Lesson-5 Ledger Learning Objectives To understand the term ledger To know how to do ledger postings To understand the rules

ules 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 transaction that 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 be maintained, 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.

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. Balance Rs.

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 the difference 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.

1 2 4 6 7 14 18 20 22 24 28 30 31

Santosh started his business with cash Purchased furniture from Yadav on credit Bought goods for cash from Manish Sold goods on credit to Amar Sold goods for cash to Joshi Paid cash to Yadav Goods purchased on credit from Nahar Sold goods on credit to Naidu Received cash from Amar due from him Joshi returned goods sold on 7th in cash Received cash from Naidu Paid office salaries Rs. 500, rent Rs. 250 Received commission Journal

10,000 500 7,000 3,700 2,900 500 9,800 5,480 3,700 2,900 4,480 750 100

Solution Date 1993 Mar.1 Mar. 2 Particulars Cash A/c Dr. To Santoshs Capital A/c (Started business with cash) Furniture A/c Dr. To Yadavs A/c (Purchased furniture on credit from Yadav) Goods A/c Dr. To Cash A/c (Cash purchases from Manish) Amar A/c Dr. To Goods A/c (Credit sales to Amar) Cash A/c Dr. To Goods A/c (Cash sales to Joshi) Yadav A/c Dr. To Cash A/c (Paid to Yadav on A/c) Goods A/c Dr To Nahar A/c (Credit purchases from Nahar) Naidu A/c Dr. To Goods A/c (Credit sales to Naidu) Cash A/c Dr. To Amar A/c (Received cash from Amar on account) Goods A/c Dr. To Cash A/c (Refunded cash to Joshi on return of goods by him) Cash A/c Dr. L.F. Dr. Rs. 10,000 500 500 7,000 7,000 3,700 3,700 2,900 2,900 500 500 9,800 9,800 5,480 5,480 3,700 3,700 2,900 2,900 4,480 Cr. Rs. 10,000

Mar. 4 Mar. 6 Mar. 7 Mar. 14 Mar. 18 Mar. 20 Mar. 22 Mar. 24

Mar. 28

Mar. 30

Mar. 31

To Naidu A/c (Received cash from Naidu on account) Salaries A/c Dr. Rent A/c Dr. To Cash A/c (Paid salaries and rent for the month of) Cash A/c Dr. To Commission A/c (Received cash for commission) Total

4,480 500 250 750 100 100 51,710 51,710

Date Particular 1998 Mar.31 To Balance c/d

L.F.

Ledger Capital A/c Rs. Date Particular 1998 10,000 Mar.1 By Cash A/c 10,000 April.1 By Balance b/d Cash A/c Rs. Date 1998 10,000 Mar.4 2,900 Mar.14 3,700 Mar.24 4,480 Mar.30 Mar.30 100 Mar.31 21,180 10,030

L.F.

Rs. 10,000 10,000 10,000

Date 1998 Mar.1 Mar.7 Mar.22 Mar.28 Mar.31

Particular To Capital A/c To Goods A/c To Amar A/c To Naidu A/c To Commission A/c

L.F.

Particular By Goods A/c By Yadav A/c By Goods A/c By Salaries A/c By Rent A/c By Balance c/d

L.F.

Rs. 7,000 500 2,900 500 250 10,030 10,000 10,000

April.1 To Balance b/d

Date Particular 1998 Mar.4 To Cash A/c Mar.18 To Nahar A/c Mar.24 To Cash A/c Date 1998 Mar.2 Particular To Yadav A/c

L.F.

Goods A/c Rs. Date Particular 1998 7,000 Mar.6 By Amar A/c 9,800 Mar.7 By Cash A/c 2,900 Mar.20 By Naidu A/c Furniture A/c Rs. Date Particular 1998 500 Mar.31 By Balance c/d 500 500 Yadav A/c Rs. Date Particular

L.F.

Rs. 3,700 2,900 5,480

L.F.

L.F.

Rs. 10,000 10,000 10,000

April.1 To Balance b/d

Date

Particular

L.F.

L.F.

Rs.

