Ledger

A ledger is a fundamental accounting tool used to record, classify, and summarize financial
transactions of a business or organization. It serves as a central repository for all financial
data and is organized into various accounts, each representing a specific type of asset,
liability, equity, revenue, or expense. Ledgers play a crucial role in the double-entry
accounting system, which ensures that for every transaction, there is an equal and opposite
entry to maintain the accounting equation (Assets = Liabilities + Equity) in balance.

Types of Ledger

General Ledger: A General Ledger is a set of account, which records the day-to-day
transactions of business entity using the concept of double entries. This is known as duality
concept. The General Ledger reveals the summary of all subsidiary ledgers in which every
transaction is recorded. Each transaction has two parts, these are the debit and the credit parts.
GL contains information which is needed to prepare the financial statements. The
transactions recorded in the GL reveals the summary/balance of assets, liabilities,
capital/equity, revenues and expenses. The GL encompasses all transactions to prepare the
Income Statements, Statement of Financial Position and other reports. The GL is very useful
in extracting the Trial Balance, list of balances in all books of accounts of an entity. This
assist in locating errors in the books of accounts.

Subsidiary Ledger: A subsidiary ledger is called books of original entry or books of prime
entry. The subsidiary accounts consist accounts such as Sales Day Book, Purchases Day
Book, Returns Inward Day Book, Return Outward Day Book, Cash Book and Petty Cash
Book

Characteristics of a Ledger

1. Recording Transactions: The ledger is where all financial transactions initially get
recorded. Entries in the ledger provide a detailed record of each transaction, including
the date, description, and the amounts involved.

2. Classification: Transactions are classified into specific accounts within the ledger.
For example, there may be separate accounts for cash, accounts receivable, accounts
payable, sales revenue, and various expense categories.

3. Posting: After transactions are recorded in the books of original entry (such as
journals), they are posted to the appropriate accounts in the ledger. Posting involves
transferring the transaction information from the journal to the ledger.

4. Summarization: The ledger allows for the aggregation and summarization of account
balances. This aggregation makes it easier to prepare financial statements, analyze
financial performance, and monitor the financial health of the organization.

5. Balancing: In the double-entry accounting system, each transaction affects at least

two accounts, with one account debited and another credited. The ledger ensures that
 the total debits equal the total credits, ensuring the accounting equation remains
balanced.

6. Reference: Ledgers provide a historical record of all financial activities, making it

possible to trace back and verify specific transactions or account balances.

Posting into the Ledger Accounts

When a transaction is recorded into an account, it is said to be posted or entered into that
account. When posting into an account, the name of the other account must be written under
the particular column of the account you are posting to. This is to indicate to the user of the
accounting information where the other posting to complete the double entry can be found.

Illustrative Example

A company bought Equipment by cash N280, 000 on May 14. Post the transaction into
relevant accounts. The two accounts affected are (1) Equipment and (2) Cash.

The account that is giving value is ‘Cash’ while ‘Equipment’ account is the one receiving
value.

Using the double entry rule, Equipment account will be debited (i.e. the receiver) while Cash
account is credited (i.e. the giver). The two accounts will look like these after posting:

Balancing of Accounts

To balance an account means to close off the account after all necessary postings have been
made. This is usually done at the end of a given period. When closing an account, the entries
on both sides of the account must be separately added. If the totals on both sides are the same,
the account is said to be balanced. However, on many occasions, the total on the debit side
may be higher than the total on the credit side or vice versa. When the total of the debit side
is higher than the total of the credit side, the difference represents a ‘debit balance’. It will be
the last entry into the credit side and it will be described as ‘balance carried down’ (bal. c/d).
At the beginning of the new period it will become ‘balance brought down’ (bal. b/d) on the
debit side of the account. When the total of the credit side is higher than the total of the debit
side, the difference represents a ‘credit balance’. It will be the last entry on the debit side of
the account at the end of the period and it is described as ‘balance carried down’ (bal. c/d). At
the beginning of the new period, it becomes ‘balance brought down’ (bal. b/d) on the credit
side of the account.

TRIAL BALANCE

A Trial Balance is a two-column schedule listing the titles and balances of all the accounts in
the order in which they appear in the ledger. The debit balances are listed in the left-hand
column and the credit balances in the right-hand column. In the case of the General Ledger,
the totals of the two columns should agree. We, now, know the fundamental principle of
double entry system of accounting where for every debit, there must be a corresponding
credit. Therefore, for every debit or a series of debits given to one or several accounts, there
is a corresponding credit or a series of credits of an equal amount given to some other
account or accounts and vice versa. Hence, according to this principle, the sum total of debit
amounts must equal the credit amounts of the ledger at any date. If the various accounts in the
ledger are balanced, then the total of all debit balances must be equal to the total of all credit
balances. If the same is not true then the books of accounts are arithmetically inaccurate.

