Ledger

Ledger- Meaning, Features and Advantages

Objectives

After going through this lesson, you shall be able to understand the following concepts.

• Meaning and Features of Ledger

• Advantages of Ledger

• Difference between Journal and Ledger

• Format of Ledger

• Types of Ledger

Introduction

By now, we all know that accounting is the art of recording, classifying and summarising the transactions of financial character and communicating the results thereof to the users of accounting information. In the previous chapter, we learnt about the recording of transactions in the Journal book. It is the first stage of accounting cycle. After the recording stage, comes the classification of these recorded transactions in separate accounts, i.e. ledgers. In this lesson, our main focus will be on understanding these separate accounts (known as Ledger Accounts).

Meaning and Features of Ledger

The following diagram explains the meaning and features of ledger accounts.

Advantages of Ledger

The classification of all recorded transactions in separate ledger accounts has the following benefits.

1. Grouping all the information pertaining to each account under a separate ledger account

2. Providing timely information about the amount owed by customers, the amount owed to suppliers, etc.

3. Enabling proper classification of items of revenue and expenses

4. Helping to identify the values of various assets and liabilities

5. Forming the basis for the preparation of trial balance and final accounts

6. It records transactions in analytical order, which implies careful evaluation of transactions of similar nature grouped under one head.

Difference between Journal and Ledger

The following diagram tabulates the points of difference between a Journal book and a Ledger Account.

 

Example 1: Use the following information to answer the next question.

 Trial Balance can be prepared with the help of _______.

Which of the following alternatives correctly completes the above statement?

(a) Journal 

(b) Ledger

(c) Accounting Equation 

(d) Financial Statements

Solution

Trial Balance can be prepared with the help of ledger. Explanation: Ledger is the summary of all the recorded transactions that facilitate the preparation of Trial Balance and Final Accounts.

Hence, the correct answer is option (b).

Example 2: Which of the following statements is not true regarding ledger accounts?

(a) It is also known as the book of final entry.

(b) The transactions are recorded after the preparation of Journal.

(c) It ensures the arithmetical accuracy of accounts.

(d) It presents the summary of transactions of similar nature under one head.

Solution

Ledger is known as the book of final entry as all the recorded transactions are finally placed in their respective ledger accounts. Recording in ledgers accounts is followed by recording in the Journal. All the transactions of similar nature are grouped under one head. However, ledgers do not ensure arithmetical accuracy of accounts. A Trial Balance (prepared after recording in ledger accounts) establishes the arithmetical accuracy of the accounts. Hence, the correct answer is option (c).

Format of Ledger

The following diagram depicts the format of a ledger account.

Types of Ledger

The various types of ledgers are diagrammatically presented below.

Example 3: Match the two columns.

Column A Column B Ram Account (Debtor) Nominal Account Cash Account General Ledger Depreciation Account Private Ledger Salary to the Manager Sales Ledger Office Equipment Cash Ledger

Solution

Column A Column B Explanation Ram Account (Debtor) Sales Ledger As Ram is a debtor, so it is obvious that the firm must have sold some goods to him on credit. Accordingly, Ram Account falls under Sales Ledger. Cash Account Cash Ledger Both Cash and Bank Accounts fall under Cash Ledger since they record all the transactions that are made in cash or through cheque. Depreciation Account Nominal Ledger Depreciation is regarded as an expense and we know that all expenses are categorised under Nominal Ledger. So, Depreciation Account is a Nominal Ledger. Salary to the Managing Director Private Ledger We know that salary given to a higher level staff is categorised as Private Ledger. So, in this case, salary given to the MD will also fall under that head. Office Equipment General Ledger Office equipment is an asset and all assets are Real Accounts. So, office equipment is classified as a General Ledger.

Objectives

After going through this lesson, you shall be able to understand the following concepts.

• Posting of Transactions

• Balancing of Ledger Accounts

Introduction

In the previous lesson, we learnt about led…