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We’ve just processed all our transactions into journals. The next step in the accounting process is entering these journal entries into ledgers.  

Think of a ledger as a summary of transactions that relate to a certain account. For example, our bank ledger will summarise all the transactions that involved our bank account; our loan ledger will summarise all the transactions that involved our loan account and so on.

What is Ledger & How to create One

Ledgers are important because they summarise all our transactions into a single balance. For example, instead of knowing that we spent $100 on car expenses in July, $300 in August, $600 in September, $500 in November and so on, our ledger will simply tell us we spent $1,500 in total. By using ledgers, we are able to summarise hundreds or even thousands of transactions into a single balance! Obviously that makes things a lot easier to manage.

A ledger consists of 4 things:

1.       An opening balance

2.       A debit side

3.       A credit side

4.       A closing balance

Let’s have a look at an example.

BANK LEDGER DEBIT CREDIT
Opening balance $0  
     

 

This is an empty BANK ledger. Notice how the opening balance is on the debit side, because BANK is an asset, which is a debit account.

Likewise, for a credit account like Owners Equity, the opening balance will be on the credit side.

Every journal entry which includes the bank account will be recorded in this ledger. Let’s take a look at a journal entry from the previous lessons. Here’s the first one.

 

Transaction 1: You decide to start a business. To start the business off, you deposit $10,000 of your savings into the business bank account.

Dr Bank $10,000
Cr Owners’ Equity $10,000

                       

So the two accounts in this transaction are Bank and Owners Equity. That means we’ll be making entries to our Bank and Owners Equity ledgers. Let’s do the Bank ledger first.

The journal entry says we need to make a debit movement to the bank account of $10,000. Let’s enter it in our ledger below. It’s as simple as entering $10,000 in the debit column.

BANK LEDGER

Details DEBIT CREDIT
Opening balance $0  
Owners Equity $10,000  

 

That’s it!

In the Details column, we will write “Owners’ Equity”. This allows us to see where the $10,000 came from.

Easy! Now let’s do the Owners’ Equity ledger.

 

OWNERS EQUITY LEDGER

Details DEBIT CREDIT
Opening balance   $0
Bank   $10,000

 

Because Owners Equity is a credit account, we put the opening balance on the credit side.

The journal entry shows a credit of $10,000 to Owners Equity. To record this in the ledger, it is as simple as putting $10,000 in the credit column. In the Details column, we’ll write “Bank”, as this allows us to see what the other side of the transaction was.

Done! We’ve just done our first two entries into our ledgers.

Now let’s look at the rest of the journals from our lesson 7, and see if we can enter them correctly into our ledgers.

Transaction 2: You take out a business loan of $10,000.

Dr

Bank

$10,000

Cr

Loan

$10,000

 

Because our journal consists of entries to the Bank and Loan accounts, we’ll need the Bank and Loan ledgers.

BANK LEDGER

Details DEBIT CREDIT
Opening balance $0  
Owners Equity $10,000  
Loan $10,000  

 

The journal shows a debit to bank of $10,000, so we simply put $10,000 in the debit column of our bank ledger. Notice how the previous entry, the $10,000 to Owners Equity from our earlier transaction, is in the ledger also. This is because the idea of a ledger is to collect ALL transactions related to an account in one place. By the end of the exercise, there will be over 10 transactions in this ledger alone.

Now let’s look at the other side of the transaction – the Loan account.

LOAN LEDGER

Details DEBIT CREDIT
Opening balance   $0
Bank   $10,000

 

Because the journal entry shows a credit to Loan of $10,000, we simply enter $10,000 in the credit column of the Loan ledger. We’ll put the corresponding side of the journal in the details column. In this case, it’s Bank!

 

Transaction 3:
You purchase your iPhone for $500.


Dr

iphone

$500

Cr

Bank

$500

Transaction 4:
You put another $5,000 of your own money into the business.



Dr

Bank

$5,000

Cr

Owner's Equity

$5,000

Transaction 5:
You pay back $1,000 of the loan (no interest).



Dr

Loan

$1,000

Cr

Bank

$1,000

Transaction 6:
You purchase a computer for $1,500.



Dr

Computer

$1,500

Cr

Bank

$1,500

Transaction 7:
You purchase a Bakemaster oven for $2,000



Dr

Oven

$2,000

Cr

Bank

$2,000

Transaction 8:
You buy some cake mix for your store for $3,000.



Dr

Cake mix

$3,000

Cr

Bank

$3,000

Transaction 9:
You pay interest on the loan of $1,000



Dr

Interest

$1,000

Cr

Bank

$1,000

Transaction 10:
You sell a box of cakes for $5,000.



Dr

Bank

$5,000

Cr

Sales

$5,000

Transaction 11:
You pay your telephone bill of $300.



Dr

Telephone expense

$300

Cr

Bank

$300

Transaction 12:
You sell another box of cakes for $2,000.



Dr

Bank

$2,000

Cr

Sales

$2,000

Transaction 13:
Your computer breaks. You pay a repairman $50 to fix it.



