The Double Entry System of Accounting is based on the principle of duality. Every business transaction has a two fold effect as per this principle – that is, every debit has an equal and opposite credit. Thus, this is the basis of analyzing all business transactions and recording their impact in books of accounts.
However, the business transactions are not directly recorded in their respective accounts.They are first recorded in the original book of entry called journal. Then, these journal entries are posted into individual accounts under ledger accounting.
In this article you will learn what is general ledger, types of ledger accounts, advantages of ledger and general ledger process
What is General Ledger?
Ledger is the principal book of accounting system in which the journal entries are transferred to individual accounts. General Ledger consists of numerous accounts in which transactions pertaining to these accounts are recorded.
Basically, all the accounts involved in the journal entries form part of ledger. Ledger is one of the most important books of accounting for a business. This is because the aggregate result of all transactions pertaining to a particular account can only be known through ledger. So let’s try to understand the usefulness of general ledger accounting through an example.
General Ledger Example
Say for instance, you are keen to know the sales made to a particular customer or purchases made from a particular vendor on a specific date. Such information can only be known by verifying the ledger account of the particular customer or the vendor on that date.
However, it is very tedious for you or your accountant to sift through the journal entries one by one. This is because journal records numerous transactions in the order in which each transaction occurs. Furthermore, the journal does not classify the transactions under the account heads to which they are related.
Whereas, each account is opened separately in a ledger. Furthermore, all the transactions pertaining to the account are recorded collectively in the account itself. Additionally, the accounts in ledger are opened in specific order to make posting and locating transactions easy. Usually, accounts are opened in the order in which they appear in the profit and loss account and balance sheet.
Types of Ledger Accounts
All accounts are divided into five categories in order to record business transactions. In other words, Ledger accounts can be classified into five different categories. These include:
This category of ledger includes all accounts that deal with the assets. That is, all accounts dealing with assets would be posted in this ledger. For instance, debtors, plant and machinery, furniture, cash, bank etc.
These type of ledgers include accounts that deal with the debt obligations of the business entity. For instance creditors, accounts payable, loans, accrued expenses etc.
Capital ledger records all accounts that deal with capital introduced in the business or drawings made out of business.
All expenses made by the business entity would come under expense ledger. For instance, rent, salaries, advertising etc.
All the gains or incomes earned by the business entity are posted in income ledger. For instance, sales, interest received, rent received etc.
These accounts are further categorized into two groups:
- permanent accounts and
- temporary accounts
The balances of the Permanent Accounts are aggregated, balanced and carried forward to the next accounting year. Whereas, the amounts in Temporary accounts are aggregated and accounts are closed at the end of the accounting period. This is done by transferring the balances to the Profit and Loss Account.
Further, all Permanent Accounts reflect in the balance sheet. Therefore, all assets, liabilities and capital accounts are categorized as Permanent Accounts.Whereas, all income and expense accounts are categorized as Temporary Accounts.
Advantages of Ledger
Ledger is very useful and one of the important books of accounting for any business entity. There are a number of benefits of undertaking ledger accounting. These are as follows:
Know the Net Result of a Specific Account
It helps to know the net result of all the transactions pertaining to a specific account at a given date. For instance, business entity can easily ascertain the amount it owes to a particular vendor from its ledger accounts.
Easy Location and Posting
Ledger accounting allows for easy identification of transactions and posting. This is because accounts in ledger are opened in a particular order, say in the order in which they appear in profit and loss account and balance sheet. Furthermore, index is also provided at the beginning of the ledger accounts for easy identification of transactions.
Helps to Prepare Trial Balance
Since journal entries are posted in individual accounts in ledger, business entity can easily prepare trial balance. This further helps in locating errors which may arise on account of posting entries into ledger accounts.
Helps in Preparing Financial Statements
With the help of ledger accounts, a business entity can prepare important financial statements which help in ascertaining the overall financial soundness of the business entity. These include income statement, balance sheet and cash flow statement.
Process Of Posting Entries From Journal
Posting involves the practice of transferring journal entries from the journal to the ledger. Further, this includes recording all the transactions related to a specific account at one place. This is done to make locating and posting transactions easy and drawing the overall inference of the account in question.
Typically, posting entries from journal to ledger is done periodically. The posting can be done weekly, fortnightly or monthly depending on the business need.
