How to prepare ledger accounts | Definition, Example with Explanations

How to prepare ledger accounts | Definition, Example with Explanations

The Ledger Accounts After The Journalize Entries And Finally Affects on Balance sheet.

The ledger accounts begin after journal entry. A journal entry is consists of the daily business transactions but it does not give information a specific account in one place such as if the business owner knows the position of the cash balance of his business. The accountant or bookkeeper would have to check all cash transactions of journal entries and this is quite an arduous job, because of hundred even thousands of cash transactions has recorded in various journal pages. To avert this difficulty, debit and credit transactions of the journal entry is transferred to ledger accounts. This transferred makes single accounts are located in one place that is ledger accounts. It makes easier to determine the current balance of an account. So we can discuss what is ledger account with example, what is ledger account format and accounts types.

What is ledger account?

When the journalized entry recorded and maintains in a book its called ledger. In ledger account is opened on each page of the ledger book but the transaction of the books might be more than one page and all transactions are recorded in date wise. In journal every transaction has posted at least two accounts; one is debit which is left side in the accounts and credit which is the right side of the accounts. That means, every transaction has produced at least two accounts in the ledger and if the transactions more than two then the ledger accounts create three accounts for the journalized transaction. The transactions cannot write down in ledger accounts, it must be journalized then the transaction transferred to the ledger. The concepts of the transaction to journal routed to ledger are given below;

Transactions ⇒ Journal ⇒ Ledger

 

In the above graphical presentation, we can say that the daily transaction transformed journal entry and the journal entry posted the ledger accounts.

How double entry works in ledger

A ledger is used by businesses that implement in double-entry bookkeeping method that means every transaction makes at least two ledger accounts and each transaction has a debit and another is credit. Double entry transactions must be equal debit and credit. Debit entry posted on the left side and the credit entry posted on the right side. In organizational accounting, owner and lender/supplier/Accounts payable want to know entity profit and loss or position of the business to make their decision on each side. Owners try to measure their position whether they run their business or what way they apply to a profitable business. Lenders of the business always figure our the debt ration of the business. They want to know is the business they lend money are they capable to repay it? All of the concern side double entry system method to do this easily to measure entity position.

Key factor in Balance sheet

The balance sheet is one of the key elements in financial statements. The balance sheet consists of three major categories assets, liabilities and owners equity and it’s based on accounting equation which is Assets= Liabilities+ owners equity. The double entry system also represents the equality of two sides and every transaction transferred from ledger accounts to balance sheet of its balancing figure into an accounts name. These transactions are consists of daily transactions. Firstly, transactions are journalized on two sides according to accounting formula, one is debit and another side name is credit. debit is left-hand side and credit is right-hand side. Then the transactions are separated their name of accounts. Finally, the debit and credit sides balancing figure forwarding in the balance sheet for know the business position.

 Characteristics of ledger accounts:

The ledger accounts have following characters which are given below;

  • The accounts have two sides one is debit which is left the side of accounts and anther is credit which is the right side of accounts.
  • The debit attitudes of all transactions are recorded on the debit side and the credit attitudes of all transactions are recorded on the credit side in given date.
  • Differences between the two sides are represented balance. The debit balance shows when the excess of debit side over credit side and the excess of credit side are over debit side is called credit balance.
  •  In the month/year end the two side balance is equal and the excess balance is written over the closing balance at the end of the month date.
  • At the end, the closing balance forwarded next year as a beginning balance.

Types of ledger accounts:

According to accounting formula, There are two types of ledger accounts

1.    Standard type

2.    Self-balancing types

Standard Types of Ledger Accounts:

How to write the accounts in ledger? For better understanding, the standard type of accounts is as follows;

DateParticularsJ.RAmountDateParticularsJ.RAmount
2017
Dec. 20
Cash A/C1,5002017
Dec. 20
Purchases A/C1,500

In this ledger accounts, you can see the left-hand side has one account which side named is debit. On the other hand, right-hand side of the accounts is called credit but in those days debit and credit word are not shown because left-hand side means debit and right-hand side means credit its known to all.

 Posting method

When the entries transfer from journal to ledger accounts is called pasting. The method of posting is as follows;

  • firstly you can post the debit entry from journal to the ledger
  • to record the transaction date of the journal in the ledger account
  • The opposite account of debit is recorded in ledger account.
  • the reference number of the journal records into the ledger account
  • to record the debit amount is ledger accounts
  • Posting the opposite of debit account and do the same procedure.

An accounts balance:

Difference between two sides of accounts is called balance. The balance is deficit side and written on this side is also an equal balance side. The process of equalizing two sides is called balancing side.

The process of balancing side is referred as follows;

  • Sum the amount of both side and written down as a rough.
  • Figure out the difference between two sides.
  • Add up the amount of deficit side for balance.
  • And finally, the balancing amount is written down in a double line.

Now the formula looks like if the debit side is bigger than credit side amount than the debit balance. If the credit side is bigger than the debit balance is called credit balance. Finally, if the two sides amount is equal than the balance is zero.

Debit balance is written in credit side as a closing balance and date will be at the end of the month or year. Similarly, credit balance is written in debit side as a closing balance and date of the end of the month. After that, the closing balance recorded figure will next month or next year as a beginning balance.

