Sunday, August 5, 2012

Ledger

When all the transactions of a given period have been journalised, the next thing is to classify them according to the accounts affected. All similar transactions must be brought together. For instance, all transactions relating to cash must be put in one place. Similarly, all transactions with a customer or a supplier must be assembled at one place. The book in which this classification is done is called the ledger.
The ledger is a book which contains a condensed and classified record of all the pecuniary transactions of the business generally brought, transferred or posted from the books of original entry.
Ledger is called the king of all books of accounts because all entries from the books of original entry must be posted to the various accounts in the ledger. It should be noted that journal contains a chronological record while ledger contains a classified record of all transactions.

Features of Ledger:

The following are the features of ledger.
  1. It has two identical sides - left hand side and right hand side. The left hand side is called debit side and right hand side is called credit side.
  2. Debit aspects of all the concerned transactions is recorded on the debit side, while credit aspect on credit side according to date.
  3. The difference of the total of the two sides represent balance. The excess of debit side over credit side indicates debit balance, while excess of credit side over debit side indicates credit balance. If the total of the two sides are equal there will be no balance.
  4. Usually balance is drawn at the year end and recorded on the deficit side to make the two sides equal. This balance is known as closing balance.
  5. The closing balance of the current year will be the opening balance of the next year.

    Advantages of Ledger:

    Learning Objectives:
    1. What are the main advantages of ledger?
    The following are the advantages derived from ledger:
    1. It is the ledger through which successful application of double entry system of bookkeeping is ensured. Each and every transaction is divided into two parts - receiver and giver - and recorded in the two concerned accounts in ledger.
    2. Transactions relating to different persons or concerns are recorded in the account of each person or concern separately. As a result, complete and reliable information is available in respect of each and every account.
    3. Different types of income and expenses are recorded in different accounts separately. So, it is possible to ascertain the amount of income and expenditure under each head and the overall result at the year end through trading and profit and loss account.
    4. Separate account is opened for each item of assets and liabilities. It is, therefore, possible to ascertain the value of different assets and liabilities and the true financial position at the year end through balance sheet.
    5. Transactions being recorded primarily in journal and thereafter finally in ledger, the possibility of errors and defalcations is remote.
    6. Valuable information and statistics are collected from ledger and supplied to the management to enable them to run the concern efficiently.

    Difference Between Ledger and Journal:

    Learning Objectives:
    1. What is the difference between ledger and journal?
    The journal and the ledger are the most important books of the double entry system of accounting. Following are the points of difference between these two types of books:
    1. The journal is the book of first entry (original entry); the ledger is the book of second entry. It is the goal where all the entries in the journal find their ultimate destination.
    2. The journal is the book of chronological record; the ledger is the book for the analytical record.
    3. The journal, as a book of source entry, ordinarily has greater weight as legal evidence than the ledger.
    4. The unit of classification of data within the journal is the transaction; the unit of classification of data within the ledger is the account.
    5. The process of recording in the journal is called journalising; the process of recording in the ledger is called posting.

    Form of Ledger and Method of Posting:

    Form of Ledger:

    One account usually occupies one page in the ledger. But if the account is big one it may extend to two or more pages. The pages of the ledger are vertically divided into two equal halves.
    The left hand half or side is known as the debit (Dr.) side and the right hand half is the credit (Cr.) side. Abbreviations "Dr." and "Cr." are put on the top left and right hand corners. Each half part is further divided into four sections - (1) Date (2) Particulars (3) Folio (4) Amount, as follows:
    Date Particulars J.F. Amount Date Particulars J.F. Amount

    Method of Posting:

    The act of separately transferring each entry from journal to the respective account in the ledger is called posting. Posting consists of:
    1. Recording the relevant amount on the left hand side of the account which according to journal is to be debited.
    2. Recording the amount on the right hand side of the account which, according to the journal, is to be credited.
    3. In the ledger account, the first entry on the debit side is preceded by the word "To" and the first entry on the credit side is preceded by the word "By." The sign of ditto is placed before the subsequent entries.

