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Lesson-5

Ledger

Learning Objectives

To understand the term ledger

To know how to do ledger postings

To understand the rules of posting

To know the meaning of trial balance

Introduction

The purpose of journal entry is to record the entries in the books of account. To know the

balance on each account at the end of the period, a summary of all transactions relating

to one account is necessary and this is done in the ledger. Thus, the activity of

classifying, summarizing and grouping is done in the ledger.

Ledger

Ledger is the principal book of accounts which contains various accounts. An account is

a summarized record of similar transactions during an accounting period relating to a

particular person or thing. Therefore, all the accounts, whether real, nominal or personal,

are collected in the ledger.

Ledger shows the net effect under one particular head relating to the similar transactionthat has taken place in a particular period. For example, if a business person wants to

know the total sales for a particular period, he/she will have to do a great deal of

searching to go through all the transactions of cash sales and credit sales recorded in the

journal to find out the total sales. This task is simplified by sorting and accumulating all

similar transactions relating to a particular account head and consolidating them in one

account maintained in the ledger. This will help in knowing the effect of the relevant

account at a glance. Hence, it becomes possible to find out the figures of purchases, sales

and net amount payable and receivable from particular individuals during a period

immediately by referring to the ledger.

In the case of a large organization where a large number of accounts are required to bemaintained, three separate ledgers are maintained. These are as follows:

1. Debtors ledger: Containing all the dealings with customers on credit

2. Creditors ledger: Containing all the dealings with suppliers on credit

3. General ledger: All the remaining accounts, i.e. real and nominal accounts

The accounts in the ledger are maintained in the following T form. Each account is

divided into two sides-- the left hand side representing the debit side and the right hand

side representing the credit side. Each side of the ledger has columns detailing date,

particulars, folio and amount.

Dr. Title of the Account Cr.

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Date Particulars Folio Rs. Date Particulars Folio Rs.

Sometimes, the ledger is also maintained in the running account form as shown below:

Date Particulars Folio Dr. Amt.Rs.

Cr. Amt.Rs.

BalanceRs.

Posting

Posting means the process of transferring all the debit and credit items from the journal

onto the accounts maintained in the ledger. Each amount entered in the debit column of

the journal is posted by entering it on the debit side of the account in the ledger with

relevant details. Similarly, each amount entered in the credit column is posted by

entering it on the credit side of the account in the ledger with relevant details.

The procedure of posting is as follows:

1. Enter the debit aspect of the transaction entered in journal on the debit side of the

account in the ledger with all the relevant details in the respective column.

2. In the folio column of the journal, the page number of the ledger in which posting is

done is entered.

3. Now enter the credit aspect of the transaction in the journal on the credit side of the

account in the ledger with all the relevant details in the respective column.

4. The entering of the folio number on the corresponding page, as explained in the point

number two above, is to be repeated in the case of credit item.5. It is customary to prefix the name of the account credited and entered on the debit

side of the account in the ledger with word To.

6. Similarly, the name of the account debited and entered on the credit side of the

account in the ledger is prefixed with By.

It may be noted that the words To and By do not have any special meaning. Hence,

the prefix can be conveniently ignored as done by modern accountants.

Balancing of Ledger Account

The totals of the debit side and credit side of an account are taken to ascertain thedifference between the two sides. This difference is known as the balance on the account.

The total of the heavier side is entered on the lighter side for arriving at the balance.

When the total of the debit side exceeds the total of the credit side, the balance is said to

be in debit, i.e. known debit balance. When the total of the credit side exceeds the total of

the debit side, it means that the account has a credit balance. The balancing of the

account is necessary to ascertain the net effect whether debit or credit on the account.

Problem

Journalize the following transactions, post them to ledger and balance the accounts:

March 1998 Rs.

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1 Santosh started his business with cash 10,000

2 Purchased furniture from Yadav on credit 500

4 Bought goods for cash from Manish 7,000

6 Sold goods on credit to Amar 3,700

7 Sold goods for cash to Joshi 2,900

14 Paid cash to Yadav 50018 Goods purchased on credit from Nahar 9,800

20 Sold goods on credit to Naidu 5,480

22 Received cash from Amar due from him 3,700

24 Joshi returned goods sold on 7thin cash 2,900

28 Received cash from Naidu 4,480

30 Paid office salaries Rs. 500, rent Rs. 250 750

31 Received commission 100

Solution

Journal

Date Particulars L.F. Dr. Rs. Cr. Rs.1993

Mar.1

Cash A/c Dr.

