UNIT 13: LEDGER

Learning Objectives

After completing this unit, students will be able to:

• Define a Ledger as the Principal Book of Accounts (King of Books) and explain its objectives and utility.
• Differentiate clearly between a Journal and a Ledger.
• Draw the standard 8-column ‘T’ Specimen of a Ledger Account and explain each column.
• Apply the step-by-step rules of Posting from Journal entries to respective Ledger accounts.
• Balance and close Personal, Real, and Nominal Ledger accounts using To/By Balance c/d and To/By Balance b/d, and interpret what Debit and Credit balances signify.

13.1 Meaning, Definition, and Objectives of a Ledger

In a Journal, all kinds of transactions are recorded chronologically in one place. If a trader wants to know at a glance “How much total cash do I have today?” or “How much does debtor Anish owe me right now?”, searching through hundreds of pages of a Journal is slow and impractical.

To answer such questions instantly, transactions of the same nature or head recorded in the Journal are grouped and transferred into separate individual accounts in a second book called the Ledger. Because it is the second stage of recording, the Ledger is called the Book of Secondary Entry or the Principal Book of Accounts.

“The book which contains a classified and permanent record of all the transactions of a business is called the Ledger.” — J.R. Batliboi
“A ledger account may be defined as a summary statement of all the transactions relating to a person, asset, expense, or income which have taken place during a given period of time and shows their net effect.” — S.P. Jain & K.L. Narang

Objectives and Importance of a Ledger

1. Classified Summary at a Glance: Collects all transactions relating to a particular person, asset, liability, expense, or income under one dedicated account head.
2. Instant Knowledge of Debtors and Creditors: Shows immediately how much money is receivable from each customer (Debtor) and how much is payable to each supplier (Creditor).
3. Ascertaining Exact Balances of Assets and Cash: Reveals the closing balance of Cash, Bank, Furniture, Machinery, and other assets on any date.
4. Foundation for Preparing the Trial Balance: Ledger account balances (Balance b/d) are the direct inputs used to prepare the Trial Balance and test arithmetical accuracy.
5. Helps Prepare Final Accounts: Summarized ledger balances of Purchases, Sales, Expenses, Incomes, Assets, and Liabilities enable the preparation of the Trading Account, Profit & Loss Account, and Balance Sheet.

13.2 Differences Between Journal and Ledger

13.3 Specimen of a Ledger Account (8 Columns in ‘T’ Form)

Every Ledger account is divided into two equal halves taking the shape of the English capital letter ‘T’: the left-hand side is the Debit (Dr.) side and the right-hand side is the Credit (Cr.) side.

Dr. …………………………………….. [Name of the Account] A/c …………………………………….. Cr.

13.4 Step-by-Step Rules for Posting from Journal to Ledger

1. Open Separate Accounts: Open a separate Ledger account for each distinct account head that appears in the Journal entries (never open two accounts with the same name).
2. Posting to the Debit Side (To ...): If an account is Debited in a Journal entry, post the entry on the Debit (left) side of that account by writing the date, To [Name of the Credited Account in that Journal entry] in the Particulars column, and that account’s own debit amount in the Amount column.
3. Posting to the Credit Side (By ...): If an account is Credited in a Journal entry, post the entry on the Credit (right) side of that account by writing the date, By [Name of the Debited Account in that Journal entry] in the Particulars column, and that account’s own credit amount in the Amount column.
4. Never Write an Account’s Own Name Inside Its Own Particulars Column: Inside Cash A/c, the word To Cash A/c or By Cash A/c can never appear!

