |
|
96,000 |
|
Jan. 8 |
S
A/C |
5 |
9,800 |
|
105,800 |
|
Furniture
Account (No.7)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 1 |
Capital
A/C |
5 |
20,000 |
|
20,000 |
|
Capital
Account (No.9)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 1 |
Cash
A/C |
5 |
|
80,000 |
|
80,000 |
Jan. 1 |
Furniture
A/C |
5 |
|
20,000 |
|
1,00,000 |
Purchases
Account (No.11)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 2 |
Y A/C |
5 |
30,000 |
|
30,000 |
|
Y Account
(No.13)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 2 |
Purchases
A/C |
5 |
|
30,000 |
|
30,000 |
Sales Account (No.15)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 3 |
Cash
A/C |
5 |
|
16,000 |
|
16,000 |
Jan. 4 |
S A/C |
5 |
|
10,000 |
|
26,000 |
S
Account (No.17)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 4 |
Sales A/C |
5 |
10,000 |
|
10,000 |
|
Jan. 8 |
Cash
A/C |
5 |
|
9,800 |
|
|
Jan. 8 |
Discount
A/C |
5 |
|
200 |
Nil |
|
Discount
Account (No.19)
Date |
references |
J.R |
Debit |
Credit |
Balance |
2005 |
Dr. |
Cr. |
Jan. 8 |
S A/C |
5 |
200 |
|
200 |
|
|