THE LEDGER & THE CONCEPT OF DOUBLE ENTRY

Financial Accounting is based on a simple notion known as the Accounting Equation.

This equation depicts the equality that exists between the resources owned by the enterprise
and the claims against the enterprise in relation to those resources.

Resources held by the enterprise are Assets, whose acquisition will have been from funds
provided either by the owners or from borrowings.

Assets = Capital + Liabilities

This can also be expressed as:

Capital = Assets – Liabilities

It follows then, that the balance sheet is founded on the accounting equation, since it is a list
of assets held by the enterprise against which there is a set of claims against the enterprise

Transactions & the Accounting equation

Given that the Balance Sheet indicates the Financial Position of an enterprise at a given
point in time, all transactions must maintain the accounting equation on which the balance
sheet rests. It is possible therefore possible to record the effects of successive transactions on
the balance sheet by the accounting equation

Definition of Ledger
A ledger is another book, similar to the journal, but organized by account. A general ledger is
the complete collection of all the accounts and transactions of a company. It is a book of
entries that contain detailed information of transactions of one account or type of transaction
or a summary of all the financial transactions of a company for a specific period.

In simple terms the ledger accounts are where the double entry records of all transactions and
events are made. They are the principal books or files for recording and totalling monetary
transactions by account. An entity's financial statements are generated from summary totals
in the ledgers.

Ledger accounting therefore is simply a record or account of book-keeping entries that help
prepare income statements and balance sheets.
There are three main types of ledger accounts – nominal, real, and personal.
  Nominal accounts contain accounts that deal with expenses, incomes, losses, and
gains. Examples are purchases, sales, salaries, commissions, and similar accounts.
 Real accounts contain accounts of assets and liabilities like accounts payable, fixed
assets, prepaid expenses, cash, debts, loans, and accounts receivables.
 Personal accounts contain accounts that are related to transactions with individuals
and organizations with whom your business transacts directly. Examples are
customers, vendors, business owners’ capital accounts, etc. are examples of personal
accounts.

Ledger Accounting and Double-Entry Bookkeeping

The term 'nominal ledger' or 'general ledger' is used to refer to the overall system of ledger
accounts used within an entity. It houses all the separate ledgers required to produce a
complete trial balance and, consequently, set of financial statements. As stated above, each
class of transaction, asset, liability and item of equity will have its own ledger account. The
summary of these ledger balances will eventually be transferred into the corresponding
caption in the primary financial statements.

How a General Ledger Functions With Double-Entry Accounting

Double entry refers to a system of bookkeeping that, while quite simple to understand, is one
of the most important foundational concepts in accounting. Basically, double-entry
bookkeeping means that for every entry into an account, there needs to be a corresponding
and opposite entry into a different account. It will result in a debit entry in one or more
accounts and a corresponding credit entry in one or more accounts.

 Double entry refers to a system of bookkeeping that is one of the most important
foundational concepts in accounting.

 Double-entry bookkeeping ensures that for every entry into an account, there needs to
be a corresponding and opposite entry into a different account. It will result in a debit
entry in one or more accounts and a corresponding credit entry in one or more
accounts.

 The main purpose of a double-entry bookkeeping system is to ensure that a

company’s accounts remain balanced and can be used to depict an accurate picture of
the company’s current financial position.
  A general ledger is used to employ the double-entry bookkeeping method, which
means that each financial transaction affects at least two sub-ledger accounts, and is
therefore recorded twice in the ledger

 A ledger has 2 sides – Debit (DR) on the right and Credit (CR) on the left side

Ledger Format
DR CR
Dat Journa Particular Journa
e Particulars l Ref. Amount Date s l Ref Amount

The classification assists in establishing rules for making the double entry in case of
different transactions. When dealing with accounts, the following must be answered:-
 What two accounts are affected?
 What type of accounts are they?
 Which account should be debited and which should be credited?
Note:
#1 – Real Accounts – Debit what comes in and Credit what goes out. Real accounts include
Pant & Machinery, Buildings, Furniture, or any other Asset account. So when we purchase
Machinery, the Machinery account is debited, and when we sell Machinery, the Machinery
account is credited.
#2 – Personal Accounts – Debit the Receiver and Credit the Giver. The personal account
includes the account of any person, such as an owner, debtor, creditor, etc. When we make
payment to our creditors, the receiver account is debited, and when we receive the payment,
the giver account is credited.

#3 – Nominal Accounts – Debit all Expenses and Losses and Credit all Incomes and Gains.
Nominal accounts include all the Expenses, Income, Profit, and Loss accounts. For example,
the Salary Paid account is debited, and the rent received account is credited.
Example 1

M. Williams begins to deal in furniture with a capital outlay of Kshs. 500,000 in cash on 1 st
January 2021. He makes the following transactions during the month of January 2021.

1. January, 5 He purchased two sofa sets at Kshs. 20,000 each paying casg
2. January, 7 Purchased one dining table with 6 chairs for a total of Kshs. 10,000
3. January, 10 He sells one sofa set for Kshs. 30,000
4. January, 15 He sells one dining table and six chairs for Kshs. 17,500
5. January, 20 He sells the remaining sofa set for Kshs 28,000
6. January, 30 He pays Kshs. 3,000 for advertisement and other sundry expenses

Required:

Make the necessary entries to record these transactions in Mr. William’s ledger

Credit Transactions

Not all transactions are based on cash, - most business transactions are based on credit. In the
case of credit purchases, cash is paid after 1 or 2 months, depending on the credit terms.
Likewise, when goods are sold on credit, cash is received afterwards, as per the terms of the
agreement.

