After recording the transactions in the journal, the entries are then posted to the principal books of accounts, which are called ledgers. Since each account is affected multiple times in multiple ways, by different transactions, it becomes necessary to ascertain the net account-wise balance at the end of the period. This is determined by ledgers.
Some points to note are as follows.
- The process of transferring debit and credit items from the journal to the ledger is called posting.
- The account debited in the journal will be debited in the ledger and the one credited will also be credited in the ledger.
- To debit an account, we will use “To” and the name of the account credited. For example, if rent is paid in cash then rent A/c will be debited using “To Cash.”
- Similarly, to credit an account we will use “By” and the name of the account debited. Like in the above case, cash A/c will be credited using “By Rent.”
At the end of the period, the ledgers of all the accounts are “balanced,” that is, the ultimate balance is ascertained.
It should be noted that nominal accounts are not balanced. Their balance is transferred to the Profit and Loss A/c. However, for real and personal accounts:
- If Debit > Credit, this means debit balance and should be written as “By balance c/f” on the credit side with the excess amount.
- If Debit < Credit, this means credit balance and should be written as “To balance c/f” on the debit side with the difference amount.
A ledger is a T-shaped A/c with debit on the left-hand side column and credit on the right-hand side.
Example
If we take the previous example of the journal, let us see how we can prepare the ledger from it.
|
Machinery A/c |
|||||
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
05-06-2014 |
To Cash |
8,000 |
30-06-2014 |
By balance c/f |
8,000 |
|
8,000 |
8,000 |
||||
|
01-04-2015 |
To balance b/d |
8,000 |
|||
|
Cash A/c |
|||||
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
16-06-2014 |
To Bank |
5,000 |
05-06-2014 |
By Machinery |
8,000 |
|
23-06-2014 |
To Ram |
24,500 |
12-06-2014 |
By Purchases |
1,750 |
|
30-06-2014 |
By Rent |
15,000 |
|||
|
30-06-2014 |
By balance c/f |
4,750 |
|||
|
29,500 |
29,500 |
||||
|
01-07-2014 |
To balance c/d |
4,750 |
|||
|
Purchase A/c |
|||||
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
12-06-2014 |
To Cash |
1,750 |
30-06-2014 |
By P/L A/c |
1,800 |
|
12-06-2014 |
To Discount |
50 |
|||
|
allowed |
|||||
|
1,800 |
1,800 |
||||
|
Rent A/c |
|||||
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
30-06-2014 |
To Cash |
15,000 |
30-06-2014 |
By P/L A/c |
20,000 |
|
12-06-2014 |
To Prepaid |
||||
|
Rent |
5,000 |
||||
|
20,000 |
20,000 |
||||
|
Ram A/c |
|||||
|
Date |
Particulars |
Amount |
Date |
Particulars |
Amount |
|
20-06-2014 |
To Sales |
25,000 |
23-06-2014 |
By Cash |
24,500 |
|
23-06-2014 |
By Discount |
||||
|
allowed |
500 |
||||
|
25,000 |
25,000 |
||||
Similarly, all ledgers of all the accounts can be made and the net balance can be ascertained.
The Cheat Sheet!
There are certain transactions that are routine and occur most commonly. They are accounted for in the same manner every time they occur. So you just have to keep this sheet close to you or memorize it at best!
|
Transaction |
Account I |
Account II |
|
Invoicing a client Depositing a client’s cheque Receiving a bill Paying a bill Buying supplies by cheque Buying an asset by cheque Buying supplies by credit card Paying a credit card in full by cheque |
Asset: Accounts receivable Asset: Cheque account Expense: Appropriate category Liability: Accounts payable Expense: Appropriate category Asset: Equipment Expense: Appropriate category Liability: Credit card |
Income Asset: Accounts receivable Liability: Accounts payable Asset: Cheque account Asset: Cheque account Asset: Cheque account Liability: Credit card Asset: Cheque account |
Note:
Balance of:
- Personal Accounts
carried forward to the next period - Nominal Accounts transferred to Profit and Loss A/c
- Real Accounts carried forward to the next period
If no balance is left in a ledger, that is, both asset and liability sides are equal, as in Ram’s A/c in the above case, this means that there is nothing due from or to the party. The account is settled.