Dr

Repairs

$50

Cr

Bank

$50

Transaction 14:
As the owner of the business, you withdraw $1,000 in cash for a personal holiday.



Dr

Drawings

$1,000

Cr

Bank

$1,000

Transaction 15:
You purchase a car from Johns Car Shop for $3,000. You purchase the car on credit, meaning you will pay for it in full next month



Dr

Car

$3,000

Cr

John’s Car Shop

$3,000



BANK LEDGER
Details DEBIT CREDIT
Opening balance $0  

Owners Equity

$10,000

 

Loan

$10,000

 

Iphone

$500

Owners Equity

$5,000

 

Loan

$1,000

Computer

$1,500

Oven

$2,000

Cake mix

$3,000

Interest

$1,000

Sales

$5,000

Telephone

$300

Sales

$2,000

Repairs

$50

Drawings

$1,000



OWNERS EQUITY LEDGER
Details DEBIT CREDIT
Opening balance   $0
Bank   $10,000
Bank   $5,000
Loan Ledger
Details DEBIT CREDIT
Opening balance   $0
Bank   $10,000
Bank $10,000
Iphone Ledger
Details DEBIT CREDIT
Opening balance   $0
Bank $500
Computer Ledger
Details DEBIT CREDIT
Opening balance $0
Bank $1,500
Oven Ledger
Details DEBIT CREDIT
Opening balance $0
Bank $2,000
Cake Mix Ledger
Details DEBIT CREDIT
Opening balance $0
Bank $3,000
Interest Ledger
Details DEBIT CREDIT
Opening balance $0
Bank $1,000
Sales Ledger
Details DEBIT CREDIT
Opening balance $0
Bank $5,000
Bank $2,000
Telephone Ledger
Details DEBIT CREDIT
Opening balance $0
Bank $300
Repairs Ledger
Details DEBIT CREDIT
Opening balance $0
Bank $50
Drawing Ledger
Details DEBIT CREDIT
Opening balance $0
Bank $1,000
Car Ledger
Details DEBIT CREDIT
Opening balance $0
Johns Car Shop $3,000


John's Car Ledger Drag & Drop in Table below -
Details DEBIT CREDIT
Opening balance $0
Car $3,000

Now that we’ve entered all our journals into our ledgers, let’s take a look at what to do next. Here’s the first one.

LOAN LEDGER

Details

DEBIT

CREDIT

Opening balance

 

$0

Bank

 

$10,000

Bank

$1,000

 

TOTAL

$1,000

$10,000

 

 

 

Minus debits

 

-$1,000

BALANCE

 

$9,000

 

Ok troops, listen carefully! This gets a little tricky.

In this ledger we have entries on both the debit and credit sides.

First, we total up both sides. Take a look at the row that reads “TOTAL”. We have a total of $1,000 on the debit side and $10,000 on the credit side.

Now we simply SUBTRACT THE SMALLER SIDE FROM THE LARGER SIDE to find our balance. In this case we subtract the $1,000 from the $10,000. This is illustrated in the row that reads “MINUS DEBITS”.

This leaves us with a balance on the credit side of $9,000. That’s it! High five amigo - you’ve completed your first ledger.

  What is Ledger & How to create One                                  

 

Now let’s go ahead and complete the rest of them.

This first one is easy. Because there’s only movements on the credit side, there’s no need to fiddle around with it. Simply total up the CREDIT column and there’s your balance!

JOHNS CAR SHOP LEDGER


Details

  1. Opening balance

Debit

  1.  

Credit


  1. $0
  1.  
    Car
  1.  

  1.  
    $3,000
  1.  
    Balance
  1.  

  1.  

CAR LEDGER


Details

  1. Opening balance

Debit

  1.  
  2. $0

Credit



  1.  
    Car
  1.  
    $3,000
  1.  

  1.  
    Balance
  1.  

  1.  

 

BANK LEDGER

Details

DEBIT

CREDIT

Opening balance

$0

 

Owner’s Equity

$10,000

 

Loan

$10,000

 

iPhone

 

$500

Oven

 

$2,000

Owner’s Equity

$5,000

 

Loan

 

$1,000

Computer

 

$1,500

Cake mix

 

$3,000

Interest

 

$1,000

Sales

$5,000

 

Telephone

 

$300

Sales

$2,000

 

Repairs

 

$50

Drawings

 

$1,000

 

 

 

TOTAL

$32,000

$10,350

Minus credits

-$10,350

 

 

 

 

BALANCE

$21,650

 

 

Magnifico! We’ve just completed all our ledgers. So what does this mean?

This means we finally have a balance of all our accounts. After entering all our sales in the sales ledger, we know the total amount of our sales. After entering all our bank transactions in our bank ledger, we know the final balance in our bank. And after entering all our expense payments in our expense ledgers, we know the total amounts of each expense!

Now that we have all our balances, we’re ready to start putting together some reports! My gosh, you’re starting to look like an accountant already.

Ok, you ready? Let’s go.

 

 

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