Classification Of Ledger Accounts Pdf

[Galeno Kent]

Youneed to record various business transactions in your books of accounts based on the dual aspect of accounting. Thus, as per the Duality Principle, each transaction involves a minimum of two accounts while recording into books. This means one account increases and the other account decreases.

Thus, accounts that get Debited or Credited are used to denote the give and take involved in every transaction. So such a system of debit and credit helps in finding out the final position of every item at the end of the given accounting period.

Now, each of your transactions follows a procedure before they are represented in the final books of accounts. First, the transactions are recorded in the Original Book of Entry, known as Journal. Once the Journal is complete, these transactions are then posted to individual accounts contained in General Ledger.

Then, the balance of each of the General Ledger Accounts is posted in your Trial Balance Sheet. Once you complete the Trial Balance, the account balance is finally entered in the income statement and the balance sheet.

General Ledger refers to a record containing individual accounts showcasing the transactions related to each of such accounts. It is a group or collection of accounts that give you information regarding the detailed transactions with respect to each of such accounts.

For example, say you purchase raw material from your vendor William Paper Mill throughout the year. Accordingly, all the cash or credit purchase transactions entered into with William Paper Mill would be recorded under the account of William Paper Mill.

General Ledger is a principal book that records all the accounts of your company. It is one of the important books of accounts for your business. Furthermore, all the accounting entries are transferred from the Journal to the Ledger.

This means you first need to record a business transaction in your Journal. Remember, you need to record each of them in Journal in the order in which they occur. Once you record the transaction in the Journal, you are then required to classify and transfer it into a specific General Ledger account.

Say you own a publishing house Martin & Co. and purchased 20 kg paper on cash at $20 per kg on December 1, 2020. Therefore, the following is the journal and ledger that you need to record into books for such a transaction.

In other words, you record transactions under the individual General Ledger accounts to which such transactions relate. Further, these transactions are recorded based on the Duality Principle of Accounting.

Thus, each transaction of your business takes place in such a way that this equality between the two sides of the accounting equation is always maintained. That is, at any point in time, the resources or the assets of your business must equate to the claims of owners and outsiders.

Sales Ledger or Debtors Ledger is one of the three types of Ledgers that you prepare as a firm or a business entity. It records all the transactions that take place between you and your debtors. Here, debtors are nothing but the business entities to whom you have sold goods that you manufacture.

Furthermore, you can refer back to the details with regards to the sales made in case you need to do so in the future. Likewise, Sales Ledger also helps you to keep track of payments received and yet to be received from your customers.

Purchases Ledger is a Ledger that records all transactions related to purchases that your business entity makes. In other words, Purchase Ledger records all the transactions taking place between you and your suppliers.

Further, the purchase ledger helps you to know the amount you pay to the creditors as well as the outstanding amount. Besides this, you can refer back to the purchase details in case you need to so in the future.

A General Ledger is a Ledger that contains all the ledger accounts other than sales and purchases accounts. Therefore, you need to prepare various sub-ledgers providing the requisite details to prepare a single ledger termed as General Ledger.

You cannot prepare financial statements like Trading and P&L and balance sheets without General Ledger. This is because the detailed accounts in General Ledger help you in preparing the trial balance.

Further, the Trial Balance ensures that the information contained in your Ledger Accounts is accurate. Therefore, you can further use the accurate amounts showcased in your Trial Balance to prepare the financial statements. These statements include the income statement and the balance sheet.

You may choose to conduct an internal audit or get your accounts audited by an accounting professional. Therefore, General Ledger acts as an important financial record that is audited whatever may be the case.

Furthermore, General Ledger Accounting also helps you to spot material misstatements with regard to various accounts. Also, the accounting professional auditing your company accounts may ask for sales receipts, purchase invoices, etc. They may do so in order to check if proper amounts are charged.

