Ledger: ~ All In One

Ledger:
Learning Objectives:
Define and explain the term ledger.
What are the main advantages of ledger?
What is the difference between ledger and journal?
Explain the method of posting.
What are the different methods of preparing a trial balance? Why a trial balance is prepared?
Prepare a trial balance.

Definition and Explanation of Ledger:
Learning Objectives:
Define and explain the term "ledger" What are the features or characteristics of 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.
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.
Debit aspects of all the concerned transactions is recorded on the debit side, while credit aspect on credit side according to date.
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.
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.
The closing balance of the current year will be the opening balance of the next year.

Advantages of Ledger:
Learning Objectives:
What are the main advantages of ledger?
The following are the advantages derived from ledger:
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.

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.
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.
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.
Transactions being recorded primarily in journal and thereafter finally in ledger, the possibility of errors and defalcations is remote.
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:
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:
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.
The journal is the book of chronological record; the ledger is the book for the analytical record.
The journal, as a book of source entry, ordinarily has greater weight as legal evidence than the ledger.
The unit of classification of data within the journal is the transaction; the unit of classification of data within the ledger is the account.
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:
Recording the relevant amount on the left hand side of the account which according to journal is to be debited.
Recording the amount on the right hand side of the account which, according to the journal, is to be credited.
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 | Preparing Ledger Accounts:
Learning Objectives:
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

Preparing Trial Balance | Accuracy of Ledger:
Learning Objectives:
Define and explain trial balance.
What are the advantages of preparing a trial balance?
What are the different methods of preparing trial balance?

Definition and Explanation:
Having posted all the transactions into the ledger, it is necessary to check the correctness of the work done before proceeding further. In order to test the arithmetical accuracy of our ledger we should prepare a statement called trial balance.
A trial balance is a statement prepared by taking out the debit and credit balances of all accounts appearing in the ledger.
Objectives and Advantages of Preparing a Trial Balance:
The following are the main objectives of preparing a trial balance.
Trial balance helps in knowing the arithmetical accuracy of the accounting entries. Trial balance represents a summary of all ledger balances and, therefore, if the two sides of the trial balance tally, it is an indication of this fact that the books of accounts are arithmetically accurate.
Trial balance forms the basis for preparing financial statements such as income statement / Trading and profit and loss account and balance sheet. In case, the trial balance is not prepared, it will be almost impossible to prepare the financial statements.
The entire ledger is summarised in the form of a trial balance. Thus the position of a particular account can be judged simply by looking at the trial balance.

Proof of Accuracy:
If the debit and credit totals of the trial balance are equal and also correspond with the total of journal, we may be satisfied that the posting have been properly made and are arithmetically accurate.

How to Prepare a Trial Balance - An Example:
The trial balance is usually prepared on a loose sheet of paper. The ruling of trial balance is similar to that of a journal. We may prepare a trial balance in one of the following forms:

Total Trial Balance Method

Balance Trial Balance Method
Total Trial Balance Method:

According to total trial balance method two sides of each ledger account i.e., debit and credit side are added up and debit and credit totals so obtained are placed in the debit and credit columns of the trial balance respectively. Thus we may draw the following trial balance by taking out the debit side total and credit side total of each account in the ledger (we have done already ledger example previous in post )

Trial Balance

Ledger Account	J.F	Total Debits	Total Credits
Cash Account Sundry Debtors Account Sundry Creditors Account Discount Account Purchases Account Sales Account Machinery Account Building Account Capital Account Rent Account Wages Account Salaries Account		$ 12,453 43,675 23,654 430 26,670 -- 10,000 20,000 -- 3,400 600 1,000	$ 8,436 34,453 31,298 550 -- 32,145 -- -- 35,000 -- -- --
		1,141,882	1,141,882

One clear defect of this method is that mistakes may be committed more often while preparing the trial balance, because large number of figures would be required to be enlisted. Thus, the process becomes unwieldy and cumbrous.

Balance Trial Balance Method:
The task of preparing a trial balance under balance - trial balance method is much simplified. There is well known axiom that if equals are subtracted from equals the remainders are equal. On this assumption, in place of writing against each account the debit as well as the credit total the balance alone is written. The difference between the two sides of an account is called the balance. If the debit side of an account is greater than the credit side, the balance falls on the debit side and is known as "debit balance." If the credit side of an account is greater than the debit, the the balance is on the credit side and is called "credit balance."

Rules of Balancing Accounts: Rules of balancing each account is as follows:
Add up both sides of the account
Find out the difference in a separate slip.
Put the difference on the lighter side.
Add up both sides again.
Rule off.
The trial balance prepared above, if prepared with the balance of accounts will appear as under the example of ledger.

Trial Balance

Ledger Account	J.F	Dr. Balance	Cr. balance
Cash Account Sundry Debtors Account Sundry Creditors Account Discount Account Purchases Account Sales Account Machinery Account Building Account Capital Account Rent Account Wages Account Salaries Account		$ 4,017 9,222 -- -- 26,670 -- 10,000 20,000 -- 3,400 600 1,000	$ -- -- 7,644 120 -- 32,145 -- -- 35,000 -- -- --
		74,909	74,909

The second method has the added advantages and is the one that is generally used. There are comparatively less chances of committing errors. As the magnitude of figures is smaller the process is not cumbrous. It does not appear to be unwieldy. Moreover, in a trial balance, the exact position of any account on the date of trial balance can be determined at a glance.