1. Ledger — Meaning and Importance
The Ledger is the principal/main book of accounts. It is also called the Book of Final Entry or Book of Secondary Entry. It contains individual accounts for every item (assets, liabilities, capital, incomes, expenses).
Purpose: The Ledger classifies all transactions by type of account. It gives the
complete picture of any specific account at any time — e.g., total sales, total expenses paid,
amount due from a particular debtor.
- All Journal entries are transferred (posted) to the respective Ledger accounts.
- Each ledger account is maintained in T-Form — Debit (Dr.) side on the LEFT, Credit (Cr.) side on the RIGHT.
- The collection of all ledger accounts is called the Ledger or General Ledger.
2. Posting Rules
- When an account is Debited in Journal → enter on the LEFT (Dr.) side of that account in Ledger, and write "To [other account]" in Particulars.
- When an account is Credited in Journal → enter on the RIGHT (Cr.) side of that account in Ledger, and write "By [other account]" in Particulars.
- For Cash Book transactions, separate posting is NOT needed since the Cash Book itself serves as the ledger for cash/bank accounts.
Memory Tip: In Ledger: "To" = Debit side; "By" = Credit side.
In Journal: "Dr." written first, "Cr." indented.
In Journal: "Dr." written first, "Cr." indented.
3. Balancing the Ledger
At the end of an accounting period, each ledger account is balanced (closed for the period):
- Total both the Dr. and Cr. sides.
- Write the higher total on BOTH sides.
- The difference is the Balance — placed on the SHORTER side.
- If Dr. total > Cr. total → Debit Balance ("To Balance c/d" on Cr. side; "By Balance b/d" on Dr. side next period).
- If Cr. total > Dr. total → Credit Balance ("By Balance c/d" on Dr. side).
| Account Type | Normal Balance | Example |
|---|---|---|
| Asset Accounts | Debit Balance | Cash A/c, Machinery A/c |
| Liability Accounts | Credit Balance | Creditors A/c, Loan A/c |
| Capital Account | Credit Balance | Capital A/c |
| Expense/Loss Accounts | Debit Balance | Salary A/c, Rent A/c |
| Revenue/Income Accounts | Credit Balance | Sales A/c, Commission Received |
Nominal Accounts: Income and expense accounts are NOT carried forward — they are
closed to the Profit & Loss Account at year end. Only Real and Personal accounts carry balances
forward.
4. Trial Balance
A Trial Balance is a statement prepared at the end of the accounting period, listing all ledger account balances (or totals) in two columns — Debit and Credit — to check arithmetic accuracy.
Total Debit Balances = Total Credit Balances (if books are arithmetically
correct)
Methods of Preparing Trial Balance
| Method | What is Listed | Feature |
|---|---|---|
| Total Method | Total of Dr. and Cr. sides of each account | Both totals (gross) are shown; more cumbersome |
| Balance Method | Net balance (Dr. or Cr.) of each account | Most common; directly useful for Balance Sheet |
| Combined Method | Both totals AND balance | Used in some advanced accounting systems |
5. Errors and Trial Balance
A Trial Balance that agrees does NOT guarantee that all entries are correct. There are two classes of errors:
Errors that DO NOT affect Trial Balance agreement (Errors of Double Effect):
- Error of Omission: A transaction completely left out — both Dr. and Cr. omitted equally.
- Error of Commission: Posted to wrong account but same side (e.g., Mohan's A/c debited instead of Sohan's A/c).
- Error of Principle: Incorrect classification (e.g., treating capital expenditure as revenue).
- Compensating Errors: Two errors that cancel each other out.
Errors that DO affect Trial Balance (Single-Effect Errors):
- Posting on wrong side (Dr. instead of Cr.).
- Wrong amount posted to one side only.
- Omitting to post one side of an entry.
- Wrong totalling of a subsidiary book.