    Folioing:

    Folio means folded page of account books. Account books are usually made of sheers of paper folded at the middle and vertically divided into two pages, each of which is called a folio. For ready reference the pages of our books should be numbered in numerical order. When we post the various entries from the journal into the ledger, we should write the ledger page in the ledger folio column of the journal and the page of the journal in the journal folio column of the ledger. This is known as folioing.

    Example of Ledger and Preparing Ledger Accounts:

    Learning Objectives:
    1. How are ledger accounts prepared?
    Journalise the following transactions and post them to the ledger accounts concerned:
    1991
    Jan. 1 Purchased goods for cash 2,000
    Jan. 3 Sold goods to Karim 500
    Jan. 10 Received from Karim 500
    Jan. 15 Purchased machinery for cash 1,000
    Jan. 20 Cash sales 300
    Jan. 25 Sold goods to Rahim & Sons 600
    Jan. 28 Received from Rahim & Sons 590
    Discount allowed 10
    Jan. 30 Paid Rent 50
    Jan. 31 Paid Salaries 100

    Solution:

    Date Particulars L.F. Debit Credit
    Jan. 1 Purchases Account 12 2,000
    To Cash Account 13 2,000
    (Goods purchased for cash)
    Jan. 3 Karim 14 500
    To Sales Account 15 500
    (Goods sold on credit)
    Jan. 10 Cash Account 13 500
    To Karim Account 14 500
    (Cash received)
    Jan. 15 Machinery Account 16 1,000
    To Cash Account 13 1,000
    (Machinery purchased)
    Jan. 20 Cash Account 13 300
    To Sales Account 15 300
    (Goods sold for cash)
    Jan. 25 Rahim & Sons 17 600

    		To Sales Account 15
    		600

    		 (Goods sold on credit)






    Jan. 28 Cash Account 13 590

    		Discount Allowed 18 10

    		To Rahim & Sons 17
    		600

    		 (Cash received, discount allowed)






    Jan. 30 Rent Account 19 50

    		To Cash Account 13
    		50

    		 (Rent paid)






    Jan. 31 Salaries Account 20 100

    		To Cash Account 13
    		100

    		 (salaries paid)






    Total 5,650 5,650

    LEDGER ACCOUNT

    Purchases Account

    Date Particulars J.F. Amount Date Particulars J.F. Amount
    1991.
    Jan.1
    To Cash a/c
    30
    2,000

    Cash Account

    Date Particulars J.F. Amount Date Particulars J.F. Amount
    1991.
    Jan.10
    Jan.20
    Jan.28
    To Karim
    To Sales a/c
    To Rahim & Sons

    30
    30
    30
    500
    300
    590    		 1991.
    Jan.1
    By Purchases a/c
    By Machinery a/c
    By Rent a/c
    By Salaries a/c
    30
    30
    30
    30
    2,000
    1,000
    50
    100

    Karim Account

    Date Particulars J.F. Amount Date Particulars J.F. Amount
    1991.
    Jan.1
    To Sales a/c

    30

    500
    		 1991.
    Jan.10
    By Cash a/c

    30

    500

    Sales Account

    Date Particulars J.F. Amount Date Particulars J.F. Amount

    		1991.
    Jan.3
    By Karim
    By Cash a/c
    By Rahim & Sons
    30
    30
    30

    500
    300
    600

    Machinery Account

    Date Particulars J.F. Amount Date Particulars J.F. Amount
    1991.
    Jan.15
    To Cash Account
    30

    1,000

    Rahim & Sons Account

    Date Particulars J.F. Amount Date Particulars J.F. Amount
    1991.
    Jan.25
    To Sales a/c

    30

    600
    		 1991.
    Jan.28
    By Cash a/c
    By Discount a/c

    590
    10

    Discount Account

    Date Particulars J.F. Amount Date Particulars J.F. Amount
    1991.
    Jan.28
    To Rahim & Sons

    30

    10

    Rent Account

    Date Particulars J.F. Amount Date Particulars J.F. Amount
    1991.
    Jan.30
    To Cash a/c

    30

    50

    Salaries Account

    Date Particulars J.F. Amount Date Particulars J.F. Amount
    1991.
    Jan.31
    To Cash a/c

    30

    2,000



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