What is Ledger? Process, Format, Balancing

What is Ledger?

A ledger refers to a book or register in which financial transactions are permanently recorded after being summarised and classified. We need to arrange the ledger accounts under particular headings. Ledgers help in preparing a trial balance, after which the final statement is prepared.

A ledger is also known as the principal book. It is important to note here that although a journal provides a complete listing of the daily transactions of a business, it does not provide information about a specific account in one place.

For example, if an accountant needed to know how much cash balance the organisation is left with, he/she would have to check all the journal entries involving cash, which is a time consuming task involving numerous entries. To avoid such instances, debit and credit entries from a journal are transferred to a single ledger account.

Table shows the format of a ledger account is as follows:

Dr.				Name of Account			Cr.
Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)

In a ledger, each account is divided into two sides, the debit side and the credit side. The left side of the ledger is called the debit side; whereas, the right side of the ledger is called the credit side. Each side is further divided into four columns.

The following is a brief description of these columns:

• Date: It records the date on which a transaction is made.
  
  
• Particulars: It records the names of the accounts to be credited on the debit side and the accounts to be debited on the credit side.
  
  
• Journal Folio (J.F.): It records the page number of the journal on which the posting of the ledger takes place.
  
  
• Amount: It records the amount of each transaction.

A ledger is often referred to as T-account due to its resemblance to the letter T. The left side of the ledger is debit, whereas the right side is credit.

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Format of Ledger

Transactions are posted to a ledger periodically, such as weekly or monthly, according to convenience.

Perform the following steps to post the transactions of a journal to a ledger:

• Creating the ledger accounts. These accounts are based on the accounts recorded in the corresponding journal.
  
  
• Entering the date of a transaction in the date column.
  
  
• Posting the debited transaction of the journal entry on the credit side of the account, this is credited in the journal entry.
  
  
• Similarly, posting the credited transaction of the journal entry on the debit side of the account which is debited in the journal entry.
  
  
• Beginning the debit side with “To” and the credit side with “By”.
  
  
• Entering the page number of the journal from where the transaction is transferred to the ledger in the J.F. column.

Illustration

Let’s suppose that on 2 April 2010, salary of ₹15,000 were paid, and you want to journalise this transaction and post it to the ledger.

The preceding transaction is recorded in the journal as follows:

Date	Particulars	L.F.	Dr. Amount (₹)	Cr. Amount (₹)
2010 Apr 2	Salary A/c Dr. To Cash A/c (Being paid salary)		15,000	15,000

The preceding entry can be posted to the ledger in the following way:

Dr.				Cash Account			Cr.
Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)
				2010 Apr 2	By Salary A/c		15,000

Dr.				Salary Account			Cr.
Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)
2010 Apr 2	To Cash A/c		15,000			

In the preceding example, two accounts are opened in the ledger, Salary account and Cash account. The Salary account, which is debited in the journal entry, is credited in the ledger entry; whereas, the Cash account, which is credited in the journal entry, is debited in the ledger entry. The Salary account shows the debited amount and the Cash account shows the credited amount in the ledger.

Let us look at another example for preparing a ledger from a journal:

Illustration 2

From the following transactions, prepare a journal and post the entries into a ledger:

December, 2013

December 3. Ali started his small-scale business with a cash of ₹1, 00,000

December 5. He purchased furniture for ₹20,000

December 12. He purchased goods worth ₹60,000

December 16. He sold goods worth ₹80,000 in cash

December 28. He paid salaries to his employees worth ₹10,000

Solution:

Date	Particulars	L.F.	Amount	Amount
December, 2013			Debit (₹)	Credit (₹)
3	Cash A/C To Capital (Being capital brought in) Dr.	9 11	100000	100000
5	Furniture A/C To Cash A/C (Being furniture purchased for cash) Dr.	13 9	20000	20000
12	Purchases A/C To Cash A/C (Goods purchased for cash) Dr.	15 9	60000	60000
16	Cash A/C To Sales A/C (Sold goods for cash) Dr.	9 17	80000	80000
28	Salaries A/C To Cash A/C (Salaries paid) Dr.	19 9	10000	10000

The ledgers from the journal are prepared as follows:

Date	Particulars	J.R.	Amount (₹)	Date	Particulars	J.R.	Amount (₹)
Dec 2013				Dec 2013
3	To Capital A/C	1	1,00,000	5	By Furniture A/C	1	20,000
16	To Sales A/C	1	80,000	12	By Purchases A/C	1	60,000
				28	By Salaries A/C	1	10,000
					By Balance c/d		90,000
	Total		1,80,000		Total		1,80,000

Date	Particulars	J.R.	Amount (₹)	Date	Particulars	J.R.	Amount (₹)
Dec 2013				Dec 2013
28	To Balance c/d		1,00,000	3	By Cash A/C	1	1,00,000
	Total		1,00,000		Total		1,00,000

Date	Particulars	J.R.	Amount (₹)	Date	Particulars	J.R.	Amount (₹)
Dec 2013				Dec 2013
5	To Cash A/C	1	20,000	28	By Balance c/d		20,000
	Total		20,000		Total		20,000

Date	Particulars	J.R.	Amount (₹)	Date	Particulars	J.R.	Amount (₹)
Dec 2013				Dec 2013
12	To Cash A/C	1	60,000	28	By Balance c/d		60,000
	Total		60,000		Total		60,000

Date	Particulars	J.R.	Amount (₹)	Date	Particulars	J.R.	Amount (₹)
Dec 2013				Dec 2013
28	To Balance c/d		80,000	16	By Cash A/C	1	80,000
	Total		80,000		Total		80,000

Date	Particulars	J.R.	Amount (₹)	Date	Particulars	J.R.	Amount (₹)
Dec 2013				Dec 2013
28	To Cash A/C	1	10,000	28	By Balance c/d		10,000
	Total		10,000		Total		10,000

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Ledger Balancing

After we have posted and recorded the transactions, it is necessary to balance each account prepared in a ledger. In simple words, ledger balancing means totalling the amount of both sides (that is the credit side and the debits side) of the account and writing the difference to the side whose total is less.

For example, if the credit side is greater than the debits side, then the difference of both sides is recorded in the debit side. On the other hand, on the debit side is greater than the credit side, the difference is recorded in the credit side.

The following steps need to be performed to balance an account:

• Calculate the amount of both the debit and credit sides of the account separately.
  
  
• Calculate the difference of both sides. If there is no difference, it means that the balance is nil. If the total of the debit side is greater than the total of the credit side, the difference is written on the credit side; and if the total of the credit side is greater than the total of the debit side, the difference is written on the debit side.
  
  
• Type the balance as To Balance c/d, if the difference is on the debit side. The word c/d means carried down to the next period. Similarly, type the balance as To Balance b/d, if the difference is on the credit side. The word b/d means brought down from an earlier period.
  
  A period refers to any duration, such as a month or three months (quarterly), according to convenience.
  
  
• Calculate the credit and debit totals at their respective sides of the accounts.

Note that the closing balance of the previous period of an account appears as the opening balance for the next period of the account. The closing balance of the previous period is written in the opposite side of the next period as To Balance b/d or By balance b/d.