To Santoshs Capital A/c

(Started business with cash)

10,000

10,000

Mar. 2 Furniture A/c Dr.

To Yadavs A/c

(Purchased furniture on credit from

Yadav)

500

500

Mar. 4 Goods A/c Dr.

To Cash A/c

(Cash purchases from Manish)

7,000

7,000

Mar. 6 Amar A/c Dr.

To Goods A/c

(Credit sales to Amar)

3,700

3,700

Mar. 7 Cash A/c Dr.

To Goods A/c

(Cash sales to Joshi)

2,900

2,900

Mar. 14 Yadav A/c Dr.

To Cash A/c

(Paid to Yadav on A/c)

500

500

Mar. 18 Goods A/c Dr

To Nahar A/c(Credit purchases from Nahar)

9,800

9,800

Mar. 20 Naidu A/c Dr.

To Goods A/c

(Credit sales to Naidu)

5,480

5,480

Mar. 22 Cash A/c Dr.

To Amar A/c

(Received cash from Amar on account)

3,700

3,700

Mar. 24 Goods A/c Dr.

To Cash A/c

(Refunded cash to Joshi on return of

goods by him)

2,900

2,900

Mar. 28 Cash A/c Dr. 4,480

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To Naidu A/c

(Received cash from Naidu on account)

4,480

Mar. 30 Salaries A/c Dr.

Rent A/c Dr.

To Cash A/c

(Paid salaries and rent for the monthof)

500

250

750

Mar. 31 Cash A/c Dr.

To Commission A/c

(Received cash for commission)

100

100

Total 51,710 51,710

Ledger

Capital A/c

Date Particular L.F. Rs. Date Particular L.F. Rs.

10,000

10,000

10,000 10,000

1998

Mar.31 To Balance c/d

1998

Mar.1

April.1

By Cash A/c

By Balance b/d 10,000

Cash A/c


10,000

2,900

3,700

4,480

100

7,000

500

2,900

500250

10,030

21,180 10,000

1998

Mar.1

Mar.7

Mar.22

Mar.28Mar.31

April.1

To Capital A/c

To Goods A/c

To Amar A/c

To Naidu A/cTo Commission

A/c

To Balance b/d 10,030

1998

Mar.4

Mar.14

Mar.24

Mar.30Mar.30

Mar.31

By Goods A/c

By Yadav A/c

By Goods A/c

By Salaries A/cBy Rent A/c

By Balance c/d

10,000

Goods A/c


1998

Mar.4

Mar.18

Mar.24

To Cash A/c

To Nahar A/c

To Cash A/c

7,000

9,800

2,900

1998

Mar.6

Mar.7

Mar.20

By Amar A/c

By Cash A/c

By Naidu A/c

3,700

2,900

5,480

Furniture A/c


500 10,000

500 10,000

1998

Mar.2

April.1

To Yadav A/c

To Balance b/d 500

1998

Mar.31

By Balance c/d

10,000

Yadav A/c


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1998

Mar.14 To Cash A/c 500

1998

Mar.2 By Furniture A/c 500

Amar A/c


1998

Mar.1 To Goods A/c 3,700

1998

Mar.22

By Cash A/c 3,700

Nahar A/c


9,800 9,800

9,800 9,800

1998


1998

Mar.18

April 1

By Goods A/c

By Balance b/d 9,800

Naidu A/cDate Particular L.F. Rs. Date Particular L.F. Rs.

5,480 4,480

1,000

5,480 5,480

1998

Mar.20

April 1

To Yadav A/c

To Balance b/d 1,000

1998

Mar.28

Mar.31

By Cash A/c

By Balance c/d

Salaries A/c


500 500

500 500

1998

Mar.30

April 1

To Cash A/c

To Balance b/d 500

1998

Mar.31

By Balance c/d

Rent A/c


250 250

250 250

1998

Mar.30

April 1

To Cash A/c

To Balance b/d 250

1998

Mar.31

By Balance c/d

Commission A/c


100 100

100 100

1998


1998

Mar.31

By Cash A/c

By Balance b/d 100

(Since goods are sold at profit, Goods A/c cannot be closed unless we know profit or

stock on hand on the last date.)