Ledger account meaning

Ledger account Example of standard type:

The following transactions in journal entry are posted them into ledger account:

2017  Particulars
Jan. 1Mr. Jamal started business with cash $1,50,000
2He purchased furniture for amount $30,000
3He purchase goods for $50,000
5He sold goods in cash $50,000
6He paid salaries to amount $20,000

Solution:

Journal

DateParticularL.FAmountAmount
2017
Jan. 1Cash A/C ……………………………………………..Dr.
Capital
(Jamal invested cash and capital)
9
11
1,50,0001,50,000
2Furniture A/C………………………………………….Dr.
Cash A/C
(furniture purchased cash)
13
9
30,00030,000
3Purchases A/C………………………………………..Dr.
Cash A/C
(Goods purchased cash amount)
15
9
50,00050,000
5Cash A/C………………………………………………Dr.
Sales A/C
(Sold goods cash amount)
9
17
50,00050,000
6Salaries A/C…………………………………………..Dr.
Cash A/C Return
(Salaries paid  to employee)
19
9
20,00020,000

 

Ledger

Cash Account (No.9)

DateParticularJ.RAmountDateParticularsJ.RAmount
20172005
Jan.1Capital A/C11,50,000Jan.2Furniture A/C130,000
Jan.5Sales A/C150,000Jan.3Purchases A/C150,000
Jan.6Salaries A/C120,000
Balance c/d1,00,000
Total2,00,000Total2,00,000

 

Capital Account (No.11)

DateParticularJ.RAmountDateParticularsJ.RAmount
20172017
Jan.6Balance c/d 1,50,000Jan.1Cash A/C11,50,000
Total1,50,000Total1,50,000

 

Furniture Account (No.13)

DateParticularJ.RAmountDateParticularsJ.RAmount
20172017
Jan.2Cash A/C130,000Jan.6Balance c/d 30,000
Total30,000Total20,000

 

Purchases Account (No.15)

DateParticularJ.RAmountDateParticularsJ.RAmount
20172017
Jan.3Cash A/C150,000Jan.6Balance c/d 50,000
Total50,000Total50,000

 

Sales Account (17)

DateParticularJ.RAmountDateParticularsJ.RAmount
20052005
Jan.6Balance c/d 50,000Jan.5Cash A/C150,000
Total50,000Total50,000

  

Salaries Account (19)

DateParticularJ.RAmountDateParticularsJ.RAmount
20052005
Jan.6Cash A/C120,000Jan.6Balance c/d 20,000
Total20,000Total20,000

Self Balancing Ledger Accounts:

The self-balancing method is mostly used in practical life. Its advantage is you can look the closing balance in the same column in a ledger. So that, after journalized entry you can measure your ledger amount of closing balance in the same ledger account at a glance. For example of self-balancing method is as follows;

Ledger account examples:

Enter the following transactions in the journal and post them into the ledger and also prepare a trial balance.

2017
Jan. 1Mr. john started business with cash $90,000 and furniture $30,000.
Jan. 2Purchased goods on credit $20,000 from Yuk.
Jan. 3Sold goods in cash $16,000.
Jan. 4Sold goods on credit to Silver for $9,000
Jan. 8Cash received from Silver $8,800 in full settlement of his account.

 

Solution:

Journal

Date
2017
ParticularsL.FDR.
Amount ($)
Cr.
Amount ($)
Jan. 1Cash A/C590,000
Furniture A/C730,000
     Capital A/C91,20,000
(Owner invested cash and furniture as a capital)
Jan. 2Purchases Account1120,000
     Yuk1320,000
( To buy goods on credit)
Jan. 3Cash A/C516,000
     Sales A/C1516,000
(Sold goods in cash)
Jan. 4Silver A/C179,000
     Sales A/C159,000
(Goods sale on credit)
Jan. 8Cash A/C58,800
Discount A/C19200
     Silver A/C179,000
(Cash received and discount in sales)

Ledger

Cash Account (No.5)

DatereferencesJ.RDebitCreditBalance
2017Dr.Cr.
Jan. 1Capital  A/C590,00090,000
Jan. 3Sales  A/C516,0001,06,000
Jan. 8Silver  A/C58,8001,14,800

 

Furniture Account (No.7)

DatereferencesJ.RDebitCreditBalance
2017Dr.Cr.
Jan. 1Capital A/C530,00030,000

Capital Account (No.9)

DatereferencesJ.RDebitCreditBalance
2017Dr.Cr.
Jan. 1Cash A/C590,00090,000
Jan. 1Furniture A/C730,0001,20,000

Purchases Account (No.11)

DatereferencesJ.RDebitCreditBalance
2017Dr.Cr.
Jan. 2Yuk A/C520,00020,000

Yuk Account (No.13)

DatereferencesJ.RDebitCreditBalance
2017Dr.Cr.
Jan. 2Purchases A/C520,00020,000

 

Sales Account (No.15)

DatereferencesJ.RDebitCreditBalance
2017Dr.Cr.
Jan. 3Cash A/C516,00016,000
Jan. 4Silver A/C59,00025,000

Silver Account (No.17)

DatereferencesJ.RDebitCreditBalance
2017Dr.Cr.
Jan. 4Sales A/C59,0009,000
Jan. 8Cash A/C58,800200
Jan. 8Discount A/C5200Nil

Discount Account (No.19)

DatereferencesJ.RDebitCreditBalance
2017Dr.Cr.
Jan. 8Silver A/C5200200

In a sense, we see the ledger account is very useful for preparing the balance sheet for the business entity to know the position of the business and the part of business persons such as owners, lender and the stockholders of this business are easily benefited from the ledger accounts.

 

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