LEDGER ACCOUNT

Table of Content

• What is a Ledger?
• Types of Ledger
• Format Of A Ledger
• Double Entry Principle
• Preparation of Ledger Accounts Using Double Entry Principle
• Identification Of Debit And Credit Items
• Classification of Transaction
• Cash Transaction
• Credit Transaction:
• Illustrations & Solutions: Preparing Ledgers on Cash Transactions and Credit Transaction

What is a Ledger?

Ledger is described as the principal book of account. It contains the accounts of all transactions made by the business. It is the book of final entry because all financial transactions have their final say therein.

A ledger account is made up of two sides, the left hand side is called the debit side and it represents the receiving side while the right hand side is called the credit side and it represents the giving side.

Types of Day Ledger

Daybook or journal can be generally classified into six as follow:

1. Sales Ledger: for recording credit sales
2. Purchases Ledger: for recording credit purchas
3. Return inward Ledger: for recording goods return by customers
4. Return outward Ledger: for recording goods return to supplies.
5. Cash Book: for recording cash transactions
6. Cash Book: for recording cash transactions

It is not compulsory for a business to keep all these books as the nature of the business will determine the type of the books to keep. For a business that deals with cash transaction alone, the cash book is the main book required but for a business that also deal with credit transactions, it is necessary to keep other books alongside with the cash book.

Full Youtube Video on Ledger Account, Types and Preparation of Ledger Using Double Entry Principle

Format Of A Ledger

A ledger account is divided into two sides. The left hand side is the debit (DR) side while the right hand side is the credit (CR) side

Format of a Ledger Account

Dr		Account Name			Cr

Double Entry Principle

The preparation of ledger is in line with the double entry principle which states that “for every debit entry, there must be a corresponding credit entry and for every credit entry, there must be a corresponding debit entry”.

What this principle means is that two accounts are involved in every transaction and when one is debited, the other account will be credited.

Preparation of Ledger Accounts Using Double Entry Principle

Prepare the account of the following transactions by applying the double entry principle.

1. Jan. 10, 2020.	Purchased motor van in cash N100,000.
2. Jan. 20, 2020.	Purchased goods in cash N12,000.

Explanation

For the transaction made on January 20, it is a cash transaction and the two accounts that are involved are Cash account and motor van account. Abiodun Enterprises is paying cash which means that the cash account will be credited while motor van account will be debited as the account receiving the payment.

1. Jan. 10, 2020. Purchased motor van in cash N100,000

Solution

Dr	Cash Account				Cr
N					N
			Jan. 10	Motor van	100,000

Dr	Motor Van Account				Cr
N					N
Jan. 10	Cash	100,000

---

2. Jan. 20, 2020. Purchased goods in cash N12,000.

Solution

Dr	Cash Account				Cr
N					N
			Jan. 20	Purchases

Dr	Purchases Account				Cr
N					N
Jan. 20	Cash	12,000

IDENTIFICATION OF DEBIT AND CREDIT ITEMS

“In a simple term, all assets are debit entry while all liabilities are credit entry. Also, all incomes are credit entry while expenses are debit entry”

Understanding the nature of a transaction helps in the preparation of ledger accounts.

Classification of Transaction

Transactions can be Cash transaction or credit transaction.

1. Cash Transaction: In every cash transactions, the two accounts that will be involved are cash account and the account of the transaction itself. Anytime cash is received, the cash account (cash book) will be debited while the corresponding credit entry will go to the account of the item or person involved (in case of a debtor). For example, when cash is received from sales, donation, loan, dividend, among others, the cash book will be debited with the amount while the corresponding credit entry will be posted to the item’s account (sales account, donation account, loan account, dividend account, among others).

   Likewise, when cash payment is made for items like electricity, goods, salary, transportation, motor van, among others, the cash account (cash book) will be credited while the corresponding debit entry goes to the item’s account (electricity account, goods account, salary account, transportation account, motor van account).

2. Credit Transaction: In the case of credit transactions, the two accounts that will be involved are the debtors/creditors account and the account of the item involved. The account of debtors and creditors replaces the cash book. Every credit sales like goods, assets such as motor van, furniture, machine, etc, are debited to the debtor’s account which is a personal account (open with the name of the debtor) while the corresponding credit entry goes to the item’s (goods, assets such as motor van, furniture, machine, etc,) account.

   Every credit purchases such as goods, office equipment such as computer system, furniture, etc, are credited to the creditor’s account (supplier/seller) while the corresponding debit entry goes to the the item’s (goods, office, computer system, furniture, etc.) account.

Illustrations: Preparing Ledgers on Cash Transactions and Credit Transaction

1. Abiodun Ltd purchased goods `worth N20,000 in cash from Jones Ltd.
2. Adamson, a retail outlet purchased goods worth N15,000 on credit from Bush Ltd.
3. Fadworld sold goods worth N50,000 on credit to Ajax.
4. Johnson ventures sold goods worth N8,000 on credit to Ajax.
5. Purchased furniture in cash N30,000.
6. Paid Electricity in cash N10,000.

Prepare the ledger account for each of the above transactions.

Solutions

1. Abiodun Ltd purchased goods worth N20,000 in cash from Jones Ltd.

Dr	Cash Account				Cr
		N			N
				Purchases	20,000

Dr	Purchases Account				Cr
		N			N
	Cash	20,000

2. Adamson, a retail outlet purchased goods worth N15,000 on credit from Bush Ltd.

Dr	Bush Ltd Account				Cr
		N			N
				Purchases	15,000

Dr	Purchases Account				Cr
		N			N
	Bush Ltd	15,000

3. Fadworld sold goods worth N50,000 on credit to Ajax.

Dr	Ajax Account				Cr
		N			N
	Sales	50,000

Dr	Sales Account				Cr
		N			N
				Ajax	50,000

4. Johnson ventures sold goods worth N8,000 on credit to Ajax.

Dr	Ajax Account				Cr
		N			N
	Sales	8,000

Dr	Sales Account				Cr
		N			N
				Ajax	8,000

5. Purchased furniture in cash N30,000.

Dr	Cash Account				Cr
		N			N
				Furniture	30,000

Dr	Furniture Account				Cr
		N			N
	Furniture	30,000

6. Paid Electricity in cash N10,000.

Dr	Cash Account				Cr
		N			N
				Electricity	10,000

Dr	Electricity Account				Cr
		N			N
	Cash	10,000