In accounting cycle after recording financial transactions in general journal next step is preparation of ledger accounts. The book (in manual accounting system) or module (in computerized accounting system) in which ledger accounts are prepared is called General Ledger. Ledgers account is also called as T-account as these accounts appear like a big T. Each account head has a separate ledger account in General Ledger. For example a General Ledger may have following ledger accounts; Land & Building a/c, Cash in Hand a/c, Salaries & Wages a/c, Sales a/c.
As described earlier a ledger account is like a big ’T’. Left hand side of the ‘T’ is Debit and right hand side of the ‘T’ is credit.
| Account Name | |
|---|---|
| Debit Side | Credit Side |
| w | |
| w | |
All the entries in the General Journal are posted in General Ledger in respective ledger account. Take a sample general entry of purchase of furniture for cash 500 $.
| Particulars | Dr. | Cr. |
| Furniture A/c | 500 | |
| Cash A/c | 500 |
This general entry will be posted in general ledger as follows;
Furniture ledger a/c will be debited by cash by writing cash in debit column with amount;
| Furniture a/c | |||
|---|---|---|---|
| Cash a/c | 500 | ||
Cash Ledger a/c will be credited by furniture by writing furniture a/c on credit column with amount.
| Cash a/c | |||
|---|---|---|---|
| Furniture a/c | 500 | ||
Let us now take another general entry of cash sales of 2,500 $
| Particulars | Dr. | Cr. |
| Cash A/c | 2,500 | |
| Sales A/c | 2,500 |
After posting this 2nd journal entry cash account will be as follows;
| Cash a/c | |||
|---|---|---|---|
| Sales a/c | 2,500 | Furniture a/c | 500 |
At the end of an accounting period we will derive balance of cash by closing the cash ledger account as follows;
| Cash a/c | |||
|---|---|---|---|
| Sales a/c | 2,500 | Furniture a/c | 500 |
| Bal c/f | 2000 | ||
| 2,500 | 2,500 | ||
(Process of balancing ledger account: Determine sum of debit and credit side and put the higher of both sum on both side and arrive at the balance by subtracting smaller sum from the higher.)
As evident from above example ledger account serves as tool to organize financial transactions as all the transactions relating to a particular account head are grouped together. If someone needs information about a particular account head e.g. Cash than he will simply review cash ledger account and need not to go through all journal entries.
Author: Zuhair Afzaal
Studied Chartered Accountancy and now Pursuing Professional Career as Financial Consultant, Manager Accounts and Finance. A teacher by passion and likes to make things easier for students by publishing courses and lecturing in on-campus and online classes
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