Likewise, the revenue and expense accounts give an accurate view of the incomes earned or the expenses incurred. Thus, these details come in handy as you do not have to look for invoices or bank statements at the time of filing tax returns.

Further, this could become a cause of concern for you as a business entity. Say, for instance, you were overcharged for an item you purchased. Now, it becomes challenging for you to identify this transaction if the Ledger Accounts are not prepared. This is because there are a number of transactions that occur during an accounting period.

General Ledger Accounts are the basis on which you prepare Trial Balance. From Trial Balance, you are able to prepare statements of final accounts. These include the income statement and balance sheet. Such financial statements help you in knowing the profitability and overall financial position of your business.

A Control Account is nothing but a General Ledger Account where you record only the summarized information regarding a specific account. It does not contain detailed information related to such an account. Thus, you need to refer to a related subsidiary ledger to know the details of such a control account.

Thus, as per the above table, the credit sales figure of $200,000 would go into the accounts receivable control account. Whereas, the sales details of various debtors like Jack & Co., Mayers, and John can be found in the related subsidiary ledger.

Assets are nothing but the resources your business entity owns. These resources have the capacity to generate cash flows. Thus, assets are items of economic value that can be converted into cash or cash equivalents.

Liabilities are the amounts you owe to individuals or outsiders. These are the financial obligations that you are bound to fulfill. Further, these are the obligations that you have to fulfill for the amounts you have borrowed and which have not yet been paid for.

Also, liabilities can be represented on the right-hand side of the balance sheet. So, liabilities can be further divided into current liabilities and non-current liabilities. The following are examples of liabilities.

Operating Expenses are the expenses that you must mandatorily incur to run the day-to-day operations of your business. Thus, these are the expenses without which you would not be able to carry out your core business operations. Examples of Operating Expenses include rent, payroll, insurance, etc.

Unlike Operating Expenses, the Non-Operating Incomes and Expenses are one-time incomes or expenses that you earn or incur. Neither are gains an outcome of your core business activity. Nor are such expenses related to your core business operations.

All General Ledger accounts can be classified into five categories. Examples of Ledger Accounts under these five categories. Some of these accounts are balance sheet accounts and some are income statement accounts.

Furthermore, unlike journal where transactions are recorded in chronological order as they occur. Thus, you record transactions in the ledger by classifying them under various account heads to which they relate.

Likewise, having proper Ledger Accounts help you to prepare the Trial Balance Sheet. Thus, with the Trial Balance, you can verify the accuracy of your accounts and prepare final accounts. These accounts may include the Income Statement and Balance Sheet.

Furthermore, a General Ledger helps you to know the overall profitability and financial health of your business entity. In addition to this, the detailed information contained in General Ledgers helps you to do the audit smoothly.

Furthermore, you identify errors or misstatements and take the requisite actions to make good the errors. Therefore, your or your accountants go through each of the accounts individually if you prepare Journal and Ledger manually.

Further, you also match General Ledger Account balances to the source documents to see if the accounts are accurate. However, with online accounting software like QuickBooks, the General Ledger Reconciliation had become a lot easier.

Whereas, the income statement accounts like operating, non-operating income and expenses start afresh in every accounting period. That is, these accounts must have a NIL balance at the beginning of the accounting period.

Under this step, you need to check the amounts recorded in each transaction forming part of your General Ledger. So,you will have to keep your source documents handy if you are preparing your General Ledger Accounts manually.

These sources help you to verify that the amounts recorded in the Ledger accounts are accurate. However, reconciling individual account balances becomes extremely easy with online accounting software like QuickBooks.

Suppose you discover after reconciliation that certain amounts were not correctly recorded in your Ledger. It could be an entry with an incorrect amount or an entry you completely omitted to record in your General Ledger Accounts.

For example, you identified that a payment of $1,000 to your vendor William Paper Mill was wrongly recorded as $100. Now, the best practice of recording a correct entry is to reverse the original entry and then record a new entry with the correct amount.

3a8082e126