(c/d means carried down and b/d means brought down)

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Subsidiary Books of Accounts

A journal is divided into separate books for the sake of convenience and to enable the

handling of numerous transactions of repetitive nature. This facilitates easy working and

curtails down the voluminous work involved in the posting and entering of each

transaction in the journal and ledger. All similar transactions pertaining to one particularclass are recorded in one particular book. For example, all transactions relating to credit

purchases of goods are recorded in one book known as the Purchase Day Book.

Similarly, all transactions relating to credit sales of goods are recorded in the Sales Day

Book.

The names of subsidiary books are as follows:

1. Cash book: To record all transactions in cash or by cheques. Cash book may also be

of two columns.

2. Petty cash book: To record all cash transactions of petty expenses.

3. Purchase day book: To record all transactions of goods purchased on credit.4. Sales day book: To record all transactions of credit sales of goods.

5. Purchase return book: To record all transactions relating to return of goods to

suppliers.

6. Sales return book: To record all transactions relating to return of goods by the

customers.

7. Bill receivable book: To record all transactions relating to bill receivables.

8. Bill payable book: All transactions relating to the acceptance of bills are recorded in

this book.

9. Journal proper: In journal proper, all transactions other than those recorded above are

recorded.

With regard to entering the transactions in the above books, it is necessary to note the

following points:

1. Goods

Goods can be defined as those items in which the business concern is dealing. It also

means the stock in trade of the business which is purchased with the intention of resale

after conversion or otherwise at a profit.

2. Purchase

Purchase means goods purchased for resale. In other words, it means all goods purchased

for resale or for the purpose of conversion into goods for resale. It does not include

purchase of assets or stationery. It is an error of principle to record purchase of assets or

stationery in the purchase day book.

3. Sales

Sales can be defined as the sale of goods forming stock in trade in which the business

concern is dealing. It does not include sale of assets etc. It is an error of principle to

record the sale of assets in the sales day book.

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Cash Book

Cash book is of various types. These are as follows:

1. Simple cash book

2. Cash book with book column3. Cash book with bank and discount column

4. Multi-column cash book

Simple Cash Book

Only cash receipts and cash payments are recorded in this book. It is just like a ledger,

with left side being the debit side and right side being the credit side. Excess of debit side

over the credit side represents balance of cash in hand. Similarly, the cash book opens

with opening cash in hand as the opening entry on the debit side.

1. Specimen of a Simple Cash Book

Date Receipt CV

No.

LF Amt.

Rs.

Date Payments DV

No.

LF Amt. Rs.

2. Two Columnar Cash Book

Two columnar cash book contains an additional column for the purpose of entering

transactions relating to bank. All transactions regarding deposits of cash and cheques,

and payment by cheques and withdrawals in cash are entered in the bank column.

3. Three Columnar Cash Book

Three columnar cash book contains an additional column for entering the discount

amount paid and received on account of various transactions. This column dispenses

with the opening of discount column in the ledger.

4. Multi-Columnar Cash Book

Multi-columnar cash book contains various columns for recording the transactions of

receipts and payments under various heads of accounts. This cash book is used more inschools, colleges, hospitals, government offices etc.

There is no need of opening cash account in the ledger as the cash book serves the

purpose of cash account. However, other accounts which are affected by cash receipts

and payments are posted in the concerned accounts in the ledger.

Petty Cash Book

In any business, a number of transactions are of petty nature involving petty payments. If

the main cash book is used for this, the recording becomes voluminous and heavy,

involving considerable wastage of time. Hence, a petty cash book is maintained in whichall the petty expenses like postage, refreshment, stationery, cartage etc. are recorded.

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Petty cash book can also have analytical columns for recording the expenses head wise.

This enables easy posting in the ledger since petty payments are grouped and recorded

head wise under different columns.

Purchase Book

In this book, all credit transactions only relating to the purchases of goods in which the

business is dealing in is recorded. Therefore, purchase of furniture, machinery or other

assets purchased on credit are not recorded in this book.

Purchase Return Book

The purchaser may return the goods which are purchased on credit if he finds these to be

defective or if they are not as per specifications. Such returns are entered in the returns

outward book or purchase returns book. It may be noted that only those transactions

which relate to the goods in which the business is dealing in are recorded in this book.

