Accounting | Ledger accounting

Welcome to Ledger Accounting! Your Accounting Home Base

Hello future accountants! Don's worry if the word "ledger" sounds complicated—it really isn't. Think of this chapter as setting up the main filing system for your business.

In the previous section, you learned about transactions and the Double Entry principle (Debit = Credit). Now, we will learn where those transactions are permanently recorded. The ledger is the essential heart of bookkeeping, and mastering it is key to success in Accounting!

What You Will Learn in This Chapter:

• What a Ledger is and its purpose.
• How to use T-Accounts.
• How to apply the Double Entry rules to post transactions.
• The crucial process of Balancing Accounts.
• The different types of ledgers used in a business.

1. Understanding the Ledger and the Account

1.1. What is the Ledger?

The Ledger is the principal book or file where all the financial accounts of a business are kept. It is the complete collection of all the records for every type of financial item (like Cash, Sales, Capital, Rent, etc.).

Analogy: Imagine your accounting system is a library. The journals are the daily check-out slips, but the Ledger is the massive bookshelf where every single book (account) has its permanent, dedicated spot.

1.2. The Account: The Building Block

An Account is an individual record used to summarize all the transactions related to one specific item.

For example, the business will have a Cash Account, a Bank Account, a Sales Account, and a Rent Expense Account. Every time cash is received or paid out, that transaction must be recorded in the Cash Account.

Quick Review: Prerequisite Knowledge

Before working with ledgers, you must be confident with the core Double Entry principle:

• Every transaction affects at least two accounts.
• One account is Debited (Dr), and one account is Credited (Cr).
• The total Debit amount must always equal the total Credit amount.

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Key Takeaway: The Ledger is the complete collection of all accounts, and accounts summarize transactions for a single item (e.g., Cash or Sales).

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2. The T-Account Structure

In accounting, we often use a simplified visual representation of an account called the T-Account. It gets its name because the lines used to draw it look like the letter 'T'.

2.1. Anatomy of the T-Account

A T-Account has two distinct sides:

Left Side: This is always the Debit (Dr) side.
Right Side: This is always the Credit (Cr) side.

(Diagram structure, using text):

    |--------------------------------------|
    |      (Debit - Dr)      |     (Credit - Cr)     |
    |------------------------|-----------------------|
    | Date | Details | Amount | Date | Details | Amount |
    |------------------------|-----------------------|

2.2. The Essential Rule: DEAD CLIC

Understanding when to Debit and when to Credit is the most important part of ledger accounting. Use the famous mnemonic DEAD CLIC to help you remember the rules:

Debit
Expenses (Increase)
Assets (Increase)
Drawings (Increase)

Credit
Liabilities (Increase)
Income (Increase)
Capital (Increase)

How to use DEAD CLIC:

• If an Asset (like cash) Increases, you Debit the Asset account.
• If an Asset (like cash) Decreases, you do the opposite: Credit the Asset account.
• If Income (like Sales) Increases, you Credit the Income account.
• If Income (like Sales) Decreases, you do the opposite: Debit the Income account (this rarely happens).

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Key Takeaway: Use the T-Account format. The left is Debit, the right is Credit. DEAD CLIC tells you whether an account increases on the Debit side (Assets, Expenses) or the Credit side (Liabilities, Income).

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3. Recording Transactions (Posting)

The process of entering transactions into the ledger accounts is called Posting.

3.1. Step-by-Step Example

Let's look at a transaction and see how it is recorded in the ledger using Double Entry.

Transaction: The business purchases equipment paying \(\$500\) immediately by cash.

Step 1: Identify the two accounts affected.
The accounts are: Equipment (an Asset) and Cash (also an Asset).

Step 2: Determine the effect on each account (Increase or Decrease).
The business receives equipment, so the Equipment Asset Increases.
The business pays cash, so the Cash Asset Decreases.

Step 3: Apply the DEAD CLIC rule.
Equipment (Asset Increase) \(\rightarrow\) DEBIT the Equipment Account.
Cash (Asset Decrease) \(\rightarrow\) Must be the opposite \(\rightarrow\) CREDIT the Cash Account.

Step 4: Post the transaction.

The Equipment Account (Asset)

    |--------------------------------------|
    |      (Debit - Dr)      |     (Credit - Cr)     |
    |------------------------|-----------------------|
    | Date | Details: Cash | \(\$500\) | Date | | |
    |------------------------|-----------------------|

The Cash Account (Asset)

    |--------------------------------------|
    |      (Debit - Dr)      |     (Credit - Cr)     |
    |------------------------|-----------------------|
    | Date | | | Date | Details: Equipment | \(\$500\) |
    |------------------------|-----------------------|

Notice that the details column shows the "other half" of the entry. This helps us trace the transaction.