OBJECTIVES OF PREPARING TRIAL BALANCE

The following are the main objectives of preparing the trial balance:
 To check the arithmetical accuracy of books of accounts: According to the principle
of double entry system of book-keeping, every business transaction has two aspects,
debit and credit. So, the agreement of the trial balance is a proof of the arithmetical
accuracy of the books of accounts.
 Helpful in preparing final accounts: The trial balance records the balances of all the
ledger accounts at one place which helps in the preparation of final accounts, i.e.
Trading and Profit and Loss Account and Balance Sheet. But, unless the trial balance
agrees, the final accounts cannot be prepared. So, if the trial balance does not agree,
errors are located and necessary corrections are made at the earliest, so that there may
not be unnecessary delay in the preparation of the final accounts.
 To serve as an aid to the management: By comparing the trial balances of different
years changes in figures of certain important items such as purchases, sales, debtors
etc. are ascertained and their analysis is made for taking managerial decisions. So, it
serves as an aid to the management.
LIMITATIONS OF TRIAL BALANCE
The following are the main limitations of the Trial Balance:
 Trial Balance can be prepared only in those concerns where double entry system of
accounting is adopted.
 Though trial balance gives arithmetic accuracy of the books of accounts but there are
certain errors, which are not disclosed by the trial balance. That is why it is said that
trial balance is not a conclusive proof of the accuracy of the books of accounts.
 If trial balance is not prepared correctly then the final accounts prepared will not
reflect the true and fair view of the state of affairs of the business. Whatever
conclusions and decisions are made by the various groups of persons will not be
correct and will mislead such persons.
METHODS OF PREPARATION OF TRIAL BALANCE
A trial balance can be prepared by the following two methods:
 Total method: In this method, the debit and credit totals of each account are shown in
the two amount columns (one for the debit total and the other for the credit total).
 Balance Method: In this method, the difference of each amount is extracted. If debit
side of an account is bigger in amount than the credit side, the difference is put in the
debit column of the Trial Balance and if the credit side is bigger, the difference is
written in the credit column of the Trial Balance.
Illustration 1
Mohammed started business on July 1, 2023 with N300000 capital. The following
transactions took place in his first week of operations:
July 1 Bought furniture and fittings for N80000
July 2 purchased goods for cash for N75000
July 4 Paid electricity bill N5000
July 4 Cash Sales N50000
July 5 Sold goods valued N55000 on credit to Bisola
July 6 purchased goods worth N90000 on credit from Sammy Enterprises

You are required to post the above transactions into the appropriate accounts and balance the
accounts and extract to a trial balance as at January 7, 2023
Illustration 2
The books of K.K. Co. shows the following transactions:
 Dec. 8 Purchased goods for cash N4,000
 Dec. 9 Paid to Ade N1,980
 Dec.10 Cash sales N3,000
 Dec. 12 Sold to Hari for cash N2,000
 Dec. 15 Purchased goods from Ade N4,000
 Dec. 18 Paid wages to workers N300
 Dec. 25 Paid Ram by cheque N500
 Dec. 31 Withdrawn for personal use N200
Required:
Use your knowledge of double entry to open a ledger for each the following transactions.

Illustration 3
Post the following transactions into the Ledger and balance the accounts as on 31st March,
2023
 Ram started business with a capital of N10,000
 He purchased goods from Mohan on credit N2,000
 He paid cash to Mohan N1,000
 He sold goods to Suresh N2,000
 He received cash from Suresh N3,000
 He further purchased goods from Mohan N2,000
 He paid cash to Mohan N1,000
 He further sold goods to Suresh N2,000
 He received cash from Suresh N1,000
Illustration 4
The following were further transactions in the month of Jan, 2020 prepare a ledger account
and balance it.
 Jan. 1: Purchased goods worth N5,000 for cash less 20% trade discount and 5% cash
discount.
 Jan. 4: Received N1, 980 from Vijay and allowed him N20 as discount.
  Jan. 6: Purchased goods from Bharat N5,000
 Jan. 8: Purchased plant from Mukesh for N5,000 and paid N100 as cartage for
bringing the plant to the factory and another N200 as installation charges.
 Jan. 18: Sold goods to Ram for cash N1,000
 Jan. 20: Paid salary to Ratan N2,000 Jan.
 21: Paid Anand N4,800 in full settlement.
 Jan. 26: Interest received from Madhu N200
 Jan. 28: Paid to Bablu interest on Loan N500
 Jan. 31: Sold goods for cash N500
 Jan. 31: Withdraw goods from business for personal use N200

