UNIT

03 Ledger Entries

Names of Sub-Units

Introduction to ledger entries: Definition of Types of Ledgers, Applications of Ledger Positing, Study of
Closing the Ledger at the end of the reporting period

Overview

In this unit, firstly, you will study the concept of ledger entries. Then, you will gain insight into Types
of Ledgers. The chapter will also shed light on Ledger Positing. In the end, you will be acquainted with
the study of Closing the Ledger at the end of the reporting period

Learning Objectives

In this unit, you will learn to:

 Discuss the concept of ledger entries
 Explain the Types of Ledgers
 Describe the Ledger Positing
 Relate Closing the Ledger at the end of the reporting period
JGI JAIN
DEEMED-TO-BE UNIVERSIT Y
Accounting for Business

Learning Outcomes
At the end of this unit you would:
 Assess the importance of ledger entries
 Appraise the Types of Ledgers
 Evaluate the application of Ledger Positing
 Analyse the Closing the Ledger at the end of the reporting period

Pre-Unit Preparatory Material

 https://kaplan.co.uk/docs/default-source/pdfs/study-options-demos/ba3-study-text-chapter-4.
pdf
 https://kaplan.co.uk/docs/default-source/pdfs/study-options-demos/ba3-study-text-chapter-4.
pdf
 https://egyankosh.ac.in/bitstream/123456789/15424/1/Unit-6.pdf

3.1 INTRODUCTION
You may have seen a wholesaler of clothes maintaining details of each of his retailers. The details contain
clothes supplied to the retailer and money received for those supplies. In accounting terms, we say that
the wholesaler maintains ledger accounts for each retailer. These ledger accounts help him identify who
owes him how much, who is paying on time and who is not likely to pay up.
A ledger entry is a record made of a business transaction. The entry may be made under either the
single entry or double entry bookkeeping system, but is usually made using the double entry format,
where the debit and credit sides of each entry always balance. A business may record hundreds or
thousands of ledger entries in each reporting period.
A general ledger represents the record-keeping system for a company’s financial data, with debit and
credit account records validated by a trial balance. It provides a record of each financial transaction
that takes place during the life of an operating company and holds account information that is needed
to prepare the company’s financial statements. Transaction data is segregated, by type, into accounts
for assets, liabilities, owners’ equity, revenues, and expenses.

3.2 CONCEPT OF LEDGERS

The book in which details of all transactions are recorded is called a ledger.
In accounting, we classify/record all items in the following manner:
1. Classify all items as asset, liability, income and expense (elements of the financial statements).
2. Each class is then further classified and recorded as a separate ledger account.
Example: Assets are further classified into plant, machinery, furniture, receivables, cash etc.
3. Each sub-class is also further classified (if needed) and recorded as a separate ledger account.
Example: Receivables are further classified according to customers—ledger account of customer A,
ledger account of customer B etc.

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This classification continues until we get to the purpose for which or the person with whom the
transaction was incurred.
Example: Company Alpha has one building, one machine and one pick-up the vehicle. It will record
its assets in different ledger accounts – building account, plant account and vehicle account.
When it acquires yet another machine, the building account and the vehicle account will remain the
same but the plant account will be classified into two—’Plant-1 ledger account’ and ‘Plant-2 ledger
account’.

3.3 TYPES OF LEDGER ACCOUNTS

1. Receivable ledger/sales ledger/debtors’ ledger: This includes all ledger accounts of customers.
2. Payable ledger/purchases ledger / creditors’ ledger: This includes all ledger accounts of sellers/
suppliers/vendors.
3. Nominal/general ledger: This includes all ledger accounts other than the receivable and payable
ledgers. Examples would be building, plant and machinery, stock, share capital, sales, expenses and
cash.

The above classification of the ledger is done for simplicity as the format and basic accounting procedure
are the same for all.

