Financial Accounting Ledger - Accounting Basics

What is Ledger in Financial Accounting?

The number of journal entries of the organization differs from hundreds to millions depending on the structure and size of the organization. Each transaction happened is recorded in the form of journal entry. But journal may not help in coming to conclusions and making decisions. More information on the following aspects need to be known:

  • 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

All these can be known with the help of the net step of financial accounting, that is ledger accounts.

The journal entries of the same nature which are summarized at single place, is known as ledger account. For instance, if 100 journal entries are passed regarding sales, only one ledger account can be created and can post all the sales transactions in that ledger account. The transformation of journal entries into a ledger account is known as ‘Posting’.

What are the Rules of Account in Ledger Account?

The different formats of the ledger accounts are as follows:

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

The six-column format is majorly used by the companies to maintain the ledger accounts of the customers. The format appears 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 basically used for academic purpose and used for learning the basic principles of accounting.

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

List out some of the important points regarding Ledger

  • The debit entry of the journal is posted in the debit side of the ledger and vice-versa.
  • Balance c/d refers to the balance carried down and balance b/d refers to the balance brought down.
  • The balancing of ledger is done after posting all the entries in the ledger. 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 is written in the last row of the credit side as ‘balance c/d’.
  • Debit balance is represented by all the expenses and assets.
  • The credit balance is represented by the income and liabilities including capital account.
  • ‘Amount Receivable’ is the debit balance of the personal account, which comes under assets category such as debtors.
  • ‘Amount Payable’ is the credit balance of the personal account, which comes under the liabilities side,
  • 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’.
  • There will be no debit and credit balance of nominal account as the balances are transferred to trading, profit and loss account to derive the 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

An illustration is considered for preparing the Journal entries for the following transactions and posts them in the 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/cDr.
To Capital A/c
(Being capital introduced)
**
4,00,000
4,00,000
2
Purchase A/cDr.
To Cash A/c
(Being cash purchase made)
**
5,00,000
5,00,000
3
Purchase A/cDr.
To Abdhul A/c
(Being goods purchase from Abdhul)
**
135,000
1,35,000
4
Inward Freight Charges A/cDr.
To Cash A/c
(Being freight charges Paid)
**
1,500
1,500
5
Computer A/cDr.
To Cash A/c
(Being computer purchased on cash)
**
35,000
35,000
6
Computer A/cDr.
To Cash A/c
(Being freight charges on computer paid)
**
500
500
7
Ram A/cDr.
To Sale A/c
(Being sold to Mr. Ram)
**
2,00,000
2,00,000
8
Rent A/cDr.
To Cash A/c
(Being rent paid )
**
12,000
12,000
9
Salary A/cDr.
To Cash A/c
(Being salary paid)
**
15,000
15,000
10
Cash A/cDr.
To Ram A/c
(Being cash Received from Mr. Ram)
**
1,50,000
1,50,000
11
Bank A/cDr.
To Cash A/c
(Being cash deposited in Bank)
**
75,000
75,000
12
Office Expenses A/cDr.
To Cash A/c
(Being office expenses paid)
**
25,000
25,000

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