The Ledger – SS1 Financial Accounting Lesson Note (First Term)

The ledger is the principal book of account that holds, in classified form, the permanent records of all the financial transactions of a business.

Behavioural objectives

By the end of the lesson, students should be able to:

1. state what the ledger is;
2. draw the format of a ledger account;
3. balance a ledger account and show the balance carried down (c/d) and brought down (b/d);
4. name the subdivisions of the ledger and say what each one contains;
5. explain the purpose of a trial balance and how it is headed.

What is the ledger?

The ledger is the book that contains all the accounts of a business, arranged in classified form.

• Principal book: it is the main book of account of a business.
• Permanent record: it keeps the lasting record of all financial transactions.
• Ledger account: each entry is made in an account, and each account has a debit side and a credit side.
• Double entry: every transaction is recorded on the double entry principle.
• Debited or credited: entries are described as “debited” or “credited” to particular accounts.

What is the format of a ledger account?

A ledger account is divided into two sides: the debit side on the left and the credit side on the right.

• Date: the day the transaction took place.
• Narration (details): the name of the other account where the double entry is made.
• Folio: a reference to the page or number of the other account.
• Amount: the value of the entry in naira.

How do you balance a ledger account?

To balance an account is to find the difference between its two sides, which is the amount left in the account.

• When: at the end of the month, the year or some other convenient interval.
• Balance: the difference between the totals of the debit side and the credit side.
• Debit balance: the debit side total is bigger than the credit side total.
• Credit balance: the credit side total is bigger than the debit side total.

What are the steps to balance a ledger account?

1. Add up each side of the account and find the difference between the two totals.
2. Enter the difference on the next available line of the side with the smaller total. Write the last day of the month in the date column and “Balance” in the details column. Write “c/d” in the folio column. It means “carried down”.
3. Total each side by drawing total lines and writing the total between them. Use a single line above the total and a double line below it. The two totals must be on the same level and must be the same figure.
4. Make the double entry for the balance. On the line below the totals, write the balance on the side opposite to “Balance c/d”. Write the first day of the next month in the date column and “Balance” in the details column. Write “b/d” in the folio column. It means “brought down”.

What does a balanced account look like?

The cash account below has a debit balance of ₦90,000 brought down on 1 July.

• Debit total: 100,000 + 40,000 = 140,000.
• Credit total before balancing: 30,000 + 20,000 = 50,000.
• Balance: 140,000 − 50,000 = 90,000, placed on the smaller (credit) side as c/d.
• Balance b/d: 90,000 is placed on the debit side on 1 July.

What are the subdivisions of the ledger?

There are four subdivisions of the ledger: the Cash Book, the Sales Ledger, the Purchases Ledger and the General Ledger.

• Why divide it: a growing business has more transactions and more accounts.
• Convenience: accounts of the same type are kept together.
• Shared work: several people can maintain the ledger at the same time.

What does each subdivision contain?

• Cash Book: the main Cash Book and the Petty Cash Book.
• Sales Ledger (Debtors Ledger): the personal accounts of debtors, who are credit customers.
• Purchases Ledger (Creditors Ledger): the personal accounts of creditors, who are credit suppliers.
• General Ledger (Nominal Ledger): all other accounts, apart from cash, bank, debtors and creditors.

What are real and nominal accounts?

• Real accounts: asset accounts, such as equipment and buildings.
• Nominal accounts: accounts for expenses, income, gains and losses, such as rent and wages.

These classifications must be reflected when transactions are recorded using the double entry principle.

What is a trial balance?

A trial balance is a list of the balances on the ledger accounts at a certain date.

• Purpose: it checks the arithmetical accuracy of the double entry bookkeeping.
• Reason: under double entry, total debit entries should equal total credit entries.
• Content: it lists the name of each account and its balance, as a debit or a credit.
• Test: the total of the debit balances should equal the total of the credit balances.
• When: it may be drawn up periodically, for example at the end of each month if accounts are balanced monthly.
• Status: it is not part of the double entry system, because it is only a list of balances.

How is a trial balance headed?

A trial balance is headed “Trial Balance as at ………”, followed by the date on which it was prepared.

Evaluation

1. Define the ledger.
2. Name the four subdivisions of the ledger.
3. Which ledger contains the personal accounts of credit customers, and what is it also called?
4. What do “c/d” and “b/d” stand for?
5. What is a trial balance, and what does it check?

Assignment

Balance the cash account below as at 31 March and show the balance brought down on 1 April.

State whether the balance is a debit balance or a credit balance, and give a reason.