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Preparation of Ledger

Ledger

A Ledger is a book that contains all the accounts used to record financial transactions, and it is prepared based on the entries made in the journal. Since ledger entries are made after journal entries, the ledger is referred to as a secondary book in accounting.

Ledger in the Accounting Process:

The ledger is a crucial part of the accounting process and is often considered the principal book of accounts. It contains all the necessary financial information required for business, which makes it indispensable when preparing the final accounts (such as the profit and loss statement or balance sheet).

Importance of the Ledger:

  • Comprehensive Information: The ledger consolidates information from all business transactions, helping provide a detailed view of the financial position.
  • Key Financial Data: It helps track how much money the firm owes to creditors and how much money debtors owe to the firm (through personal accounts).
  • Real Accounts: The real accounts in the ledger show the value of assets, such as furniture, land, and stock.
  • Nominal Accounts: The nominal accounts record the sources of income and the amount spent on various expenses.

Without a ledger, it would be very difficult to compile accurate final accounts and evaluate the financial health of the business.

Ledger Posting: The Basic Accounting Process

The process of ledger posting involves transferring the information from journal entries to the ledger in a structured and summarized form. This process is a key step in preparing journal entries, ledger accounts, and the trial balance.

Key Points to Remember for Ledger Posting:

  1. No repetition of the same account: When posting from the journal to the ledger, the name of the account should not appear within its own ledger. For example, if we are posting an entry to the Furniture Account, we will not mention "Furniture" within that ledger; instead, we reference the corresponding credited account.
  2. Classified and Summarized Accounts: The ledger provides a summarized form of the accounts, making it easier to view debits and credits in a structured manner.

Example of Ledger Posting:

Consider the following journal entry made on April 8:

  • Furniture Account Dr. 500
    To ABC Furniture & Co. 500

This journal entry records the purchase of furniture on credit from ABC Furniture & Co.. When posting this journal entry into the ledger, we will create two separate ledger accounts:

1. Furniture Account:

  • Date: April 8
  • Debit: ABC Furniture & Co.
  • Amount: 500

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Since the furniture account is debited in the journal entry, the furniture account is debited, but by writing the name of ABC Furniture & Co. , appearing as credit item in journal entry. This ledger posting will be read as – The Furniture Account is debited by ABC Furniture & Co. just, as ABC Furniture & Co. Account is credited in the journal entry, the same will find an entry in its ledger account on credit side but with the name of Furniture Account; and it is shown below:

2. ABC Furniture & Co. Account:

  • Date: April 8
  • Credit: Furniture Account
  • Amount: 500

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Rules for Ledger Posting:

  • When an account is debited in the journal entry, the corresponding account in the ledger must be credited with the same amount.
  • Similarly, when an account is credited in the journal entry, the corresponding ledger must be debited with the same amount.

Conclusion:

The ledger is an essential tool in the accounting process, helping to organize, summarize, and classify all business transactions recorded in the journal. By performing ledger posting, businesses can maintain a comprehensive record of all their accounts, providing valuable information about assets, liabilities, income, and expenses. Accurate ledger entries are critical for the preparation of final accounts and evaluating the overall financial performance of the business.

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