What are LEDGER ACCOUNTS ?

What is a ledger?

          After the transactions are entered into the books of prime entry, the next step is to prepare the ledger accounts. Ledger accounts are where all the transactions taken place in the business are classified into separate accounts.

Ledger accounts are prepared in equal intervals (maybe every – day, week, month, quarter, once in two quarters, or every year). It all depends on the type of business. The organisation can decide in which interval they decide to prepare their accounts, and they should follow their routine without breaking it.

Pro forma

Dr                                             Name of the Account                                Cr

Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
	To				By
	To				By

 

Purpose of creating ledger accounts

          Since everything in this world has some purpose, ledger accounts are no different.

·       Ledger accounts are created so that, all transactions recorded are in a classified format and it will help us to retrieve information more easily which was not possible to do easily by just looking at the books of prime entry.

·       It helps in preparing the trial balance, from which we can retrieve conclusions (*if the trial balance balances) like: -    ledgers are partially error free, the trial balance is free from arithmetical errors, we can continue to prepare the financial statements.

·       When we finish preparing the ledger accounts the next step is to prepare the financial accounts like: - statement of profit and loss, statement of financial statements, cash flow statement and also disclosure notes.

 

How to post an entry in the ledger account

·       Double entry system must be followed when posting all the entries in the ledger.

·       When posting an entry in the ledger, To have to be written on the debit side or the left hand side of the account and By has to be written on the credit side or the right hand side before each transaction.

·       When posting an entry in the ledger account, the account on the debit side of the journal entry must be debited in the other account (credit account) and the account on the credit side of the journal entry must be credited in the other account (debit account). (understand the double entry system properly before posting an entry)

For example:- cash sales of $5000 on 15/7/20XX

                         Journal entry will be

    

Date	Particulars	Ledger folio	Amount Dr	Amount Cr
15/7/20XX	Cash A/c          Dr      To Sales A/c	1	5000	5000

 

Ledger posting will be

Dr                                             Cash A/C                                                     Cr

Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
	To Sales A/C	1	5000

 

 

Dr                                             Sales A/C                                                     Cr

Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
					By Cash A/C	1	5000

 

This is how a journal and a ledger entry are posted.

 How is a ledger balanced?

          A ledger is balanced at the end of an accounting period (maybe every week, month, quarter ore every year).

All the assets, liabilities and capital accounts of a business are carried forwarded [c/f] while closing the ledger accounts. (And they are brought forwarded [b/f] once the new accounting period starts). They are written in the balance sheet/statement of financial position. (Examples of asset: - land and building, inventory, trade receivables/debtors, cash in hand and bank etc) (Examples of liabilities are trade payables/creditors, bank loans etc)

All the income and expense accounts of a business are closed to the profit and loss account/statement of profit or loss/income statement. (Examples of income: - revenue, commission etc)

(Examples of expenses: - freight, electricity, salary to employees etc)

It must be noted that all assets and expenses have debit balances. And all liabilities, expenses, capital have credit balances. 

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