1998 Mar.14 To Cash A/c

1998 500 Mar.2

By Furniture A/c

500

Date 1998 Mar.1

Particular To Goods A/c

L.F.

Amar A/c Rs. Date Particular 1998 3,700 Mar.22 By Cash A/c Nahar A/c Rs. Date Particular 1998 9,800 Mar.18 By Goods A/c 9,800 April 1 By Balance b/d Naidu A/c Rs. Date Particular 1998 5,480 Mar.28 By Cash A/c Mar.31 By Balance c/d 5,480 1,000 Salaries A/c Rs. Date Particular 1998 500 Mar.31 By Balance c/d 500 500 Rent A/c Rs. Date Particular 1998 250 Mar.31 By Balance c/d 250 250 Commission A/c Rs. Date Particular 1998 100 Mar.31 By Cash A/c 100 By Balance b/d

L.F.

Rs. 3,700

Date Particular 1998 Mar.31 To Balance c/d

L.F.

L.F.

Rs. 9,800 9,800 9,800

Date Particular 1998 Mar.20 To Yadav A/c April 1 To Balance b/d

L.F.

L.F.

Rs. 4,480 1,000 5,480

Date Particular 1998 Mar.30 To Cash A/c April 1 To Balance b/d

L.F.

L.F.

Rs. 500 500

Date Particular 1998 Mar.30 To Cash A/c April 1 To Balance b/d

L.F.

L.F.

Rs. 250 250

Date Particular 1998 Mar.31 To Balance c/d

L.F.

L.F.

Rs. 100 100 100

(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)

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 particular class 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.

Cash Book Cash book is of various types. These are as follows: 1. 2. 3. 4. Simple cash book Cash book with book column Cash book with bank and discount column 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 in schools, 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 which all the petty expenses like postage, refreshment, stationery, cartage etc. are recorded.

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, it is 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.

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 Jan.1 Particulars 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) L.F. Dr. Amount (Rs.) 4,000 20,000 5,000 11,800 4,200 Cr. Amount (Rs.)

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

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 To Profit & Loss A/c (Being transfer of gross profit) or e. Profit & Loss A/c To Trading A/c (Being transfer of gross loss) Dr.

Dr.

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 To Capital A/c (Being transfer of net profit to Capital A/c) or d. Capital A/c To Profit & Loss A/c (Being transfer of net loss to Capital A/c) Dr.

Dr.

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

Pass the closing entries in the books of Deepak from the following debit and credit balances which were taken out in December 1998. Dr. (Rs.) 1,000 2,000 18,000 1,000 4,000 1,000 800 6,000 3,000 10,000 500 600 200 600 300 49,000 Cr. (Rs.)

Stock Machinery Purchases Fuel Wages Factory Lighting Discount Salaries Discount Received Office Expenses Sales Commission Received Debtors Rates and Taxes Stationary Trade Expenses Carriage Outward Carriage Inward Capital Total Closing Stock Rs. 10,000 Solution In the books of Deepak Journal Date Particulars L.F. 1998 Dec.31 Trading A/c Dr. To Stock A/c To Purchases A/c To Fuel A/c To Wages A/c To Factory Lighting A/c To Carriage Inwards A/c (Being record of last years balance brought forward in new books) Sales A/c Dr. To Trading A/c (Being transfer of sales to Trading A/c) Closing Stock A/c Dr. To Trading A/c (Being value of stock-in-hand on the closing date of the year)

200 30,000 400

18,400 49,000

Dr. Amount (Rs.) 4,000 20,000 5,000 11,800 4,200

Cr. Amount (Rs.)