3.4 LEDGER POSTING

Posting means recording the debit and credit effects of a journal entry in the ledger account. Posting is
to be made to the debit side of the account which is to be debited and to the credit side of the account
which is to be credited.
Let’s take up an example to learn this concept.
ICC Ltd carried out the following transactions with a customer, Alan:
 January 2020 - sold goods worth ` 1,000 invoice no. - 10025
 25 February 2020 - sold goods worth ` 4,000 invoice no. - 10092
 Received cheque from Alan ` 1,000 on 2 February 2020 and issued a receipt to Alan which had a
number R1009.
Step 1: Identify two elements Journal entry
As the goods were sold on credit (payment was not received immediately), the journal entry will be:
Alan account Dr ` 1,000
To Sales account Cr ` 1,000
(Being goods sold on credit)
Step 2: Preparing ledger accounts
To record the above entry, ICC Ltd has to open two ledger accounts
1. Alan account
2. Sales account

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DEEMED-TO-BE UNIVERSIT Y
Accounting for Business

The suggested format of a ledger account is as follows:

In the Books of ICC Ltd

Alan account
Dr Cr

Date ` Date `

Total Total

In the Books of ICC Ltd

Sales account
Dr Cr
Date ` Date `

Total Total

Step 3: Posting into ledger accounts

Let’s see how to post our entry in the ledger account:
Alan account Dr ` 1,000
To Sales account Cr ` 1,000
(Being goods sold on credit)

Books of ICC Ltd

Dr Cr
Date ` Date `
02/01/2020 To Sales account -10025 1,000

As Alan’s account is debited, the entry will be posted to the debit side of Alan’s account. After posting all
entries, Alan’s account will appear as follows:

Books of ICC Ltd

Alan account
Dr Cr
Date ` Date `
02/01/2020 To Sales account – 10025 1,000 02/02/2020 By Receipt – R1009 1,000
25/02/2020 To Sales account – 10092 4,000

Step 4: Balancing off the ledger

Once all entries are posted, the ledger has to be balanced as follows: add up each side and put the higher
balance on both sides. The balancing figure is the carried forward figure.

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Books of ICC Ltd

Alan account
Dr Cr

Date ` Date `
02/01/2020 To Sales account - 10025 1,000 02/02/2020 By Receipt - R1009 1,000
25/02/2020 To Sales account - 10092 4,000 Balance c/f 4,000
Total 5,000 Total 5,000

Alan’s account shows that ICC Ltd has sold goods worth ` 5,000 and received only ` 1,000. Therefore,
` 4,000 are still receivable from Alan.

3.5 CLOSING THE LEDGER AT THE END OF THE REPORTING PERIOD

We have already seen that a ledger account has two sides, a debit side and a credit. The expression to
calculate a balance on the ledger account means to total each side of the ledger account and calculate
the difference between the two sides.
The procedure for balancing a ledger account is as follows:
1. Total the debit and credit sides
2. Calculate the difference between the two sides
3. Find the balancing figure
4. If the debit side exceeds the credit side, then it is a debit balance (This balance is written on the credit
side). Now debit total = credit total
5. If the credit side exceeds the debit side, then it is a credit balance (This balance is written on the debit
side). Now a total of the debit column = total of the credit side

Example: This is asset account of ICC Ltd

Books of ICC Ltd

Asset account
Dr Cr

Date ` in ‘000 Date ` in ‘000

01/04/2020 To Balance b/d 500
02/08/2020 To New machinery 500
purchased in cash
09/10/2020 By New wheels 330 31/03/2021 By Sale of asset 200
purchased in cash
Total 1,430 Total 200

As you can see, the totals of the debit side and credit side are not equal. There is a difference of 1,430 - 200
= 1,230 (amounts in ` ‘000). We have taken the total of both sides. Then the difference in the two totals is
identified.
As the total of the debit column exceeds the total of the credit column – it is a debit balance.

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Accounting for Business

This debit balance is written in the credit column in the following manner.

Books of ICC Ltd

Asset account
Dr Cr
Date ` in ‘000 Date ` in ‘000
01/04/2020 To Balance b/d 500
02/08/2020 To New machinery 600
purchased in cash
09/10/2020 To New wheels 330 31/03/2021 By Sale of asset 200
purchased in cash

Balance c/f 1,230

Total 1,430 Total 1,430

The correct way to write the closing balance is to write on the last line of the ledger account.
At the end of the financial year:
 All income and expense accounts i.e., accounts appearing in the income statement are closed.