Credit transactions are recorded as follows:

When goods purchased on credit
DR: Purchases Account
CR: Creditors Account
When cash is paid to creditors
DR: Creditors Account
CR: Cash Account
When goods are sold on credit
DR: Debtors Account
CR: Sales Account
When cash is received from debtors
DR: Cash Account
CR: Debtors Account

Example 2
Walter started business on 1 st January 2022 with capital of Kshs. 2,000,000, which he paid
into the bank account. Below are transactions for the month

1. January, 6 He purchased a motor vehicle and paid by cheque Kshs. 800,000

2. January, 9 He purchased goods for re-sale on credit from A.B & Co. for Kshs.
400,000
3. January, 13 He sold some of the goods to X.Y & Co. on credit for Kshs. 300,000
4. January, 25 Paid A.B & Co. by cheque for goods purchased

Required:

Make the necessary entries to record these transactions in Walters ledger

Example 1 Solution
Journals

Ledger
Date Particulars Folio Debit Credit
Jan, 1 Bank account CB-1 50,000
Capital account L-2 50,000
Being cash started with
capital of Kshs. 500,000
Jan, 5 Purchases L-3 40,000
Bank account CB-1 40,000
Being purchase of 2 sofa
sets
Jan, 7 Purchases L-3 10,000
Bank account CB-1 10,000
Being purchase of dining
table and 6 chairs
Jan, 10 Bank account CB-1 30,000
Sales L-2 30,000
Being sale of 1 sofa set
Jan, 15 Bank account CB-1 17,500
Sales L-2 17,500
Being sale of dining table
and 6 chairs
Jan, 20 Bank account CB-1 28,000
Sales L-2 28,000
Being sale of 2nd sofa
set
Advertisement and
Jan, 30 sundries L-4 3,000
Bank CB-1
Being payment for
advertisement and
sundry expenses
Ledgers

CASH ACCOUNT (CB - 1)

DR CR
Date Particulars J.R Amount Date Particulars J.R Amount
Jan, 1 Capital L-1 500,000 Jan, 5 Purchases L-3 40,000
Jan, 10 Sales L-2 30,000 Jan, 7 Purchases L-3 10,000
Jan, 15 Sales L-2 17,500 Jan, 30 Sundry L-4 3,000
Jan, 20 Sales L-2 28,000

M. WILLIAM CAPITAL ACCOUNT (L-1)

DR CR
Date Particulars J.R Amount Date Particulars J.R Amount

Jan, 1 CB-1 500,000

SALES LEDGER (L-2)

DR CR
Date Particulars J.R Amount Date Particulars J.R Amount
Jan, 10 Sales CB-1 30,000
Jan, 15 Sales CB-1 17,500
Jan, 20 Sales CB-1 28,000

PURCHASES LEDGER (L-3)

DR CR
Date Particulars J.R Amount Date Particulars J.R Amount
Jan, 5 Purchases CB-1 40,000
Jan, 7 Purchases CB-1 10,000

SUNDRY EXPENSES LEDGER (L-4)

DR CR
Date Particulars J.R Amount Date Particulars J.R Amount
Jan, 30 Advertisement CB-1 3,000

Example 2 solution (Walter)

Journal entries
Ledger
Date Particulars Folio Debit Credit
Jan, 1 Bank account 2,000,000
Capital account 2,000,000
Being cash started with
capital of Kshs. 2,000,000
Jan, 6 Motor vehicle L-3 800,000
Bank account CB-1 800,000
Being purchase of motor
vehicle
Jan, 9 Purchases L-3 400,000
AB & Co. (Creditor) CB-1 400,000
Being purchase of goods on
credit
Jan, 13 XY & Co. (Debtor) CB-1 300,000
Sales L-2 300,000
Being sale of goods to XY &
Co.
Jan, 25 AB & Co. (Creditor) CB-1 400,000
Bank account L-2 400,000
Being payment for purchases

Ledgers (Walter accounts continued)

 WALTER CAPITAL ACCOUNT
DR CR
Date Particulars J.R Amount Date Particulars J.R Amount
Jan, 1 Bank CB-1 2,000,000

MOTOR VEHICLE ACCOUNT

DR CR
Date Particulars J.R Amount Date Particulars J.R Amount

Jan, 6 Bank 800,000

PURCHASES ACCOUNT
DR CR
Date Particulars J.R Amount Date Particulars J.R Amount
Jan, 9 A.B & Co 400,000

AB & Co. ACCOUNT (Creditor)

DR CR
Date Particulars J.R Amount Date Particulars J.R Amount
Jan, 25 Purchases 400,000 Jan, 9 Purchases 400,000

SALES ACCOUNT
DR CR
Date Particulars J.R Amount Date Particulars J.R Amount
Jan, 13 XY & Co. 300,000

XY & Co. ACCOUNT (Debtor)

DR CR
Date Particulars J.R Amount Date Particulars J.R Amount
Jan, 13 Sales 300,000

BANK ACCOUNT
DR CR
Date Particulars J.R Amount Date Particulars J.R Amount
CB-
Jan, 1 Walter 1 2,000,000 Jan, 6 Vehicle 800,000
 Jan, 25 Purchases 400,000

Balance c/d 800,000

2,000,000 2,000,000