Preparation of Ledger
Business organizations need to write and prepare ledger account wherein all the transactions of are recorded permanently under different heads of accounts.
As per accounting principle, the transactions just after their occurrence are recorded in the primary book of account – journal in chronological order of dates with explanations.
But it is not possible to determine the complete results of transactions from the journal.
How to Write and Prepare Ledger Account
So, the 5 simple steps for writing and preparing ledger are;
- Drawing the Form: Get pen and paper, start drawing the ledger account.
- Posting: Transactions from journal to respective ledger account.
- Folioing: Put the page number for a journal entry on the ledger account’s folio column.
- Castin: Separating debit and credit amount.
- Balancing: Find the difference between debit and credit to get debit or credit balance of the account.
Drawing the Form – Get pen and paper, Start Drawing the Ledger Account.
Every leaf of account is divided into two equal parts by a bold vertical line or two sharp vertical lines. The left side of it is the debit side and the right side is the credit side.
Thereafter, both the sides are again divided into four columns i.e., this is divided into eight columns having four on the debit side and four in the credit side.
In the first column of both the sides’ dates, the second particulars, and the third journal folio and in the fourth amount are written.
Posting Transactions from Journal to Respective Ledger Account.
The act of transferring the transactions from the journal to the respective accounts of the ledger is called posting. The two accounts involved in each transaction are maintained in the ledger.
Debit account of the journal is posted on the debit side of that account and the credit account of the journal is posted on the credit side of that account.
In this regard, it is to be carefully noted that at the time of posting in the debit side of the ledger account, credit account of the journal is to be written in particular column and in the credit side of the ledger account debit account of that journal is to be written in particular column.
Folioing – Put the Page Number for a Journal Entry on the Ledger Account’s Folio Column.
The page of the journal from which the journal entries are transferred to the particular ledger account that page number is written in the folio column of a ledger account and the page of the ledger wherein the account is posted the number of that page is written in the journal in the ledger folio column of the journal.
In this way writing of page number of the journal in the ledger and that of the ledger in the journal is called folioing.
Casting – Separating Debit and Credit Amount.
The amount of debit and credit of each ledger account is totaled separately in both sides. In this way totaling of debit and credit is called casting.
Balancing – Find the Difference between Debit and Credit to get Debit or Credit balance of the Account.
After totaling of debit and credit of ledger accounts, it shows that the total of both the sides is made equal putting the difference on both sides the account is considered balanced.
In this case, nothing is left to be done. But if the total of both the sides is unequal, in that case, the difference is to be determined.
Thereafter the amount of difference is added in the deficit side to equalize both the sides. This sort of difference between the two sides of accounts is called balance.
The act of equalizing the total of both the sides by adding debit balance in the credit side and the credit balance in the debit side is called balancing.
Preparation of Posting
Posting the Cash Book
The debit side of the Cash Book shows receipts of cash or receipts by bank. One should open all the accounts mentioned on the debit side and credit them because cash has been received in respect of them. Thus, if, on the debit side of the Cash Book, one finds the entry “To Mohan & Co. Rs 500,” it means that cash has been received from Mohan & Co. who, therefore, is entitled to a credit. One will open an account of Mohan & Co. (if it has not already been opened) and make the entry on the credit side “By Cash Rs 500.”
Similarly, the payment side of the Cash Book shows to whom or for what purpose cash has been paid. Therefore, all accounts mentioned on the credit side will be debited saying “To Cash”. When a person has allowed discount, the amount actually paid to him will appear in the Cash or Bank column of the Cash Book, and the discount received from him will be shown in the discount column of the Cash Book.
The person concerned should be debited with the full amount, i.e. amount actually paid to him plus discount received from him. Similarly, when discount is allowed to a person on his paying the amount due, the actual amount received is entered in the cash or bank column on the debit side and the discount allowed is entered in the discount column.
One must credit the person concerned with the full amount, i.e., the amount actually received plus the discount allowed to him. The total of the discount column on the debit side of the cash book shows total discount allowed to customers. One should debit the discount account with the total, saying, “To Sundries as per Cash Book…”
Similarly, the total of the discount column on the credit side of the Cash Book shows total gain from creditors by way of discount. The discount account should, therefore, be credited with the total. Students should note this apparent departure from the rules mentioned above (viz., accounts mentioned on the debit side should be credited and vice versa).
It is really not a departure, because discount columns are not part of the Cash Book really; they have been put there for convenience to know readily the discounts allowed and received in a period rather than pass a journal entry every time a transaction involving discount occurs. It should be noted that in posting the Cash Book, no cash account or bank account should be opened. The Cash Book itself consists of these two accounts. All entries marked ‘C’, being contra items, should be ignored while posting, because the corresponding debit or credit already appears in the Cash Book itself.
Posting the Purchases, Sales and Returns Books. Taking the Purchases Book first, the total of the Book for a month will show total credit purchases made or, in other words, the total value of goods purchased on credit. Goods having come in, one should debit Purchases Account with the total saying “To Sundries as per Purchases Book”. The persons who have supplied goods on credit (entered in the Purchases Book) should be credited with the amounts appearing against their names. So, the posting of the Book consists in debiting Purchases Account with the total and crediting individual suppliers with the value of their respective supplies.
The Sales Book will show total sales for the month. Goods having gone out, one should credit the Sales Account with the total. The persons whose names appear in the Sales Book (as having received goods) should be debited with the amount mentioned against their names. Hence, in the case of Sales Book, debit individual customers with sales made to them and credit Sales Account with the total. In the case of Returns Outwards Book (Purchases Returns), the total of the Book is credited to the Returns Outwards Account and the suppliers concerned, having received back the goods, will be debited.
Similarly, in the case of Returns Inwards Book (Sales Returns), the total will be debited to the Returns Inwards Account and the individual amounts in the Book will be credited to those customers who returned the goods.