 All asset and liability accounts i.e., accounts appearing in the balance sheet are carried forward to
the next accounting year.
Now let us see the carry-over and closing process.
Carryover Process

Books of ICC Ltd

Loan account - year 1
Dr Cr

Date ` Date `
01/04/2019 By Balance b/d 8,50,000
01/04/2019 To Instalment paid 1,65,000 30/09/2019 By Additional loan 1,20,000
31/03/2020 By Interest 66,500

31/03/2020 Balance c/f 8,71,500

Total 10,36,500 Total 10,36,500

Balance b/d or b/f denotes the balance of an account brought forward from last year
Balance c/d or c/f denotes the balance of an account carried forward to next year.
The above account has the following features:
 Liability account, as the credit is greater than the debit entries.
 Appears in the balance sheet (remember income and expense are closed at the end of the year).
 Has a closing credit balance of `8,71,500 (This must be carried over to the next accounting period).

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Carryover to the next accounting period:

 Write the opening balance on the first line of the ledger account in the next year.
 Opening balance is credit; hence write on the credit side of the ledger account.

Books of ICC Ltd

Loan account I year 2
Dr Cr
Date ` Date `
01/04/2020 By Balance b/d (brought down from last year) 8,71,500

Total Total

Closing an Account
To close the ledger accounts relating to items of incomes and expenses, simply transfer the balance to
the profit or loss account as follows:

Sales Account
Dr Cr

Date ` Date `
31/03/2020 To Sales returns 2,260 31/03/2020 By March sales 51,060

31/03/2020 To Balance transferred to 48,800

the profit or loss account
Total 51,060 Total 51,060

The above account has the following features:

 Income account (as it has a credit balance).
 Should appear in the profit or loss account.
 Has a closing credit balance of ` 48,800 i.e., credit side is greater than the debit side.

Let’s look at another example:

Purchases Account
Dr Cr

Date ` Date `
01/11/2019 To October purchases 950 01/11/2019 By Purchases returns 143

31/03/2020 By Balance transferred to 807

the profit or loss account
Total 950 Total 950

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DEEMED-TO-BE UNIVERSIT Y
Accounting for Business

The above account has the following features:

 Expense account (as it has a debit balance).
 Should appear in the income statement.
 Has a closing debit balance of ` 807 i.e., debit side is greater than the credit side.

Main Types Of Business Transactions

Let us now learn some key business transactions.
1. Sales
The sale of goods refers to the income generated by the entity from its main activities. They may also be
referred to as turnover. Sales are of two types as follows:
 Cash sales: The payment for the sale is received immediately. The seller issues a cash invoice. The
journal entry to record this transaction is:
Cash account Dr X
To Sales account Cr X
(Being goods sold and cash received)
 Credit sales: The buyer promises to pay in the future; hence a receivable and payable relationship is
created. The seller issues an invoice. The double-entry is:
Receivables account Dr X
To Credit sales account Cr X
(Being goods sold on credit)
2. Purchases

Purchases are one of the most important activities for an entity. These are the opposite of sales – they
refer to the main direct expenses incurred in generating sales income. Purchases are of two types.
 Cash purchases: The payment for purchase is immediately made at the time of purchase. The
double-entry is:
Purchases account Dr X
To Cash account Cr X
(Being purchases made and cash paid.
 Credit purchases: The buyer does not pay immediately at the time of purchase but promises to pay
in the future. The double-entry is:
Purchases account Dr X
To Payables account Cr X
(Being purchases made on credit)

3. Payments
Payments refer to the outflow of cash by the payer. Payments can be either:
1. Payment in cash OR
2. Payment by cheque, credit card, standing order or direct debit. (We use the term ‘payment in cash’
even for these types of payments).

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Payment can be towards:

a. Cash purchases
b. Payment to suppliers (payables)
c. Purchases of buying fixed assets
d. Drawings from the business (Money is taken for personal use by the proprietor)
e. Expenses

(The above list is not exhaustive)

While making a payment, you need to obtain a receipt from the recipient or obtain his acknowledgment
on a payment voucher. This is your primary source of proof that a payment has been received and must
be obtained for cash transactions.
4. Receipts
Receipts refer to the inflow of cash to the recipient. Receipts can be either:
1. Receipt in cash OR
2. Receipt by cheque, credit cards, direct credit and standing order

