Key Terms
Key Terms: The Ledger
Learn the core terms of Chapter 5 so you can record, balance and classify accounts correctly in the exam. Each term comes with its meaning, a memory hook and how it is tested.
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The Ledger and Its Purpose
- The ledger (lejar) is the main book of record that gathers all the accounts of a business; its purpose is to classify and summarise transactions posted from the books of prime entry, by account, so the balance of each account can be found for preparing financial statements.
- Memory hook: books of prime entry 'record', the ledger 'classifies'. Picture the ledger as a filing cabinet where each account is a separate file collecting every effect that touches it.
- How it is tested: structured questions ask you to 'explain the purpose of preparing the ledger' (2-3 marks), or to post entries correctly from the journals / cash book into ledger accounts.
General Ledger and Subsidiary Ledgers
- The General Ledger (Lejar Am) holds all accounts except individual debtors' and creditors' accounts, that is, asset, liability, owner's equity, revenue, expense and Control Accounts. It is the main source for the financial statements.
- Subsidiary ledgers break down the detail: the Debtors' (Receivables) Subsidiary Ledger keeps an account for each debtor, and the Creditors' (Payables) Subsidiary Ledger keeps an account for each creditor. Their function is to show how much each customer or supplier owes or is owed.
- Format: an account may be drawn in 'T' form (debit on the left, credit on the right) or in columnar form (Date, Particulars, Folio, Debit, Credit, Balance). Remember that the columnar form shows a running balance after each entry.
- How it is tested: 'state the function of the General and Subsidiary Ledgers', or draw one account in both formats. A common slip is placing a debtor's account in the General Ledger; it belongs in the Subsidiary Ledger.
Real Accounts and Nominal Accounts
- Real accounts are accounts for assets and things that physically or permanently exist, e.g. Cash, Bank, Motor Vehicle, Office Equipment and Stock. Their balances are carried down to the next period.
- Nominal accounts are revenue and expense accounts such as Sales, Purchases, Rent, Salaries and Rates. Their balances are transferred to the Trading / Profit and Loss account at period end, so they are not carried down.
- Memory hook: 'Real = you can touch it or it lasts; Nominal = it flows in and out each period'. Ask: 'Does this remain after year-end?' If yes, it is Real.
- How it is tested: objective and structured questions ask you to 'classify the following accounts by group' in a table, listing each account under Real or Nominal.
Double Entry System, Debit, Credit and Normal Balances
- The double entry system means every transaction is recorded in at least two accounts, one debited and one credited, with total debits always equal to total credits. Debit is the left side of an account and credit is the right side.
- Recording rule: assets and expenses increase on the debit side; liabilities, owner's equity and revenue increase on the credit side. Example: for furniture bought for cash, debit Furniture (asset up) and credit Cash (asset down).
- The normal balance is the side on which an account usually stands: assets and expenses have debit balances; liabilities, owner's equity and revenue have credit balances. See the table below and memorise it, because it underpins the Trial Balance.
- How it is tested: identify the accounts involved, record transactions from a statement, and discuss the effects if the double entry system is not used (e.g. errors hard to detect, balances not agreeing, inaccurate financial statements).
Balancing Accounts: Balance b/d and Balance c/d
- Balancing an account means finding the difference between its total debit and total credit sides. The 'balance c/d' (carried down) is entered on the smaller side to make both sides equal, and the 'balance b/d' (brought down) opens the next period.
- Memory hook: c/d ('carried') closes the period first, then b/d ('brought') appears below the totals on the new date on the opposite side. The balance b/d shows the account's normal balance side.
- How it is tested: complete a ledger account down to the balance b/d, or state the expected balance type (debit/credit) and link it to the Trial Balance.
Control Accounts, Contra Entries and Minority Balances
- A Control Account is a summary account that checks the accuracy of a subsidiary ledger: the Receivables Control Account summarises all debtors, and the Payables Control Account summarises all creditors. Its information comes from the books of prime entry (journals, cash book).
- Common items: credit purchases/sales, receipts and payments, cash discounts, returns, bad debts, dishonoured cheques, discounts cancelled, and interest on overdue accounts. Each enters the Control Account according to its debit/credit effect.
- A contra entry arises when a person is both a debtor and a creditor of the business; the smaller amount is set off by reducing both accounts. This is one reason a Receivables Control Account can show a credit (minority) balance and a Payables Control Account a debit (minority) balance, alongside overpayments or advance payments.
- How it is tested: prepare a full Control Account, explain the cause of a minority balance, give a debtor-cum-creditor example, and explain the implications if a Control Account is not prepared (errors in the subsidiary ledger are hard to detect).
| Account Type | Normal Balance | Increases on | Decreases on |
|---|---|---|---|
| Asset | Debit | Debit | Credit |
| Liability | Credit | Credit | Debit |
| Owner's Equity | Credit | Credit | Debit |
| Revenue | Credit | Credit | Debit |
| Expense | Debit | Debit | Credit |
Memorise this table: it tells you the correct side in the ledger and the Trial Balance.
See the full glossary for this chapter →