ICAI Notes- Unit 2: Ledgers | Principles and Practice of Accounting - CA Foundation PDF Download

Introduction

After recording the original 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.

Specimen of Ledger Accounts

A ledger account has two sides-debit (left side of the account) and credit (right side 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.

Posting

The process of transferring the debit and credit items from journal to classified accounts in the ledger is known as posting. 

Rules regarding Posting of Entries in the Ledger 

1. Separate account is opened in ledger book for each distinct account and entries from Journal are 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.

Balancing an Account

At the end of each month or year or any particular reporting period, it may be necessary to ascertain the balance in an account. Suppose a person has bought goods worth ₹1,000 and has paid only ₹ 850; he owes ₹150 and that is the balance in his account. To ascertain the balance in any account, both the sides of the account is totalled and smaller amount is deducted from the bigger amount to ascertain the difference. If the credit side is bigger than the debit side, it is a credit balance and vice a versa. 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 and 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 balances are ultimately shown in the balance sheet at the end of the accounting period. The capital account is adjusted for profit or loss (i.e net of nominal accounts) at the end of accounting period. 

Illustration 1: Prepare the Stationery Account of a firm for the month of Jan. 2022 duly balanced off, from the following details:

Sol:

Illustration 2: Prepare the ledger accounts on the basis of following transactions in the books of a trader.
Debit Balances on January 1, 2022:
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, 2022:
Trade payables: Anand ₹ 5,000 and Kapil ₹7,000, Capital ₹ 55,000
Following were further transactions in the month of January, 2022:
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.
Sol:

Illustration 3: 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, 2022.
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 ½% 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.
Sol:

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 ½ of ₹ 90,000 less½% 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.

Note: The balance of all nominal accounts is transferred to Profit and Loss account at the time of preparation of financial statements as the nominal Accounts are in the nature of revenue/incomes/gains or expenses/losses. Thus, the net result of all nominal accounts is reflected in profit and loss Account for an accounting period which is transferred to Capital Account. The balance of all the accounts relating to assets and liabilities (personal and real) are reflected in the Balance Sheet at the end of accounting period.

Summary

• Process of transferring journal entries in the accounts opened in Ledger is called posting. 
• Ledger is known as principal books of accounts and it provides full information regarding all the financial transactions pertaining to any individual account. 
• The difference between the totals of debits and credit sides is found out as the balance. Some of these balances (i.e nominal accounts) are transferred to the profit and loss account and some are carried forward to the next period/year i.e., shown in the balance sheet, depending upon the nature of the account.