A receipt can be from:

a. Cash sales
b. Collection from customers (receivables)
c. Sale proceeds from the disposal of fixed assets
d. Capital brought into the business by the owners
e. Loan financing
f. Other income received in cash
g. A correcting entry
(The above list is not exhaustive)
While receiving the money, you need to issue a receipt to the payer or an acknowledgment of receipt.
5. Cash and Credit Transactions
When cash is received or paid immediately, it is called a cash transaction. When cash receipt or payment
is postponed, although the other part of the transaction is completed (e.g., goods receipt), it is called a
credit transaction. In cash transactions, one of the two effects (debit or credit) is necessarily given to the
cash account or the bank account.
Remember that once a receivable or payable is recorded in a party’s account, the subsequent receipt or
payment must be recorded in the same account and not in the income or expense account.
6. Receivables and Payables
When goods are sold or services rendered on credit, the receivables account is debited (it is an increase
in an asset) and the sales account (income account) is credited. Similarly, when credit purchases are
made, the purchase account is debited (it is an increase in expense) and payables (liability) are credited
(being an increase in liability).

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JGI JAINDEEMED-TO-BE UNIVERSIT Y
Accounting for Business

7. Drawings
Drawings are the amount of money taken out from the business by the owners. The capital or drawings
account is debited (being a reduction in the capital) and the cash account is credited (being a reduction
in an asset).

Conclusion 3.6 CONCLUSION

 A ledger entry is a record made of a business transaction.

 The entry may be made under either the single entry or double entry bookkeeping system, but is
usually made using the double entry format, where the debit and credit sides of each entry always
balance.
 A business may record hundreds or thousands of ledger entries in each reporting period.
 A general ledger represents the record-keeping system for a company’s financial data, with debit
and credit account records validated by a trial balance.
 It provides a record of each financial transaction that takes place during the life of an operating
company and holds account information that is needed to prepare the company’s financial
statements.
 Transaction data is segregated, by type, into accounts for assets, liabilities, owners’ equity, revenues,
and expenses.
 Posting means recording the debit and credit effects of a journal entry in the ledger account.
 Posting is to be made to the debit side of the account which is to be debited and to the credit side of
the account which is to be credited.
 Purchases are one of the most important activities for an entity.
 These are the opposite of sales – they refer to the main direct expenses incurred in generating sales
income.
 When cash is received or paid immediately, it is called a cash transaction.
 When cash receipt or payment is postponed, although the other part of the transaction is completed
(e.g. goods receipt), it is called a credit transaction.
 In cash transactions, one of the two effects (debit or credit) is necessarily given to the cash account
or the bank account.
 Remember that once a receivable or payable is recorded in a party’s account, the subsequent receipt
or payment must be recorded in the same account and not in the income or expense account.
 When goods are sold or services rendered on credit, the receivables account is debited (it is an
increase in an asset) and the sales account (income account) is credited. Similarly, when credit
purchases are made, the purchase account is debited (it is an increase in expense) and payables
(liability) are credited (being an increase in liability).

3.7 GLOSSARY

 Drawings: Drawings are the amount of money taken out from the business by the owners.
 Ledger: The book in which details of all transactions are recorded is called a ledger.
 Posting: Posting means recording the debit and credit effects of a journal entry in the ledger account.

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3.8 CASE STUDY: LEDGER POSTING

Case Objective
This case study highlights the methods of posing of ledgers of diffident ledgers.
Ketan is a sole trader who manufactures shoes. He makes the following transactions in February 2020.
1 February Capital introduced ` 3,00,000 in cash into the business.
Shoelaces purchased for ` 10,000.
Leather purchased on credit from Letha Manufacturing ` 50,000
25 February Rent for 3 months paid ` 50,000
28 February Shoes sold on credit ` 10,000 to Mohan stores.
Post the above transactions to the respective ledger accounts.