As mentioned above, business transactions are not directly recorded in their respective accounts. They are first recorded in journal and then then transferred to ledger. Since journal is the first step in analysing and recording transactions in books of accounts, let’s understand in brief what is journal.
What is Journal?
Journal is the book in which business transactions are recorded for the first time. This is the reason why Journal is also known as the Book of Original Entry.
Furthermore, they are recorded based on the principle of duality which is the foundation of double entry system of accounting. As per this system, every transaction has a minimum of two accounts i.e. a debit and a credit.
Let’s consider an example to understand how journal entries are recorded and their proper format.
1. April 1, 2018 – Rajveer started a business with Rs 10,00,000.
Effect of Transaction: Cash (asset) increases by Rs 10,00,000 and Capital (liability) increases by Rs 10,00,000.
2. April 3, 2018 – Rajveer deposited Rs 10,00,000 in Bank of Baroda.
Effect of Transaction: Cash at Bank (asset) increases by Rs 10,00,000 and Cash (asset) decreases by Rs 10,00,000.
3. April 5, 2018 – Purchased Furniture worth Rs 6,00,000 and in return a cheque is issued on the same day.
Effect of Transaction: Furniture (asset) increases by Rs 6,00,000 and the Bank (asset) decreases by Rs 6,00,000.
4. April 6, 2018 – Purchased Machinery for Rs 2,00,000 and an advance of Rs 30,000 is paid in cash to M/s Singhania
Effect of Transaction: Machinery (asset) increases by Rs 2,00,000, Cash (asset) decreases by Rs 30,000 and Creditors (liability) increases by Rs 1,70,000.
5. April 15, 2018 – Goods bought from M/s Khanna worth Rs 70,000.
Effect of Transaction: Goods increase by Rs 70,000 and the Creditors (liability) increases by Rs 70,000.
6. April 18, 2018 – Goods worth Rs 50,000 sold to Bector Enterprises for Rs 60,000.
Effect of Transaction: Debtors (asset) increased by Rs 60,000, Goods (asset) decrease by Rs 50,000 and Capital (Profit) increases by Rs 10,000.
|Date||Particulars||Ledger Folio||Debit Amount (in Rs)||Credit Amount (in Rs)|
|3/4/2018||Cash at Bank||9,60,000|
|To M/s Singhania||1,70,000|
|To M/s Khanna||70,000|
Now, the transactions are ready to go into their ledger accounts after recording them in the Journal. So, let’s understand what is general ledger accounting and why is it undertaken.
So let’s have a look at the steps involved in posting entries from journal to ledger through the example mentioned above.
General Ledger Format Example
Let’s see how the journal entries recorded in the books of Rajveer are posted into various ledger accounts.
|1/4/2018||To Capital||10,00,000||3/4/2018||By Bank||9,60,000|
|30/4/2018||By Balance C/d||10,000|
|1/5/2018||To Balance B/d||10,000|
|30/4/2018||To Balance C/d||10,10,000||1/4/2018||By Cash||10,00,000|
|18/4/2018||By Bector Ent.||10,000|
|1/5/2018||By Balance B/d||10,10,000|
|3/4/2018||To Cash||9,60,000||5/4/2018||By Furniture||6,00,000|
|30/4/2018||By Balance C/d||3,60,000|
|1/5/2018||To Balance B/d||3,60,000|
|5/4/2018||To Bank||6,00,000||30/4/2018||By Balance C/d||6,00,000|
|1/5/2018||To Balance B/d||6,00,000|
|6/4/2018||To Cash||30,000||30/4/2018||By Balance C/d||2,00,000|
|6/4/2018||To M/s Singhania||1,70,000|
|1/5/2018||To Balance B/d||2,00,000|
|M/s Singhania Account|
|30/4/2018||To Balance C/d||1,70,000||6/4/2018||By Machinery||1,70,000|
|1/5/2018||By Balance B/d||1,70,000|
|15/4/2018||To M/s Khanna||70,000||18/4/2018||By Bector Ent.||50,000|
|30/4/2018||By Balance C/d||20,000|
|1/5/2018||To Balance B/d||20,000|
|M/s Khanna Account|
|30/4/2018||To Balance C/d||70,000||15/4/2018||By Purchase||70,000|
|1/5/2018||By Balance B/d||70,000|
|Bector Enterprises Account|
|18/4/2018||To Sales||50,000||30/4/2018||By Balance C/d||60,000|
|1/5/2018||By Balance B/d||60,000|