LEDGER

 2.3 LEDGER

You know that the Journal is just a chronological record of all business transactions. It does not provide all information regarding a particular item at one place. This makes it difficult to know the net effect of various transactions affecting a particular item. For example, if you want to know the amount due to a particular supplier or the amount due from a particular customer, you will have to go through the whole journal. To overcome lhis difficulty, we maintain another book called 'Ledger'. In this book we open separate accounts for each item and all transactions related to a particular item as recorded in journal are posted in the concerned account. For example, all transactions related to a particular supplier, say

 Mohan, are posted to Mohan's Account. Similarly, all cash payments and cash receipts can be posted to Cash Account. Thus, you will have no problem in knowing the amount due to Mohan or the balance in Cash Account, and so on.

Thus, ledger is a book where all accounts relating to different items are maintained and into which all journal entries must be posted. In fact, ledger is the principal book of entry which provides complete information about various transactions relating to all parties and all items of asset, incomes and expenses. Some persons have even suggested that we should record all transactions directly into ledger and do away with Journal. But, it is not advisable because in that case we will not have any date-wise record of the transactions and the details thereof. Such record is considered necessary for future reference. 

You learnt about the 'T' form of an account which divides it into two parts. The left hand side is called the debit side and the right hand side the credit side. The proper fom of a ledger account is givenh Figure 2.2. 

You will notice that both sides of the account have date, particulars, folio and amount columns. Now, let us see how postings are made into the ledger accounts.

 2.3.1 Posting into Ledger

 The journal entries form the basis for recording in the ledger accounts, and the process of ' entering transaction in the ledger is called 'Posting'. When a journal entry has to be posted in the concerned ledger accounts, the following procedure is adopted.

1         Every journal entry will have to be posted into all those accounts which have been debited and credited in the journal entry. For example, for cash sales, Cash Account is debited and Sales Account is credited in the joumal. When this entry is posted in the ledger, it must be posted in Cash Account as well as in Sales Account. 

2         Posting will be made on the debit side of the account which has been debited in the journal, and the credit side of the account which has been credit@in the journal. In case of the above example of cash sales, posting will be made on the debit side of Cash Account, as it has been debited in journal and the credit side of Sales Account, as it had been credited in the journal. 

3         Whether the posting is made on the debit side or the credit side, first of all the date of the transaction (as given in the journal) will be entered in the date column. The method of recording the date in the ledger account is the same as in the joumal. 

4         While posting on the debit side of an account in the particulars column, we shall write the name of the account which had been credited in the journal and add the word 'To' before the name.?irnilarly, while posting on the credit side of an account, we shall write the name of the account which has been debited in the journal and add the word 'By' before the name. In case of the above example, we shall write 'To Sales A/c' in the particulars column on the debit side of Cash Account, and 'By Cash A/c' in the Particulars Column on the credit side of the Sales Account. 

5         The journal entries contain 'narration'. But it is not required in the ledger accounts. Similarly, there is no need to draw a line between the two entries in an account as is done in the journal. Note that posting in the ledger account is considered complete only when both the debit and the credit aspects of all journal entries have been posted. 

6         In the folio column, we shall mention the page number of the journal where concerned journal entry appears. At the same time, the page number of the ledger accounts will be entered in the 'L, F.' column in the journal so as to complete the cross reference. 

7         The amount involved in the journal entry shall be entered in amount columns of both the accounts.

Now let us take a transaction, joumalise it, and then show how the posting is done in the ledger.

