Process of Ledger Posting

The two aspects i.e. the debit aspect and the credit aspect if each transaction should be
carefully recorded in the Ledger Account.
Each ledger account has two identical parts
— debit side – on the left hand side and
— credit side – on the right hand side.
The basic rules about recording transactions are :
1. Debit the receiver and credit the giver.
2. Debit what comes in and credit what goes out.
3. Debit all expenses and losses and credit all incomes and gains.
The rules for writing up accounts of various types are as follows :
Assets : Increases on the left handside or the debit side and decreases on the credit side
or the right hand side.
Liabilities : Increases on the credit side and decreases on the debit side.
Capitals : The same as liabilities.
Expenses : Increases on the debit side and decreases on the credit side.
Incomes or gain : Increases on the credit side and decrease on the debit side.




The student should a clearly understand the nature of debit and credit.
A debit denotes :
(a) In the case of a person that he has received some benefit against which he has already
rendered some service or will render service in future. When a person becomes liable to
do something in favour of the firm, the fact is recorded by debiting that person’s account
: (relating to Personal Account)
(b) In case of goods or properties, that the value and the stock of such goods or properties
has increased, (relating to Real Acounts)
(c) In case of other accounts like losses or expenses, that the firm has incurred certain expenses
or has lost money. (relating to Nominal Account)
A credit denotes :
(a) In case of a person, that some benefit has been received from him, entitling him to claim
from the firm a return benefit in the form of cash or goods or service. When a person
becomes entitled to money or money’s worth for any reason. The fact is recorded by
crediting him (relating to Personal Account)
(b) In the case of goods or properties, that the stock and value of such goods or properties
has decreased. (relating to Real Acounts)
(c) In case of other accounts like interest or dividend or commission received, or discount
received, that the firm has made a gain (relating to Nominal Account)



Ledger Posting
As and when the transaction takes place, it is recorded in the journal in the form of journal
entry. This entry is posted again in the respective ledger accounts under double entry principle
from the journal. This is called ledger posting.




Balancing of an account
The difference between the debit side total and the credit side total is called balance.
If debit side total is greater than the credit side total of the same ledger account, the “balance”
is known as the debit balance.
If credit side total is greater than the debit side total of the same ledger account, the “balance”
is known as the credit balance.
A debit balance shows that :
(a) Money is owing to the firm (Personal Account)
(b) The firm owns property or goods. (Real Account)
(c) The firm has lost money or increased certain expense. (Nominal Account)
A debit balance is shown on the credit side as “By Balance carried down” or “By Balance c/
d”.
A credit balance shows that :
(a) Money is owing to some person (Personal Account)
(b) The firm has given up so much property. (Real Account)
(c) The firm has earned an income or gains. (Nominal Account)
A credit balance is shown on the debit side as “To Balance carried down” or “To Balance c/d”.
With reference to the previous illustration, let us show the ledger balancing at the end of the
month :


With reference to the previous illustration, let us show the ledger balancing at the end of the
month :




In the above cash account, the debit side total is Rs. 40,000 while the credit side total is NIL.
So, the debit side total is Rs. 40,000 more than the credit side total. This balance is placed on the
credit side as “By Balance c/d”. again the balance is brought down at the beginning of the next
accounting period as “To Balance b/d”.



In the above Capital Account, the credit side total is Rs. 40,000 and the debit side total is
NIL. So the credit side total is Rs. 40,000 more than the debit side total. This balance is placed
on the debit-side as “To Balance c/d”. again the balance is brought down at the beginning is
brought down at the beginning of the next accounting period as “By Balance b/d”.
Closing balance and Opening balance
The debit or credit balance of an account what we get at the end of the accounting period is
known as closing balance of that account.
The “balance of the nominal accounts” is closed by transferring to trading account and the
profit and loss account which shows the net operating results – net profit or net loss.
The “balance of the personal accounts and real accounts” representing assets, liabilities,
owners equity are reflected in the Balance sheet, which shows the financial position of a business
on a particular date. These balances are transported as opening balance in the succeeding
accounting period.
Some terms used :
Casting — totalling
Balancing — to find the difference between debit side total and credit side total of an account.
C/d - Carried down B/d - Brought down
C/o - Carried over B/o - Brought over
C/f - Carried forward B/f - Brought forward

LEDGER

The book which contains accounts is known as the ledger. Since finding information
pertaining to the financial position of a business emerges only from the accounts, the ledger is
also called the Principal Book. As a result, all the necessary information relating to any account
is available from the ledger. This is the most important book of the business and hence is
rightly called the “King of All Books”.
The specimen form of a leger account is presented below :

