Journal records all business transactions separately and date-wise. The transactions relating to a particular person, asset, expense or income are recorded at different places in the journal as they occur on different dates. Hence, it fails to bring the similar transactions together at one place. Thus, to have a consolidated view of the similar transactions different accounts are prepared in the Ledger.
A Ledger account may be defined as a summary statement of all the transactions relating to a person, asset, expense or income, which have taken place during a given period of time and show their net effect. So every entry recorded in the journal must be posted into the Ledger. A ledger account is a statement shaped liked an English alphabet 'T' that systematically contains all financial transactions relating to either a particular person or thing for a certain period of time. It is the principal book of accounts.
Features of ledger
The following are the features of ledger.
a) It has two identical sides - left hand side and right hand side. The left hand side is called debit side and right hand side is called credit side.
b) Debit aspects of all the concerned transactions is recorded on the debit side, while credit aspect on credit side according to date.
c) The difference of the total of the two sides represents balance. The excess of debit side over credit side indicates debit balance, while excess of credit side over debit side indicates credit balance. If the total of the two sides are equal there will be no balance.
d) Usually balance is drawn at the year end and recorded on the deficit side to make the two sides equal. This balance is known as closing balance.
e) The closing balance of the current year will be the opening balance of the next year.
Importance of Ledger / Advantages of ledgers
Ledger is an important book of Account. It contains all the accounts in which all the business transactions of a business enterprise are classified. At the end of the accounting period, each account will contain the entire information of all the transactions relating to it. Following are the advantages of ledger.
a) Knowledge of Business results: Ledger provides detailed information about revenues and expenses at one place. While finding out business results the revenue and expenses are matched with each other.
b) Knowledge of book value of assets: Ledger records every asset separately. Hence, we can get the information about the Book value of any asset whenever we need.
c) Useful for management: The information given in different ledger accounts will help the management in preparing budgets. It also helps the management in keeping the check on the performance of business it is managing.
d) Knowledge of Financial Position: Ledger provides information about assets and liabilities of the business. From this we can judge the financial position and health of the business.
e) Instant Information: The business always needs to know what it owes to others and what the others owe to it. The ledger accounts provide this information at a glance through the account receivables and payables.
Sub-division of ledger
In a big business, the number of accounts is numerous and it is found necessary to maintain a separate ledger for customers, suppliers and for others. Usually, the following three types of ledgers are maintained in such big business concerns.
(i) Debtors’ Ledger: It contains accounts of all customers to whom goods have been sold on credit. From the Sales Day Book, Sales Returns Book and Cash Book, the entries are made in this ledger. This ledger is also known as sales ledger.
(ii) Creditors’ Ledger: It contains accounts of all suppliers from whom goods have been bought on credit. From the Purchases Day Book, Purchases Returns Book and Cash Book, the entries are made in this ledger. This ledger is also known as Purchase Ledger.
(iii) General Ledger: It contains all the residual accounts of real and nominal nature. It is also known as Nominal Ledger.
Distinction between journal and ledger
(i) Journal is a book of prime entry, whereas ledger is a book of final entry.
(ii) Transactions are recorded daily in the journal, whereas posting in the ledger is made periodically.
(iii) In the journal, information about a particular account is not found at one place, whereas in the ledger information about a particular account is found at one place only.
(iv) Recording of transactions in the journal is called journalising and recording of transactions in the ledger is called posting.
(v) A journal entry shows both the aspects debit as well as credit but each entry in the ledger shows only one aspect.
(vi) Narration is written after each entry in the journal but no narration is given in the ledger.
(vii) Vouchers, receipts, debit notes, credit notes etc., from the basic documents form journal entry, whereas journal constitutes basic record for ledger entries.
Balancing of accounts
Balancing of an account is the difference between the total of debits and total of credits of an account. If debit side total is more than the credit side, the account shows a debit balance. Similarly, the balance will be credit if the credit side total of an account is more than the debit side total. This process of ascertaining and writing the balance of each account in the ledger is called balancing of an account. An account has two sides: debit and credit. Items by which this account is debited are entered on its debit side with their amounts and items by which this account is credited are entered on its credit side with their amounts so all items related to an account are shown at one place in the ledger. But then we would like to know the net effect of this account i.e. the balance between its debit amount and credit amount. The following steps are to be followed in Balancing the Ledger Account:
a) Total up the two sides of an Account on a rough sheet.
b) Determine the difference between the two sides. If the credit side is more than the debit side, the balance calculated is a credit balance.
c) Put the difference on the ‘Shorter side’ of the account such that the totals of the two sides of the account are equal.
d) If the difference amount is written on debit side (i.e., if credit. side is bigger) then write as “Balance c/d” (c/d stands for carried down). If difference is written on the credit side (i.e., if debit side is bigger) then write it as “Balance c/d.
e) Finally at the end of the year all the ledger accounts are closed by taking out the balance of each account.
The Balance then should be brought down or carried forward to the next period. If the difference was put on credit side as “Balance c/d” it should now be written on the debit side of the account as “Balance b/d” (b/d stands for brought down) and vice-a-versa. Thus debit balance will automatically be brought down on the debit side and a credit balance on the credit side.
How Posting is done from journal to ledger?
We know that the purpose of opening an account in the ledger is to bring all related items of this account which might have been recorded in different books of accounts on different dates at one place. The process involved in this exercise is called posting in the ledger. This procedure is adopted for each account.
To take the items from the journal to the relevant account in the ledger is called posting of journal. Following procedure is followed for posting of journal to ledger:
1. Identify both the accounts ‘debit’ and credit of the journal entry. Open the two accounts in the ledger.
2. Post the item in the first account by writing date in the date column, name of the account to be credited in the particulars column and the amount in the amount column of the ‘debit’ side of the account.
3. Write the page number of the journal from which the item is taken to the ledger in Folio column and write the page number of the ledger from which account is written in L.F. column of the journal.
4. Now take the second Account and give the similar treatment. Write the date in the ‘date’ column, name of the account in the ‘amount’ column of the account on its credit side in the ledger.
5. Write page number of journal in the ‘folio’ column of the ledger and page number of the ledger in the ‘LF’ of column of the journal.