13.5 Balancing and Closing of Ledger Accounts

At the end of a month or fiscal year, we find the net position of each Ledger account through Balancing:

1. Total both the Debit side and Credit side roughly on a scratchpad and find which side is heavier (larger).
2. Write the larger total in the total box at the bottom of both sides on the same horizontal line, double-underlining the total.
3. On the shorter (lighter) side, insert the difference on the last date of the month/year:
   • If the Debit side is larger than the Credit side (Dr. > Cr.), write By Balance c/d (carried down) on the Credit side to equalize the totals, and bring it down on the first day of the next month on the Debit side as To Balance b/d (brought down). Such an account is said to have a Debit Balance.
   • If the Credit side is larger than the Debit side (Cr. > Dr.), write To Balance c/d on the Debit side to equalize the totals, and bring it down on the first day of the next month on the Credit side as By Balance b/d. Such an account has a Credit Balance.
   • If both sides are already equal (Dr. = Cr.), the account is Closed / Settled with zero balance.

What Do Ledger Balances Signify?

13.6 Complete Worked Numerical Illustration (Journal to Ledger & Balancing)

Question: Journalize the following transactions of Himalayan Hardware, Pokhara for Shrawan 2082 and prepare Cash Account, Purchase Account, Suresh’s Account, and Sales Account:

• Shrawan 1: Started business with cash Rs. 2,00,000.
• Shrawan 5: Purchased goods from Suresh on credit for Rs. 50,000.
• Shrawan 10: Purchased goods for cash Rs. 20,000.
• Shrawan 15: Sold goods for cash Rs. 45,000.
• Shrawan 20: Paid cash Rs. 48,500 to Suresh in full settlement of his account.
• Shrawan 28: Paid office rent Rs. 12,000 in cash.

Solution — Step 1: Journal Entries

Solution — Step 2: Ledger Accounts

1. Dr. ……………………………………………… Cash Account ……………………………………………… Cr.

2. Dr. ……………………………………………. Purchase Account ……………………………………………. Cr.

3. Dr. …………………………………………….. Suresh’s Account …………………………………………….. Cr.

(Note: Suresh’s Account has equal Debit and Credit totals of Rs. 50,000, so his account is completely settled with zero closing balance.)

4. Dr. ……………………………………………… Sales Account ……………………………………………… Cr.

Things to Remember (Unit 13 Summary)

• The Ledger is the Principal Book of Accounts containing 8 columns (Date, Particulars, J.F., Amount on both Dr. and Cr. sides).
• While posting a compound entry (such as Suresh's A/c Dr. 50,000 To Cash A/c 48,500 To Discount Received A/c 1,500), inside Cash A/c on the Credit side we write By Suresh's A/c, but the amount entered in Cash A/c is strictly Cash’s own amount (Rs. 48,500), not Rs. 50,000!
• If Debit Total > Credit Total, the account has a Debit Balance (By Balance c/d on Cr. side → To Balance b/d on Dr. side).

Exercises (Unit 13)

A. Very Short Answer Questions (1 Mark Each)

1. Why is the Ledger called the Principal Book of Accounts?
2. Define Posting and Balancing of a Ledger Account.
3. What do c/d and b/d stand for in ledger balancing?
4. What does a Debit balance in a Personal Account signify? What does a Credit balance signify?

B. Numerical Problems for Practice (8 Marks Each)

Problem 13.1: From the following transactions of Lumbini Store, prepare Furniture Account and Pradhan’s Account and balance them:

1. Opening balance of Furniture on Chaitra 1: Rs. 90,000.
2. Chaitra 5: Purchased furniture on credit from Pradhan for Rs. 25,000.
3. Chaitra 12: Purchased additional furniture for cash Rs. 15,000.
4. Chaitra 18: Returned damaged furniture worth Rs. 3,000 to Pradhan.
5. Chaitra 22: Sold old furniture costing Rs. 10,000 for cash Rs. 10,000.
6. Chaitra 26: Paid cash Rs. 21,000 to Pradhan in full settlement of his account.
7. Chaitra 30: Provided depreciation on furniture Rs. 7,000. (Check Answers: Closing Debit Balance of Furniture A/c = Rs. 1,10,000; Pradhan’s A/c is fully settled at Rs. 25,000 with Rs. 1,000 Discount Received).

Worked answers to these exercises are in Unit 13 Solutions.