Home » Accounting Explanation » Preparing Ledger Accounts


Ledger Account  

(Also known as "T" Account and Account)

Having passed the double or journal entries, the next step is to post these double or journal entries into Ledger accounts. Ledger account or an account is simply the classification of double entries which we have made in General Journal or any other journal. In an account we bring together all similar entries in one place. For example a company has purchased goods on 4th and 7th January, we would put both entries in purchases account because of their similar nature i.e. the purchases and therefore an account shows net increase or decrease in the balance of similar entries / items (in the aforementioned example there was an increase in purchases balance)

Example of accounts is payable or creditor account, purchases account, sales accounts, receivable or debtor account, cash account, bank account, machinery account, building account, vehicle account etc

Each account is divided into Debit and Credit portions. Debit is the left hand side of an account and credit is the right hand side of an account. An account looks like English alphabet "T" which is why a ledger account is also referred to as "T" account




DEBIT
Account's Title



CREDIT
DATE
DESCRIPTION
AMOUNT
DATE
DESCRIPTION
AMOUNT

















An Account has three main parts:
  1. Title is the name of account
  2. Debit is on the left hand side
  3. Credit is on the right hand side

Posting

In Accounting the word "posting" implies that the process of posting or recording double or journal entries into an account

Classification of accounts

1) Real accounts or balance sheet accounts

These are the accounts of assets, liability and capital. These accounts remain open even after the end of an accounting period (e.g one year). Examples of these accounts include accounts of machinery, plant, creditors, debtors, bill payable, bonds, fixed deposits, capital etc.

2) Nominal accounts

These are the accounts of revenues and expenses. These accounts are closed after the end of  an accounting period (e.g one year). Examples of these accounts include accounts of Salaries, rent, depreciation, discount received, discount allowed, interest earned, commission received, sales return etc.


EXAMPLE



   December 3.Started business with cash $200,000 
   December 4.Purchased goods on credit from Mr. Z and Co. worth $2000 
   December 5.Paid cash to Mr. Z and Co. $2000 for goods purchased on credit   
   December 7.Paid cash $500 for telephone bills
   December 20.Commission $1000 received for selling goods of G man




  DATE  DESCRIPTION FOLIO DEBIT CREDIT





   Dec. 3

   Cash

                    Capital

   $200,000

   
   

   $200,000





   Dec. 4

   Purchases

                    Creditor (Mr. Z and Co.)

   $2000

   
   

   $2000





   Dec. 5

   Creditor (Mr. Z and Co.)

                    Cash

   $2000

   
   

   $2000





   Dec. 7

   Telephone expenses

                    Cash

   $500

   
   

   $500





   Dec. 20

   Cash

                    Commisssion income

   $1000

   
   

   $1000







Now lets create our First Ledger account

First of all we would create an account for cash because it's the first item in General journal. Since we are going to create an account for cash, we would write Cash in the place "Title" (or name) of account




DEBIT
Cash account



CREDIT
DATE
DESCRIPTION
AMOUNT
DATE
DESCRIPTION
AMOUNT
Dec. 3
Dec. 20

Capital
Commission income
$200,000
$1000
Dec. 5
Dec. 7
Creditor (Mr. Z and Co.)
Telephone expenses

Balance c/d

$2000
$500

198500

TOTAL $201,000
TOTAL $201,000

Wohooo, we have created our first Account!

Explanation or how the cash account was prepared?

Look at the General Journal, for the first transaction (on December 3) we have debited cash and credited capital. Since we are creating a cash account, we have to check if cash is debit or credit. In the first entry "Cash" is debit and therefore we would record this transaction on the Debit side of our cash account and because "Capital" is on the opposite side (credit side) of cash, we would record capital in the "Description" column of Cash Account and lastly would repeat this procedure for all cash related transactions

Procedure of recording transactions in an account

In the Journal entries
Look for the item for which you are creating an account if it is debit or credit
If the item is debit, record the transaction on the debit side of account and vice versa
Record the opposite item in the Description column of account

What's Balance c/d

Balance c/d is short for Balance Carried forward (ending balance of an account), it is the balance that we would carry forward in the next accounting period (for example an year). In the next accounting period it would become Balance b/d (b/d is short brought forward) that would be the opening balance of our account.

How to calculate Balance c/d or ending balance of an account
  1. Add up Debit side and then Credit side of the account
  2. Find the difference between Debit and Credit side total balances. The difference would be Balance c/d
  3. Write Balance c/d on the smaller side of account

In the above example
  1. Debit totalled to $201,000 and Credit side added to 2500
  2. The difference is 201,000-2500=198500. Therefore balance c/d is 198500
  3. Since credit side is smaller (2500), we would write balance c/d on credit side 
  4. We are done