Answers:

The ledger accounts will be prepared as follows:

Cash Account
Dr Cr
Date ` Date `
01/02/2020 To Capital account 3,00,000 01/02/2020 By Purchases (Shoe lace) account 10,000
25/02/2020 By Rent expenses account 50,000
By Balance c/f 2,40,000
Total 3,00,000 Total 3,00,000

Capital Account
Dr Cr
Date ` Date `
01/02/2020 By Cash account 3,00,000

Balance c/f 3,00,000

Total 3,00,000 Total 3,00,000

Shoe Lace Account

Dr Cr
Date ` Date `
01/02/2020 To Cash 10,000
By Balance c/f 10,000
Total 10,000 Total 10,000

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DEEMED-TO-BE UNIVERSIT Y
Accounting for Business

Leather Account
Dr Cr

Date ` Date `

01/02/2020 To Sundry accounts payable 50,000

By Balance c/f 50,000

Total 50,000 Total 50,000

Rent Account
Dr Cr

Date ` Date `

25/02/2020 To Cash 50,000

By Balance c/f 50,000

Total 50,000 Total 50,000

Sales Account
Dr Cr

Date ` Date `

28/02/2020 By Trade accounts receivable 10,000

To Balance c/f 10,000

Total 10,000 Total 10,000

Payable Account
Dr Cr

Date ` Date `
01/02/2020 By Leather 50,000
To Balance c/f 50,000
Total 50,000 Total 50,000

Trade Receivable Account

Dr Cr

Date ` Date `
28/02/2020 To Sales 10,000
By balance c/f 10,000
Total 10,000 Total 10,000

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3.9 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. What do you mean by Ledger Entries?
2. Explain the ledger posting.
3. What do you mean by drawings?
4. On 1 April 2007, Manish had a bank balance of `1,000.
He completed the following transactions during April 20X7.
1. Cash sale of ` 60
2. Receipt from credit customer Jay ` 780
3. Receipt from credit customer Tarak ` 300 less discount allowed ` 30
4. Receipt from credit customer Ramesh ` 250 less discount allowed `20
5. Receipt of cheque from Mahesh ` 1,500 against loan given
6. Receipt from second cash sale ` 170
7. Receipt of cash for the sale of an equipment ` 400
8. Payment made to supplier Ishan ` 150
9. Payment made to supplier Palak ` 250
10. Electricity bill paid ` 500
11. Telephone bill paid ` 250
12. Cash withdrawn from bank for petty cash ` 200
13. New equipment purchased for ` 2,000 from Nikhil
Prepare the cash book.

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JGI JAIN
DEEMED-TO-BE UNIVERSIT Y
Accounting for Business

3.10 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. A ledger entry is a record made of a business transaction. The entry may be made under either the
single entry or double entry bookkeeping system, but is usually made using the double entry format,
where the debit and credit sides of each entry always balance. A business may record hundreds or
thousands of ledger entries in each reporting period. Refer to section introduction.
2. Posting means recording the debit and credit effects of a journal entry in the ledger account. Posting
is to be made to the debit side of the account which is to be debited and to the credit side of the
account which is to be credited. Refer to section ledger posting.
3. Drawings are the amount of money taken out from the business by the owners. The capital or
drawings account is debited (being a reduction in the capital) and the cash account is credited
(being a reduction in an asset). Refer to section drawings.
4.

Cash book of Manish

for the month of April 2007

Cash Total Cash Petty Total

Date Receipts Debtors Others Date Payments Creditors Others
sales ` purchase cash `

1/4 Balance 1,000 Purchase 2,000 2,000

b/d of asset

Cash sales 60 60 Payable – 150 150

Ishan
Receivable 780 780 Palak 250 250
Jay
Tarak 270 270 Electricity 500 500
bill

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Cash Total Cash Petty Total

Date Receipts Debtors Others Date Payments Creditors Others
sales ` purchase cash `

Ramesh 230 230 Telephone 250 250

bill

Loan – 1,500 1,500 Petty cash 200 200

Mahesh
Cash sales 170 170 Balance c/f 1,060

Sale of 400 400

asset

Total 230 1,280 1,900 4,410 Total 400 200 2,750 4,410

@ 3.11 POST-UNIT READING MATERIAL

 https://www.futureaccountant.com/accounting-process/study-notes/ledger-preparation-
balancing-illustration.php
 https://www.futureaccountant.com/accounting-process/study-notes/posting-ledger.php

3.12 TOPICS FOR DISCUSSION FORUMS

 Discuss what type of ledger accounts a manufacturing company will be required to prepare.
 Prepare cash book to record your pocket money expenses.

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