Ledger books are the books of final entry which contains the various accounts to which the entries made in the Books of Original entry are transferred.
All transactions are recorded in ledger accounts, which simply means individual records ('accounts') of every major type of asset and liability, income and expense (and also the owner's capital). 'Ledger' is the collective noun for a group of accounts. There are in fact three key sub-divisions of the 'ledger':
Division of Ledger Books
1. Sales Ledger: It contains all the individual accounts relevant to the business's debtors, i.e. those customers who buy from the business on credit terms (they are sent an invoice rather than paying straight away). This, unsurprisingly, might also be called the 'Debtors ledger'.
2. Purchases Ledger: It contains all the individual accounts relevant to the business's creditors, i.e. suppliers from whom the business has bought goods or services on credit terms (they have received an invoice rather than paying immediately). Alternatively, this can be called the 'Creditors ledger'.
These two ledgers are 'personal' ledgers, as each account they contain bears the name of a customer or supplier.
3. General Ledger or Nominal Ledger: It is referred to as being 'impersonal', as it contains all accounts other than those of debtors and creditors. Examples include asset accounts such as 'machinery', 'motor vehicles' and 'computers', liability accounts such as 'loans payable', income accounts such as 'sales' and 'rent receivable' and expense accounts such as 'purchases' (cost of goods for resale), 'wages', 'stationery' and 'advertising'. It also contains the 'capital' account.
An important sub-division of the general ledger is the cash book, which contains two accounts - 'bank' and 'cash', which tend to have many more entries than any other accounts. The bank account records all payments into and out of the bank, the cash account records all cash paid into or out of the business. Additionally, there might be a petty cash book which records all the relatively minor office expenses such as tea and coffee, car parking costs etc.
Assets Accounts, expenses account, losses account, etc., and also the Total
purchases account, Total sales account, Total Sales returns account, Purchases
Returns account. It is also called as Nominal ledger.
Advantages Of Dividing The Ledger:
1. It facilitates division of labour in the maintenance of ledger.
2. It becomes easy to locate errors in ledger accounts.
3. It helps the ledger clerks to complete their respective work in time with
perfection.
4. It becomes easy to refer to any particular account.
Format of Ledger
Posting
The process of transferring the debit and credit items from journal to classified accounts in the ledger is known as ‘Posting’.
Rules Regarding Posting
• Separate account is opened in ledger book for each account and entries from ledger posted to respective account accordingly.
• Use the words ‘To” (identifies the accounts to be written on the debit side) and ‘By’ (identifies the accounts to be written on the credit side)
• The concerned account debited in the journal should also be debited in the ledger but reference should be of the respective credit account.
Balancing
At the end of the each month or year or any specific day it is necessary to determine the balance in an account. To do that, add the totals of both sides (Debit and credit sides) and find out the difference in both the side. The difference in both the sides is ‘Balance’. If the Debit is greater than the credit side, it is a Debit balance or vice-versa.
The Debit balance is written on the Credit side as, “By Balance c/d” (carried down) or the Credit balance is written on the Debit side as, “To Balance c/d. By doing this, two sides will be equal.
While preparing the Ledger accounts for next period, this balance would be transferred from last period Ledger accounts as ‘To Balance b/d’ (brought down) if there was debit balance or ‘By Balance b/d’ if there was credit balance in the last period Ledger.
It should be noted that Nominal accounts are not balanced, instead the balance at end need to be transferred to the Profit and Loss Account.