Ledger is the next stage after Journal. After recording all the entries in the Journal, the next step is the posting of the transaction in the respective accounts. These accounts are collectively known as Ledgers.
Meaning of Ledger
A ledger may be a collection of various accounts of assets, liabilities, capital, revenue, and expenses. After recording transactions in the Journal (book of original entry), these are transferred to their respective ledger accounts. Ledgers are the ultimate place of all the transactions; therefore, they’re also referred to as “Books of Final Entry”.
Uses of Ledger
1) One-stop destination for all the information of an account: All the transactions pertaining to a particular account is recorded in its respective ledger account. Hence, a complete picture of the account can be drawn by looking at one place in the ledger.
2) Revenue Stream and Expenses Incurred: Since a separate account is maintained for every revenue and expense item, therefore a firm can track them during the year to check for its total income and expenses. For example Sales account, rent account, etc.
3) Helps in Preparing Trial Balance: A trial balance is a statement wherein all the debit and credit balances from the ledger accounts are recorded. It must balance i.e. the total of debit and credit balances must match for ensuring the arithmetic accuracy of the accounts. Hence, ledger accounts provide the required information for its preparation.
4) Preparation of Final Accounts: Once the trial balance has been prepared, final accounts are drawn in the books to know about the financial position and profitability of the business. They form a part of the annual report of the firm and communicate vital information about the performance of the firm to the stakeholders.
Advantages of Ledger
- Detailed information of all accounts is maintained during a single book.
- Any type of information related to business can be obtained from the Ledger, such as the amount owed by customers, the amount owed by the firm to its creditors, the number of purchases, or sales by the firm.
- It helps in identifying the most items of revenue.
- The items of expenses can be identified from the ledgers.
- It helps in identifying assets & liabilities and their value.
- Ledger balances help in the preparation of Trial Balance which helps in ascertaining the arithmetical accuracy of accounts.
- It enables the preparation of Final Accounts.
Posting of a transaction
Posting of a transaction is done by transferring the recorded transaction (from the journal) to the concerned accounts. These accounts are collectively known as ledgers, therefore, posting of a transaction in their respective accounts is also termed as ledger posting. By posting all the transactions in their respective ledger accounts, we will be able to know the position of a particular account during the period as a result of the net effect of various transactions.
Steps involved in posting the transaction from Journal to Ledgers
Every ledger account has two sides i.e. Debit side on the Left Hand and the Credit side on the Right Hand. Following are the steps involved in posting a transaction from Journal to Ledger.
(1) First identify the account which is debited in the transaction (in journal). Now, all the details are recorded on the debit side (or left side) of this account.
(2) Write the date of transaction under the date column (on the debit side of the account).
(3) Write the name of the account which is credited in the Journal {as ………………….. (Name of account)} under the Particulars column (on the debit side).
(4) Write the page number of Journal in the folio column (on the debit side).
(5) Record the amount in the amount column which is standing against the account credited in the Journal.
(6) Now, proceed to the account that is credited in the transaction (in journal). Now, all the details are recorded on the credit side (or right side) of this account.
(7) Write the date of transaction under the date column (on the credit side of the account).
(8) Write the name of the account which is debited in the Journal{ as ………………….. (Name of account) Dr.} under the Particulars column (on the credit side).
(9) Write the pagination of Journal within the folio column (on the credit side)
(10) Record the amount in the amount column which is standing against the account debited in the Journal.
Closing & Balancing of Ledgers
Once the transactions are posted in their respective accounts, the next process is to calculate the net effect of the transactions posted. This net effect is the difference between the total debit side and the total credit side of an account. This difference amount is also known as the balance of an account. The balance amount can be a debit balance or a credit balance or even a nil balance. This is due to the following factors.
- If the debit side of an account exceeds its credit side then the difference amount is regarded as a debit balance of an account.
- If the credit side of an account exceeds its debit side then the difference amount is regarded as the credit balance of an account.
- If the debit side is equal to its credit side then there will be no balance and hence, this is termed as nil balance of an account.
Note: We usually balance Real Accounts (assets) and Personal Accounts (Ram, Mohan). Nominal Accounts are never balanced, these are closed by transferring their balances to the Trading and Profit & Loss Account.
Also, Read What are Debit and Credit?