Class Exercise 1
Miss Korkor started a restaurant investing N5,00,000 on Jan. 1, 2019 and further submits the
details of the transactions:
 Jan.5: She purchased furniture for N2,75,000; Crockery N75,000 and cooking utensils
N38,000
 Jan. 10: She paid N100,000 as Salami for taking the shop on lease for ten years at
Abeokuta.
 Jan. 15: She took a temporary loan of N75,000 from her brother Rupinder, a
financier.
 Jan. 25: She took a bank loan of N50,000 and repaid the loan taken from her brother.
 Jan. 31: She appointed Lavina as a manager at a salary of N5000 p.m. and took from
her a security deposit of N50,000.
Required
Pass Journal entire in the books of Miss Korkor.

Assignment 1
Journalise the following transactions that took place in January 2023
 July 2 Commenced business with Cash N25,000
 July 4 Purchased furniture for cash N2,000
 July 4 Cash purchases N14,500
 July 7 Bought of Somal N2,600
 July 7 Sold of Monica N808
 July 9 Drawings by the proprietor for household expenses N400
 July 9 Goods taken out by the proprietor for domestic use N50
 July 9 Cash withdrawn from Bank N2,700
 July 10 Sold to Manohar N985
 July 11 Purchases made, payment through cheque N290
 July 14 Cash received from Popli on account N1,000
 July 14 Cash paid to Somal after deduction of discount (N130) N 2,470
 July 17 Cash received from Manohar in full settlement of his account N975
 July 18 Monica becomes insolvent. A dividend of N50 raise in a kobo is received.
N404
 July 18 Purchase of a scooter for cash N13,000
 July 20 Sold goods to Amrik N864
 July 20 Sold to Neena N378 N24 Electricity bill paid N510
 July 24 Cartage paid in cash
 July 5 24 Repairs to scooter, payment not yet made N17
  July 26 Payment of cash for petrol N115
 July 26 Purchases of goods for cash N1,200
 July 26 Purchases of office equipment for cash N1,250
 July 27 Repairs bill paid in cash N17
 July 28 Amrik returns goods N40
 July 31 Depreciation of furniture N110
 July 31 Depreciation of Scooter N220
 July 31 Adjustment for the month’s rent N180
 July 31 Bank charges for the month N5
 July 31 Interest on capital for the month N125
 July 31 Salary to be credited to proprietor N200
 July 31 Sonal agrees to take some defective goods N70 purchased from him and
immediately refunds the money.
Assignment 2
Journalise the following transactions:
 Paid by cheque fire insurance premium N327
 Paid by cheque proprietor’s life insurance premium N210
 Paid by cheque A’s bill for repairs to machinery N265
 Drew a cheque for pretty cash N120.
 Bill payable due this day met at bank N330.
 Received B/s acceptance for N780 from A is settlement of latter’s account for N800
 Discounted N’s acceptance for N585 at N570
 Sold goods to Murthi and he endorsed M’s bill to us.
 Bank collected interest on our investments N 95
 Received dividend on shares of A & Co. Ltd. N137
 Received a cheque for N93 for commission due to us.
 Invested in Government securities N5,000
 Bought shares in Best & Co. Ltd. for N3,000
 Purchased Plant and Machinery for N15,500
 Interest allowed by bank on our current account N15
 Bank charges made by bank N17
 Paid for an insertion in “The business name” N15
 Bought goods from Seth & Co. for N750 accepted their bill for N500, N500 and
gave them a cheque for N250
 Sold goods to John and Co. for N650, received their acceptance for N500 and gave
them a cheque for N250.
 Returned goods to A.A. N75
 B.B. returned goods to us N94
 Bought of C & Co., goods for cash N500
 Received dividend on shares N55
 Bought Prize Bonds of Indian Government for N150
 Bought National Savings Certificates for N100
 Paid by cheque A. Anand’s bills for repairs to machinery N120
 Received a cheque for N350 from B. Balu to be credited to M. Mani’s account.
 Received from D. Datta N970
 Paid d. Data’s cheque into the bank.
 Bank returned D. Datta’s cheque dishonoured.
 Borrowed for the bank N50,000.
 Repaid M’s loan of N500 with interest N25
Errors not affecting Trial Balance Agreement
The preparation of a Trial Balance does not prove that transactions have been completely and
correctly recorded in the proper accounts. There are errors that do not affect the agreement of
the Trial Balance and they include the following:
 Error of omission: This is a complete omission of a transaction from the ledger. Both
the debit entry and the credit entry were not recorded.
 Error of principle: When a transaction is posted to the wrong class of account an error
of principle has been committed. An example is where a trader purchases an
additional motor vehicle for N950,000 in cash and treated the transaction as a motor
running expense by crediting his cash/bank account and debiting Motor Running
Expenses Account (Nominal class of account). The motor vehicles Account (asset-
Real Account) ought to have been debited and cash/bank credited.
 Error of commission: This is an error within the same class of account but affecting
different persons. It is the posting of entry to the account of a person other than the
one intended. For example, a payment received from B. Abbey that is credited to B.
Abu’s account.
 Compensating errors: An error made in the ledger which, is exactly by sheer
coincidence, balanced by another error elsewhere in the ledger is referred to as a
compensating error, More than one error may at times be made and yet the sum totals
exactly equal another single error somewhere else in the ledger. The effect is usually
that there is overstatement of an item in one account and an equivalent amount
understated in another account
 Complete reversal of entries: This involves error in which, for a transaction, the
account that ought to be debited is credited and the one to be credited is debited. For
instance, cash paid to trade receivables is debited in cash account and credited in trade
payable account instead of vice versa.
 Errors of original entry: This error is committed where a transaction is incorrectly
recorded in a source document or book of original entry and the incorrect amount is
eventually posted to the relevant account in the ledger. This type of error will not have
any effect on the agreement of the trial balance. For example if goods invoiced at
N52,500 to J. K. Salmon is record as N55,200 in the sales day book, the trial balance
will in no way show the error if the incorrect amount of N55,200 is also debited to J.
K. Salmon’s account with other sales.
Errors that affect the Trial Balance
The total of the debit side and credit side of the Trial Balance may not agree which means
that one or more errors have been committed. Some of these errors are:
 Arithmetic errors in balancing ledger accounts
 Using one figure for the debit entry and another figure for the credit entry in respect
of one transaction.
 Errors of extracting the wrong figure from the ledger to the Trial Balance
 Listing a debit balance to the credit side of the Trial Balance
 Listing a credit balance to the debit side of the Trial Balance.
 The posting of debit as credit or vice versa while the other entry is correctly made.
 Making an entry on only one side of the accounts, omitting the second entry