Sales Book

In this book, all the credit sales transactions relating to the goods dealt with by the

business are recorded. If furniture, machinery or other assets are sold on credit, they are

not recorded in this book.

Sales Return Book

In this book, the return of goods which have been earlier sold on credit is recorded. This

book is also known as returns inward book. Only the transactions relating to the goods

dealt with by the businessmen are recorded.

Bill Receivable Book

The bills which have been drawn by the businessman but accepted by the other party are

known as bill receivable and are entered in this book.

Journal Proper

If a transaction is such that it cannot be recorded in any of the books mentioned above, itis recorded in a book called journal proper. If a transaction is not related to cash book,

petty cash book, purchase book, purchase return book, sales book, sales return book, bill

receivable book or bill payable book, it is recorded in journal proper. Such transactions

may be related to opening entries, closing entries, transfer entries, rectification entries,

adjusting entries or miscellaneous entries.

Opening Entries

Every year new books of accounts are used. Old books are closed at the end of the year.

When balances of personal and real accounts of old books are recorded in the new

accounting year on the first day in new books, these entries are called opening entries.

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Problem

Following balances appeared in the books of Umesh of Tirupati on December 31, 1998.

Pass the necessary opening entries on January 1, 1999.

Credit balance: Capital-- Rs. 20,000, Bills payable-- Rs. 15,000, Creditors-- Rs. 10,000.Debit balances: Furniture-- Rs. 4,000, Machinery-- Rs. 20,000, Debtors-- Rs. 5,000, Bills

receivable-- Rs. 11,800, Cash-- Rs. 4,200.

Solution

In the books of Mr. Umesh

Journal

Date

1999

Particulars L.F. Dr.

Amount

(Rs.)

Cr.

Amount (Rs.)

Jan.1 Furniture A/c Dr.

Machinery A/c Dr.

Debtors A/c Dr.

Bill Receivable A/c Dr.

Cash A/c Dr.

To Capital A/c

To Bill Receivable A/c

To Creditors A/c

(Being record of last years balance

brought forward in new books)

4,000

20,000

5,000

11,800

4,200

20,000

15,000

10,000

Closing Entries

While closing accounts at the end of the year, balances of nominal accounts are

transferred to trading and profit and loss account. All the balances which are transferred

to trading and profit and loss account at the end of the accounting period through

accounting entries are recorded in journal proper. Such entries are called closing entries.

Following are the examples of closing entries:

1. Closing entries in relation to the trading account are as follows:

a. Trading A/c Dr.

To Purchases A/c

To Wages A/c

To Carriage Inward A/c

To Fuel and Power A/c

To Direct or Manufacturing Expenses A/c

(Being transfer of the above mentioned balance to Trading A/c)

b. Sales A/c Dr.

To Trading A/c(Being sales during the year)

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c. Closing Stock A/c Dr.

To Trading A/c

(Being value of stock in hand on the closing date of the year)

d. Trading A/c Dr.To Profit & Loss A/c

(Being transfer of gross profit)

or

e. Profit & Loss A/c Dr.

To Trading A/c

(Being transfer of gross loss)

Only one entry will be made out of above d. and e.

2. Closing entries in relation to P&L A/c are as follows:

a. Profit & Loss A/c Dr.

To Salaries A/c

To Discount A/c

To Advertising A/c

To Rent and Rates A/c

To Printing and Stationery A/c

To Trade Expenses A/c

To Postage and Telegram A/c

To Insurance Charges A/c

To Carriage Outward A/c

To Other Indirect Expenses A/c

(Being transfer of the above mentioned expenses to Profit and Loss A/c)

b. Discount Received A/c Dr.

To Commission Received A/c

To Interest on Investment A/c

To Other Revenue Receipts and Income A/c

(Being transfer of revenue income to Profit and Loss A/c)

c. Profit and Loss A/c Dr.

To Capital A/c(Being transfer of net profit to Capital A/c)

or

d. Capital A/c Dr.

To Profit & Loss A/c

(Being transfer of net loss to Capital A/c)

Only one entry will be made out of above c. and d. If there is net profit, third entry

will be made and if there is net loss, fourth entry will be passed.

Problem 1

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Pass the closing entries in the books of Deepak from the following debit and credit

balances which were taken out in December 1998.