Purchased machinery for. cash, Rs. 50,000 on April 4,1988: This transaction will appear in the joumal and the -ledger as undet-: 

2.3,2 Balancing Ledger Accounts 

Whenever one wants to know the net effect of various transactions in a particular account, wc have to work out its balance, Balance is the difference between the totals of the debit and the credit side of an account. The process of finding out the balance is known as balnncing, The procedure for balancing is as follows:

i) Total the two sides of an account.

ii) Find out the difference between the totals of the,two sides. 

iii) Put the difference in the amount column of the side showing less total.

iv) If the difference is entered on the debit side, write against it in the particulars column 'To Balance c/d' (c/d stands for carried down). In case the difference is entered on the credit side, write against it in the particulars column 'By Balance c/d .

v) Now, total both the sides and you will find that both the totals are equal, 

vi) The closing balance (balance c/d) is going to be the opening balance for the subsequent period, The opening balance is shown on the next date in the account by writing 'To Balance b/d' (b/d stands for brought down) or 'By Balance b/d' as the case may be. Note that if the closing balance was on the debit sides, the opening balance would be shown on the credit side and if the closing balance was shown on the credit side, the opening balance would be shown on the debit side. In fact, an account is said to have a debit balwce if its debit side total is bigger and a credit balance if its credit side total is bigger. Thus, the opening balance is shown according to the nature of the balance i.e., the debit balance on the debit side and the credit balance on the credit side.

vii) soittimes the totals of the debit side and the credit side of an account are equal. It implies that the account has nil balance. In such a situation the account is said to have closed having no closing and opening balances,

hok at fllustration 3 and study how various transactions have been recorded in the Journal, posted into various accounts in the ledger, and how ledger accoun@ are halnnced.

Notes: 

1         Transaction on December 14: Ram La1 paid Rs, 4,950 in full settlement of Rs, 5,000 due from him on account of the goods sold to him on December 4. It implies that Rs. 50 @s. 5000- Rs. 4,950) was allowed to him as cash discount, 

  2         Transaction on December 30 : Prem becomes insolvent. The firm could recover only 50 paise in a rupee i.e., 50% of the amount due, Goods worth Rs. 8,000 were sold to him (Rs. 6,000 on December 3 and Rs. 2,000 on December 23). He paid Rs. 5,000 on December 25 leaving a balance of Rs, 3,000. Of this, the firm could recover Rs. 1,500 (50% of Rs, 3,000). The remaining amount of Rs. 1,500-has ken treated as bad debts.

Note:

Nominal accounts like Wages Account, Discount Account, Stationery Account, etc. and the accounts relating to purchases, sales and returns of goods are not to be balanced. As per rules, they are simply closed by transfer to the Trading and Profit and Loss Account at the time of preparing the final accounts. In the above illustration, however, they have been balanced for the purpose of preparing the Trial Balance which is being discussed in the next section, 

2.3.3 Significance of Balances

You have learnt that the 'balance' in an account signifies the net effect of all transactions related to it during a given period. It may be a debit balance or a credit balance or a nil balance depending upon whether the debit or the credit total is higher. Let us now understand the significance of a balance in respect of the various types of accounts in the ledger.

Personal Accounts: Personal accounts are more frequently balanced as compared to any other class of accounts. Balance in a personal account indicates whether the party concerned owes to thk business or the business is owing to him. When it shows a debit balance, it The Accounting Process means that the party owes that amount to the business and he is a debtor to the business. Similarly, when it shows a credit balance, it would mean that the business owes that amount to him and he is a creditor of the business. If, however, the account shows a nil balance, it means that the account has been cleared, nothing is due to him or due from him.

Real Accounts: Real accounts are normally balanced at the end of the accounting period primarily for the purpose of preparing the final accounts. The Cash Account, however, is balanced everyday because the actual cash is to be verified and confirmed with the closing balance shown by Cash Account. All real accounts show a debit balance as these are assets (property) accounts. 

Nominal Accounts: Nominal accounts are not to be balanced. They are simply closed by transfer to the Trading and Profit aid Loss Accounts, at the time of preparing the final accounts. However, for the purpose of understanding the procedure involved, nominal accounts have also been balanced. Even otherwise, the difference between the debit side and credit side totals have to be worked out for preparing the Trial Balance. Note that the accounts which relate to expenses or losses will show a debit balance; whereas those reiating to incomes and gains will have a credit balance. This is because all expenses and losses are debited and all incomes and gains are credited. 

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