Accounts

Account
An account denotes a summarized records of transactions pertaining to one person, one
kind of asset, or one class of income, expense or loss.
It can also be explained as :
“TO COUNT”
→ the financial value of each events,
which are termed as Transactions.
Classification of Accounts
Accounts are usually subdivided into the following classes :


1. Personal Accounts : These accounts deal with transactions relating to persons or an
organization. It can be classified as :
(a) Natural Persons : Mr. S. Sharma, Triveni & Sons, etc.
(b) Artificial Persons : State Bank of India, ITC Ltd, CC & FC, Royal Calcutta Golf
Club, etc.
(c) Representative Persons : Outstanding Expenses (represent ting liability for
expenses to supplies) ; Prepaid Salary (representating employess) etc.
2. Impersonal Accounts : There accounts do not relate to any persons are known as
impersonal accounts.
(a) Real Accounts : It is an accounts relating to assets and properties.
Eg: Land, Building, Plant, Machinery, Cash, Bank, Stock, etc.
(b) Nominal Accounts : It is an account relating to expenses, losses, incomes and gains.
They do not have any physical existence except names.
Eg: Sales, Purchases, Salary, Wages, Rent, Interest, Repairs, Travelling, etc.

Debit and Credit
Debit is derived from the latin word “debitum”, which means `what we will receive’. It is
the destination, who enjoys the benefit.
Credit is derived from the latin word “credre” which means `what we will have to pay’. It is
the source, who sacrifices for the benefit.
Diagrammatic Representation of Accounting Rules or the Golden Rules of Accounting



Modern Version : Any change in any variable of the equation must have another change in
another variable either in the opposite direction in the same side, or in the same direction in
the opposite side.
Events : Any or all activities which we are doing in our day-to-day life.
Example : Reading, Sleeping, Eating, Thinking, Singing, Gossiping, Buying, Selling, Playing
and etc.
Transactions : An event which has the following characteristics :
(i) Which changes the financial position of a person.
(ii) Which can be measured in terms of money.
(iii) Which can be recorded in the Books of Accounts.
Example : Purchase, Sales, Travelling Expenses, Rent, Wages, Salaries, and etc. It is therefore
concluded that “All transactions are events but all events are not transactions”.
Classification of Transaction


Cash Transactions : Those transactions which involves inflow / outflow of cash.
Example : (i) Purchased goods for cash Rs. 100.
(ii) Paid Expenses Rs. 20.
(iii) Sold goods for cash Rs. 300 and etc.
Non-cash Transaction : Those transaction which is not involved with immediate inflow /
outflow of cash. They are again sub-divided cost.
Credit Transactions : Those transactions which involve increase in assets /liabilities.
Example : (i) Goods sold to Mr. Sen on credit
— increase in asset.
(ii) Purchased goods from Sunny on credit
— increase in liability.
Other Non - Cash Transactions : Those which involves loses and does not result in immediate
outflow of cash.
Example : (i) Depreciation of Fixed assets
(ii) Bad Debts and etc.

Limitations of Double Entry System

(1) The system does not disclose all the errors committed in the books accounts.
(2) The trial balance prepared under this system does not disclose certain types of errors.
(3) It is costly as it involves maintenance of numbers of books of accounts.

Advantages of Double Entry System

(i) Since personal and impersonal accounts are maintained under the double entry system,
both the effects of the transactions are recorded.
(ii) It ensures arithmetical accuracy of the books of accounts, for every debit, there is a
corresponding and equal credit. This is ascertained by preparing a trial balance
periodically or at the end of the financial year.
(iii) It prevents and minimizes frauds. Moreover frauds can be detected early.
(iv) Errors can be checked and rectified easily.
(v) The balances of receivables and payables are determined easily, since the personal
accounts are maintained.
(vi) The businessman can compare the financial position of the current year with that of the
past year/s.
(vii) The businessman can justify the standing of his business in comparison with the previous
years purchase, sales, stocks, in comes and expenses with that of the current year figures.
(viii) Helps in decision making.
(ix) The net operating results can be calculated by preparing the Trading and Profit and
Loss A/C for the year ended and the financial position can be ascertained by the
preparation of the Balance Sheet.
(x) It becomes easy for the Government to decide the tax.
(xi) It helps the Government to decide sickness of business units and extend help accordingly.
(xii) The other stakeholders like suppliers, banks, etc take a proper decision regarding grant
of credit or loans.