Correction of Errors
There are two approaches to the correction of errors. This is dependent on the effect of the
error on the Trial Balance. For errors which do not affect the agreement of Trial Balance
totals, there will always be two affected accounts in between which the error will be
corrected, while errors which affect the agreement of the Trial Balance will affect only one
ledger account, thereby requiring one other account, which is the Suspense Account for
correction to be effected.

Suspense Account
The suspense account is an account in which the net difference in Trial Balance totals is
recorded pending the location and correction of the errors causing the difference.
Location of Errors
Errors which affect the agreement of the Trial Balance totals are more easily discovered than
those which do not affect Trial Balance totals. In most cases errors not affecting the Trial
Balance will only come to light through complaints from affected third parties such as
customers or suppliers.
An error of either type can be located by taking the following steps:
 Re-cast the addition of ledger balances on the Trial Balance
 Check for any omission on the Trial Balance
 Make sure that the ledger balances appear on the correct side of the Trial Balance i.e.
Income, Liabilities, capital and sales to be on the credit side while Expenses, Assets,
Drawings and Purchases should be on the debit side.
 Check for correct transfer of ledger balances to the Trial Balance.
 Take a general look at the entries in the ledger to see if a figure close to the difference
sought is in them.
 Check the double entries in the ledger.
 Check the arithmetic in the ledger. Recast each side of ledger accounts and reconfirm
the balances c/d and b/d
 If the trial balance difference is exactly divisible by two, check for one half of the
difference on the trial balance, the figure might be on the wrong side of the trial
balance.
 If the trial balance difference is exactly divisible by 9, there could be error of
transposition of figures, for example, N98 written as N89. The difference is 9.
Steps involved in correcting Errors
In correcting errors which are not revealed by the Trial Balance the following steps
should be taken:
 Read the question well and try to understand the transaction involved.
 When the transaction is understood, determine the accounts involved and the entry
which ought to be passed.
 Compare the entries which ought to be passed with what has been done, as reported in
the question.
 On the basis of the observed difference, effect the correction of error.