Dr. Cr.

(Rs.) (Rs.)

Stock 1,000Machinery 2,000

Purchases 18,000

Fuel 1,000

Wages 4,000

Factory Lighting 1,000

Discount 800

Salaries 6,000

Discount Received - 200

Office Expenses 3,000

Sales - 30,000

Commission Received - 400Debtors 10,000

Rates and Taxes 500

Stationary 600

Trade Expenses 200

Carriage Outward 600

Carriage Inward 300

Capital - 18,400

Total 49,000 49,000

Closing Stock Rs. 10,000

Solution

In the books of Deepak

Journal

Date

1998

Particulars L.F. Dr.

Amount (Rs.)

Cr.

Amount (Rs.)

Dec.31 Trading A/c Dr.

To Stock A/c

To Purchases A/c

To Fuel A/c

To Wages A/cTo Factory Lighting A/c

To Carriage Inwards A/c

(Being record of last years balance

brought forward in new books)

4,000

20,000

5,000

11,800

4,20020,000

15,000

10,000

Sales A/c Dr.

To Trading A/c

(Being transfer of sales to Trading

A/c)

30,000

30,000

Closing Stock A/c Dr.

To Trading A/c

(Being value of stock-in-hand on theclosing date of the year)

10,000

10,000

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Trading A/c Dr.

To Profit and Loss A/c

(Being transfer of gross profit)

14,700

Profit & Loss A/c Dr.

To Salaries A/c

To Discount A/cTo Office Expenses A/c

To Rates and Taxes A/c

To Stationery A/c

To Trade Expenses A/c

To Carriage Outward A/c

(Being transfer of the above

mentioned expenses to Profit and

Loss A/c)

11,700

6,000

8003,000

500

600

200

600

Discount A/c Dr.

Commission A/c Dr.

To Profit and Loss A/c(Being transfer of revenue income to

Profit and Loss A/c)

200

400

600

Profit and Loss A/c Dr.

To Capital A/c

(Being transfer of net profit to

Capital A/c)

3,600

3,600

1. Rs. (30,000 + 10,000) 25,300 = Rs. 14,700

2. Rs. (14,700 + 600) 11,700 = Rs. 3,600

Problem 2

Enter the following transactions in the books of original records of Mr. Khan of Mumbai:

1997

January 1 - Opening balance: Furniture-- Rs. 800, Machinery-- Rs. 2,000, Debtors-- Rs.

1,200, Creditors-- Rs. 3,000, Capital-- Rs. 3,500, Cash in Hand-- Rs. 2,000,

Cash at Bank-- Rs. 500

January 2 - Purchased goods from A on credit Rs. 1,000.

January 4 - Purchased 50 bags of sugar @ Rs. 45 per bag

January 6 - Paid rent Rs. 50January 7 - Gave Rs. 100 as donation

January 13 - Sold goods to E on credit Rs. 1,000

January 17 - Returned goods to A for Rs. 50

January 18 - Returned goods to B for Rs. 40, E returned goods for Rs. 60.

January 19 - Paid Rs. 400 to B by cheque in full settlement of his accounts

January 20 - Received Rs. 600 from E in cash, Purchased furniture in cash Rs. 400

January 21 - Purchased furniture on credit from Mohan for Rs. 200

January 23 - Sold old furniture on credit to R for Rs. 40

January 24 - Withdrew Rs. 100 for personal use

January 31 - Outstanding wages are Rs. 50 and outstanding salaries are Rs. 200

Solution

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In the books of Mr. Khan

Purchase Book

Date

1997

Particulars Ref.

No.

L.F. Amount

Rs.

1,000500

2,000

Jan.2Jan.3

Jan.4

AB

C 50 Bags of Sugar @ Rs. 40 per bag

Total 3,500

Purchase Return Book

Date

1997

Particulars Ref.

No.

L.F. Amount

Rs.

50

40

Jan.17

Jan.18

A

B

Total 90

Sales Book

Date

1997

Particulars Ref.

No.

L.F. Amount

Rs.

1,350

1,000

Jan.5

Jan.13

D 30 Bags of Sugar @ Rs. 45 per bag.

E

Total 2,350

Sales Return Book

Date

1997

Particulars Ref.

No.

L.F. Amount

Rs.60Jan.18 E

Total 60

Cash Book

Date

1997

Jan.

