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After recording the transactions in the journal, recorded entries are classified and grouped into by preparation of accounts. The book which contains all set of accounts (viz. personal, real and nominal accounts), is known as Ledger. It is known as principal books of account in which account-wise balance of each account is determined.
2.2 Specimen of Ledger Accounts
A ledger account has two sides-debit (left part of the account) and credit (right part of the account). Each of the debit and credit side has four columns. (i) Date (ii) Particulars (iii) Journal folio i.e. page from where the entries are taken for posting and (iv) Amount.
The process of transferring the debit and credit items from journal to classified accounts in the ledger is known as posting.
2.1 Rules Regarding Posting of Entries in the Ledger
1. Separate account is opened in ledger book for each account and entries from ledger posted to respective account accordingly.
2. It is a practice to use words 'To' and 'By' while posting transactions in the ledger. The word 'To' is used in the particular column with the accounts written on the debit side while 'By' is used with the accounts written in the particular column of the credit side. These 'To' and 'By' do not have any meanings but are used to the account debited and credited.
3. The concerned account debited in the journal should also be debited in the ledger but reference should be of the respective credit account.
2.4 Balancing an Account
At the end of the each month or year or any particular day it may be necessary to ascertain the balance in an account. This is not a too difficult thing to do; suppose a person has bought goods worth '1,000 and has paid only ' 850; he owes '150 and that is balance in his account. To ascertain the balance in any account, what is done is to total the sides and ascertain the difference; the difference is the balance. If the credit side is bigger than the debit side, it is a credit balance. In the other case it is a debit balance.
The credit balance is written on the debit side as, "To Balance c/d"; c/d means "carried down". By doing this, two sides will be equal. The totals are written on the two sides opposite one another. Then the credit balance is written on the credit side as "By balance b/d (i.e., brought down)". This is the opening balance for the new period. The debit balance similarly is written on the credit side as "By Balance c/d", the totals then are written on the two sides as shown above as then the debit balance written on the debit side as, "To Balance b/d", as the opening balance of the new period.
It should be noted that nominal accounts are not balanced; the balance in the end are transferred to the profit and loss account. Only personal and real accounts ultimately show balances. In the illustrations given, you will have notice that the capital account, the purchases account, sales account, the discount account, the rent account and the salary account have not been balanced. The capital account will have to be adjusted for profit or loss and that is why it has not been balanced yet.
Prepare the Stationery Account of a firm for the year ended 31.12.2015 duly balanced off, from the following details:
Prepare the ledger accounts on the basis of following transactions in the books of a trader. Debit Balances on January 1,2015:
Cash in Hand ₹ 8,000, Cash at Bank ₹ 25,000, inventory of Goods ₹ 20,000, Building ₹ 10,000. Trade receivables: Vijay ₹ 2,000 and Madhu ₹ 2,000. Credit Balances on January 1,2015:
Trade payables: Anand ₹ 5,000, Capital ₹ 55,000
Following were further transactions in the month of January, 2015:
Jan. 1 Purchased goods worth ₹ 5,000 (payable at later date) for cash less 20% trade discount and 5% cash discount.
Jan. 4 Received ₹ 1,980 from Vijay and allowed him ₹ 20 as discount.
Jan. 8 Purchased plant from Mukesh for ₹ 5,000 and paid ₹100 as cartage for bringing the plant to the factory and another ₹200 as installation charges.
Jan. 12 Sold goods to Rahim on credit ₹ 600.
Jan. 15 Rahim became insolvent and could pay only 50 paise in a rupee.
Jan. 18 Sold goods to Ram for cash ₹ 1,000.
The following data is given by Mr. S, the owner, with a request to compile only the two personal accounts of Mr. H and Mr. R, in his ledger, for the month of April, 2015.
1 Mr. S owes Mr. R ₹ 15,000; Mr. H owes Mr. S ₹ 20,000.
4 Mr. R sold goods worth ₹ 60,000 @ 10% trade discount to Mr. S.
5 Mr. S sold to Mr. H goods prices at ₹ 30,000.
17 Record a purchase of ₹ 25,000 net from R, which were sold to H at a profit of ₹ 15,000.
18 Mr. S rejected 10% of Mr. R's goods of 4th April.
19 Mr. S issued a cash memo for ₹ 10,000 to Mr. H who came personally for this consignment of goods, urgently needed by him.
22 Mr. H cleared half his total dues to Mr. S, enjoying a %% cash discount (of the payment received, ₹ 20,000 was by cheque).
26 R's total dues (less ₹10,000 held back) were cleared by cheque, enjoying a cash discount of ₹ 1,000 on the Payment Made
29 Close H's Account to record the fact that all but ₹ 5,000 was cleared by him, by a cheque, because he was declared bankrupt.
30 Balance R's Account.
Solution: Working Notes:
(1) Sale of '10,000 on 19th April is a cash sales, therefore, it will not be recorded in the Personal Account of Mr. H; and
(2) On 22nd April, Mr. H owes Mr. S ₹ 90,000, amount paid by Mr. H VT. of ₹ 90,000 less discount i. e., ₹ 45,000- ₹ 225 = ₹ 44,775. Out of this amount, ₹ 20,000 paid by cheque and the balance of ₹ 24,775 in cash.