Preparing Ledger Accounts

(Also known as "T" Account and Account)

Having passed the double or journal entries, the next step is to post these double or journal entries into Ledger accounts. Ledger account or an account is simply the classification of double entries which we have made in General Journal or any other journal. In an account we bring together all similar entries in one place. For example a company has purchased goods on 4th and 7th January, we would put both entries in purchases account because of their similar nature i.e. the purchases and therefore an account shows net increase or decrease in the balance of similar entries / items (in the aforementioned example there was an increase in purchases balance)

Example of accounts is payable or creditor account, purchases account, sales accounts, receivable or debtor account, cash account, bank account, machinery account, building account, vehicle account etc

Each account is divided into Debit and Credit portions. Debit is the left hand side of an account and credit is the right hand side of an account. An account looks like English alphabet "T" which is why a ledger account is also referred to as "T" account

DEBIT

Account's Title

CREDIT

DATE	DESCRIPTION	AMOUNT	DATE	DESCRIPTION	AMOUNT

An Account has three main parts:

1. Title is the name of account
2. Debit is on the left hand side
3. Credit is on the right hand side

Posting

In Accounting the word "posting" implies that the process of posting or recording double or journal entries into an account

Classification of accounts

1) Real accounts or balance sheet accounts

These are the accounts of assets, liability and capital . These accounts remain open even after the end of an accounting period (e.g one year). Examples of these accounts include accounts of machinery, plant, creditors, debtors, bill payable, bonds, fixed deposits, capital etc.

2) Nominal accounts

These are the accounts of revenues and expenses. These accounts are closed after the end of  an accounting period (e.g one year). Examples of these accounts include accounts of Salaries, rent, depreciation, discount received, discount allowed, interest earned, commission received, sales return etc.


EXAMPLE

December 3.	Started business with cash $200,000
December 4.	Purchased goods on credit from Mr. Z and Co. worth $2000
December 5.	Paid cash to Mr. Z and Co. $2000 for goods purchased on credit
December 7.	Paid cash $500 for telephone bills
December 20.	Commission $1000 received for selling goods of G man

DATE	DESCRIPTION	FOLIO	DEBIT	CREDIT
Dec. 3	Cash                     Capital		$200,000	$200,000
Dec. 4	Purchases                     Creditor (Mr. Z and Co.)		$2000	$2000
Dec. 5	Creditor (Mr. Z and Co.)                     Cash		$2000	$2000
Dec. 7	Telephone expenses                     Cash		$500	$500
Dec. 20	Cash                     Commisssion income		$1000	$1000

Now lets create our First Ledger account

First of all we would create an account for cash because it's the first item in General journal. Since we are going to create an account for cash, we would write Cash in the place "Title" (or name) of account

DEBIT

Cash account

CREDIT

DATE	DESCRIPTION	AMOUNT	DATE	DESCRIPTION	AMOUNT
Dec. 3 Dec. 20	Capital Commission income	$200,000 $1000	Dec. 5 Dec. 7	Creditor (Mr. Z and Co.) Telephone expenses Balance c/d	$2000 $500 198500
	TOTAL	$201,000		TOTAL	$201,000

Wohooo, we have created our first Account!

Explanation or how the cash account was prepared?

Look at the General Journal, for the first transaction (on December 3) we have debited cash and credited capital. Since we are creating a cash account, we have to check if cash is debit or credit. In the first entry "Cash" is debit and therefore we would record this transaction on the Debit side of our cash account and because "Capital" is on the opposite side (credit side) of cash, we would record capital in the "Description" column of Cash Account and lastly would repeat this procedure for all cash related transactions

Procedure of recording transactions in an account

In the Journal entries
Look for the item for which you are creating an account if it is debit or credit
If the item is debit, record the transaction on the debit side of account and vice versa
Record the opposite item in the Description column of account

What's Balance c/d

Balance c/d is short for Balance Carried forward (ending balance of an account), it is the balance that we would carry forward in the next accounting period (for example an year). In the next accounting period it would become Balance b/d (b/d is short brought forward) that would be the opening balance of our account.

How to calculate Balance c/d or ending balance of an account

1. Add up Debit side and then Credit side of the account
2. Find the difference between Debit and Credit side total balances. The difference would be Balance c/d
3. Write Balance c/d on the smaller side of account

In the above example

1. Debit totalled to $201,000 and Credit side added to 2500
2. The difference is 201,000-2500=198500. Therefore balance c/d is 198500
3. Since credit side is smaller (2500), we would write balance c/d on credit side 
4. We are done 

 Our second ledger Account

We would now create a Capital account because it's the second element in our General journal. The procedure of preparing a capital account is same as of Cash account

DEBIT

Capital account

CREDIT

DATE	DESCRIPTION	AMOUNT	DATE	DESCRIPTION	AMOUNT
	Balance c/d	$200,000	Dec. 3	Cash	$200,000
	TOTAL	$200,000		TOTAL	$200,000

Third Account

Nominal accounts

These are the accounts of revenues and expenses. These accounts are closed after the end of  an accounting period (e.g one year). Examples of these accounts include: accounts of Salaries, rent, depreciation, discount received, discount allowed, interest earned, commission received, sales return etc..

Important to note: Since we are going to create a Purchases expenses account (a nominal account), we won't use the words "Balance c/d " and "Balance b/d" rather that we would use Income statement or Profit and loss account. Because these accounts are closed after the end of an accounting period and their balances are transferred to income statement contrary to Real accounts where balances are transferred to Balance sheet. Don't worry about Income statement and Balance sheet, we will cover them later on

DEBIT

Purchases account

CREDIT

DATE	DESCRIPTION	AMOUNT	DATE	DESCRIPTION	AMOUNT
Dec. 4	Creditor (Mr. Z and Co.)	$2000		Income statement (BF)	$2000
	TOTAL	$2000		TOTAL	$2000

BF=Balancing figure
The only difference in this account is the use of word "Income statement" in the place Balance c/d. However, the procedure of posting transactions in this account is same.

Fourth account

DEBIT

Creditor account

CREDIT

DATE	DESCRIPTION	AMOUNT	DATE	DESCRIPTION	AMOUNT
Dec. 5	Cash Balance c/d	$2000 Nil	Dec. 4	Purchases	$2000
	TOTAL	$2000		TOTAL	$2000

Fifth Account

DEBIT

Tel. Expenses account

CREDIT

DATE	DESCRIPTION	AMOUNT	DATE	DESCRIPTION	AMOUNT
Dec. 7	Cash	$500	Dec. 7	Income statement	$500
	TOTAL	$500		TOTAL	$500

Sixth and the last Account

DEBIT

Commission income account

CREDIT

DATE	DESCRIPTION	AMOUNT	DATE	DESCRIPTION	AMOUNT
Dec. 20	Income statement	$1000	Dec. 20	Cash	$1000
	TOTAL	$1000		TOTAL	$1000