Receipts L

F

Di-

sc.

Cash

Rs.

Bank

Rs.

Date

1997

Jan.

Payments L

F

Di-

sc.

Cash

Rs.

Bank

Rs.

2,000

600

80

500

300

50

100

400

300

100

1,730

400

400

1

20

21

22

To Bal. b/d

To E

To Cash A/c

To Furniture

A/c

Total

C

2,680 800

6

7

19

24

31

By Rent A/c

By Donations

By B A/c

By Furniture

By Bank A/c

By Drawings

By Bal. c/d

Total

60

60 2,680 800

1. Rs. 500 Returns 40 = Rs. 460

2. Rs. 460 400 = Rs. 60

Journal Proper

Date Particular L.F. Dr.Amount Cr.Amount

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Furniture A/c Dr.

Machinery A/c Dr.

Debtors A/c Dr.

Cash A/c Dr.

Bank A/c Dr.To Creditors A/c

To Capital A/c

(Opening entry for the balances in new

books)

Furniture A/c Dr.

To Mohan

(Furniture purchased from Mohan)

R Dr.

To Furniture A/c

(Sale of old furniture to R)

Salaries A/c Dr.Wages A/c Dr.

To Outstanding Salaries A/c

To Outstanding Wages A/c

(Salaries and wages outstanding)

Rs.

800

2,000

1,200

2,000

500

200

40

20050

Rs.

3,000

3,500

200

40

200

50

1998

Jan. 1

Jan. 21

Jan. 23

Jan. 31

Total (Rs.) 6,990 6,990

Summary

1. Following are the two types of ledger:

General ledger

Subsidiary ledger

2. The subsidiary ledger is further subdivided into the the following:

Debtors ledger

Creditors ledger

3. These subsidiary ledgers contain individual customers and suppliers accounts.

4. Posting refers to the recording of transactions from journals to the ledger.

5. Ledger is a book of secondary entries.6. Balancing refers to the closing of the ledger accounts by putting the balance on the

appropriate side of the account.

Questions

1. Shri Ramesh had Cash at Bank-- Rs. 10,000, Furniture-- Rs. 2,000 and Typewriter of

Rs. 1,500. He started business with these assets on January 01, 1994. His other

transactions during January were as under:

Jan 2 Withdrew cash from bank for office use Rs. 4,0003 Purchased from Diwan goods for Rs. 5,000 subject to trade discount of 5%

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and issued a cheque for half the amount

5 Sold goods to Ramdas less 2 % discount for payment of cash in 7

days Rs. 2,250

8 Sold goods for a cheque Rs. 750

11 Received Ramdas cheque in settlement of his account and paid it to

bank11 Purchased furniture of Rs. 800 from Manik in cash

20 Paid Diwan by cheque the amount due

25 Paid life insurance premium of Rs. 250 on the life of Mrs. Ramesh

31 Purchased postal stamps of Rs. 25

Journalize the above transactions, post them to ledger and balance the accounts.

2. Enter the following transactions in the books of original records of M/s A & B Co. of

Mumbai:

1997January 1 Opening Balance: Furniture-- Rs. 8,000, Machinery-- Rs. 20,000,

Debtors-- Rs. 12,000, Creditors-- Rs. 30,000, Capital-- Rs. 35,000,

Cash in Hand Rs. 20,000, Cash at Bank-- Rs. 5,000

January 2 Purchased goods from Mr. Khan on credit Rs. 10,000

January 4 Purchased 500 bags of sugar @ Rs. 45 per bag

January 6 Paid rent Rs. 500

January 7 Gave Rs. 1,000 as donation

January 13 Sold goods to E on credit Rs. 10,000

January 17 Returned goods to Mr. Khan Rs. 500

January 18 Returned goods to B Rs. 4,000, E returned goods Rs. 600

January 19 Paid Rs. 4,000 to B by cheque in full settlement of his accounts

January 20 Received Rs. 6,000 from E in cash, Purchased furniture in cash Rs.

4,000

January 21 Purchased furniture on credit from Mohan Rs. 2,000

January 23 Sold old furniture on credit to R for Rs. 400

January 24 Withdrew Rs. 1,000 for personal use

January 31 Outstanding wages are Rs. 500 and outstanding salaries are Rs.

2,000

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