20,000 15,000 10,000 30,000 30,000 10,000 10,000

Trading A/c Dr. To Profit and Loss A/c (Being transfer of gross profit) Profit & Loss A/c Dr. To Salaries A/c To Discount A/c To 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) 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) Profit and Loss A/c Dr. To Capital A/c (Being transfer of net profit to Capital A/c) 1. 2. Rs. (30,000 + 10,000) 25,300 = Rs. 14,700 Rs. (14,700 + 600) 11,700 = Rs. 3,600

14,700 11,700 6,000 800 3,000 500 600 200 600

200 400 600 3,600 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. 50 January 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

In the books of Mr. Khan Date 1997 Jan.2 Jan.3 Jan.4 Purchase Book Particulars A B C 50 Bags of Sugar @ Rs. 40 per bag Total Purchase Return Book Particulars A B Total Sales Book Date 1997 Jan.5 Jan.13 Particulars D 30 Bags of Sugar @ Rs. 45 per bag. E Total Sales Return Book Particulars E Total L DiF sc. Cash Rs. 2,000 600 80 31 Total 2,680 800 Cash Book Bank Date Rs. 1997 Jan. 500 6 7 300 19 24 Payments By Rent A/c By Donations By B A/c By Furniture By Bank A/c By Drawings By Bal. c/d Total L DiF sc. Cash Rs. 50 100 60 400 300 100 1,730 2,680 400 Ref. No. L.F. Ref. No. L.F. Amount Rs. 1,350 1,000 2,350 Amount Rs. 60 60 Bank Rs. Ref. No. L.F. Ref. No. L.F. Amount Rs. 1,000 500 2,000 3,500 Amount Rs. 50 40 90

Date 1997 Jan.17 Jan.18

Date 1997 Jan.18

Date 1997 Jan. 1 20 21 22

Receipts

To Bal. b/d To E To Cash A/c C To Furniture A/c

60

400 800

1. Rs. 500 Returns 40 = Rs. 460 2. Rs. 460 400 = Rs. 60 Date Journal Proper Particular L.F. Dr. Amount Cr. Amount

1998 Jan. 1

Jan. 21 Jan. 23 Jan. 31

Furniture A/c Machinery A/c Debtors A/c Cash A/c Bank A/c To Creditors A/c To Capital A/c (Opening entry for the balances in books) Furniture A/c To Mohan (Furniture purchased from Mohan) R To Furniture A/c (Sale of old furniture to R) Salaries A/c Wages A/c To Outstanding Salaries A/c To Outstanding Wages A/c (Salaries and wages outstanding) Total (Rs.)

Dr. Dr. Dr. Dr. Dr. new Dr. Dr. Dr. Dr.

Rs. 800 2,000 1,200 2,000 500

Rs.

3,000 3,500 200 200 40 40 200 50 200 50 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: 3. 4. 5. 6. Debtors ledger Creditors ledger

These subsidiary ledgers contain individual customers and suppliers accounts. Posting refers to the recording of transactions from journals to the ledger. Ledger is a book of secondary entries. 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. 4,000 3 Purchased from Diwan goods for Rs. 5,000 subject to trade discount of 5%

5 8 11 11 20 25 31

and issued a cheque for half the amount Sold goods to Ramdas less 2 % discount for payment of cash in 7 days Rs. 2,250 Sold goods for a cheque Rs. 750 Received Ramdas cheque in settlement of his account and paid it to bank Purchased furniture of Rs. 800 from Manik in cash Paid Diwan by cheque the amount due Paid life insurance premium of Rs. 250 on the life of Mrs. Ramesh 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: 1997 January 1 January 2 January 4 January 6 January 7 January 13 January 17 January 18 January 19 January 20 January 21 January 23 January 24 January 31 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 Purchased goods from Mr. Khan on credit Rs. 10,000 Purchased 500 bags of sugar @ Rs. 45 per bag Paid rent Rs. 500 Gave Rs. 1,000 as donation Sold goods to E on credit Rs. 10,000 Returned goods to Mr. Khan Rs. 500 Returned goods to B Rs. 4,000, E returned goods Rs. 600 Paid Rs. 4,000 to B by cheque in full settlement of his accounts Received Rs. 6,000 from E in cash, Purchased furniture in cash Rs. 4,000 Purchased furniture on credit from Mohan Rs. 2,000 Sold old furniture on credit to R for Rs. 400 Withdrew Rs. 1,000 for personal use Outstanding wages are Rs. 500 and outstanding salaries are Rs. 2,000