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Key Takeaway: Posting requires careful analysis using DEAD CLIC to ensure one account is Debited and the corresponding account is Credited for the exact same amount.

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4. Balancing the Ledger Accounts

At the end of an accounting period (e.g., month or year), we need to find out how much money is left in each account. This process is called Balancing the Accounts.

The final figure we calculate is called the Balance.

4.1. Step-by-Step Balancing Process

Let's assume the Cash Account for June has the following entries:

• Total Debits (Cash received) = \(\$2,000\)
• Total Credits (Cash paid out) = \(\$1,200\)

Step 1: Calculate the Totals (Footing)
Find the total for the Debit side and the total for the Credit side.
Dr Total: \(\$2,000\)
Cr Total: \(\$1,200\)

Step 2: Find the Difference (The Balance)
The difference is \(\$2,000 - \$1,200 = \$800\).

Step 3: Insert the Balancing Figure (Balance c/d)
We place the difference on the side that currently has the smaller total (the Credit side in this example) so that both sides total the same amount (\(\$2,000\)). This closing balance is called Balance carried down (c/d).

    |----------------------------------------------------|
    |       Cash Account (Dr)      |      Cash Account (Cr)      |
    |------------------------------|-----------------------------|
    | Other Receipts | \(\$2,000\) | Other Payments | \(\$1,200\) |
    | | | Balance c/d | \(\$800\) | 
    |------------------------------|-----------------------------|
    | Total | \(\$2,000\) | Total | \(\$2,000\) |
    |==============================|=============================|

Step 4: Bring the Balance Down (Balance b/d)
Immediately below the totals (and double rule), the balance must be brought down onto the opposite side. This is called the Balance brought down (b/d).

    |----------------------------------------------------|
    |       Cash Account (Dr)      |      Cash Account (Cr)      |
    |==============================|=============================|
    | Balance b/d | \(\$800\) | | |

The Balance b/d is the starting figure for the next period and is the amount that will be transferred to the Trial Balance.

4.2. Understanding Account Balances

The normal balance of an account is determined by the side on which the Balance b/d appears.

• Debit Balance: If the Debit total was larger, the Balance b/d appears on the Debit side (e.g., Assets and Expenses usually have Debit balances).
• Credit Balance: If the Credit total was larger, the Balance b/d appears on the Credit side (e.g., Liabilities and Income usually have Credit balances).

❌ Common Mistakes to Avoid

Do not forget the rule:
1. Balance c/d goes on the smaller side to close the account.
2. Balance b/d opens the account on the OPPOSITE side.

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Key Takeaway: Balancing finds the difference between the total Debits and Credits. The balance c/d closes the account, and the balance b/d is the true balance carried forward.

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5. Types of Ledgers

For a business with many customers and suppliers, keeping all the accounts in one massive book can be messy. Therefore, the ledger is usually divided into three specialised parts.

5.1. The Sales Ledger (or Debtors Ledger)

This ledger holds the individual accounts for all the Trade Receivables (customers who owe the business money because they bought goods on credit).

• It keeps track of how much each individual customer owes us.

5.2. The Purchases Ledger (or Creditors Ledger)

This ledger holds the individual accounts for all the Trade Payables (suppliers the business owes money to because we bought goods on credit).

• It keeps track of how much we owe each individual supplier.

5.3. The General Ledger (or Nominal/Private Ledger)

This ledger contains all the other accounts that are not related to individual debtors or creditors. It is the largest ledger and includes accounts for:

• Assets (Cash, Bank, Equipment, Buildings)
• Capital and Drawings
• Income (e.g., Sales totals)
• Expenses (e.g., Rent, Wages)

Fun Fact: In older accounting systems, ledgers used to be physical, handwritten books. If you were a ledger clerk, your job was to post transactions neatly and accurately all day!

Summary Table of Ledgers

Ledger Name	What It Records	Key Account Type
Sales Ledger	Individual customer accounts (Credit Sales)	Trade Receivables (Assets)
Purchases Ledger	Individual supplier accounts (Credit Purchases)	Trade Payables (Liabilities)
General Ledger	All other accounts (Cash, Capital, Revenue, Expenses)	Nominal/Real Accounts

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Key Takeaway: Ledgers are separated for organization. The Sales and Purchases Ledgers track specific people/companies we deal with on credit, while the General Ledger handles everything else.

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Chapter Review: Checklist for Success

You are ready to move on when you can confidently:

1. Define a Ledger and an Account.
2. Draw a T-Account and label the Debit and Credit sides correctly.
3. Use the DEAD CLIC mnemonic to decide which account to Debit/Credit.
4. Calculate and insert the Balance c/d.
5. Transfer the balance to the next period as the Balance b/d.
6. Name the three main types of ledgers and what kind of accounts they hold.