Part C The use of double
entry and accounting systems
5: Ledger accounts and double entry
73
(b) Built
up
in
cumulative totals.
(i)
Day by day (eg total sales on Monday, total sales on Tuesday)
(ii) Week
by
week
(iii) Month
by
month
(iv)
Year by year
We have already seen the first step in this process, which is to list all the transactions in various books of
prime entry. Now we will look at the method used to summarise these records:
ledger accounting and
double entry.
This system of summarising information speeds up the provision of useful information to managers and
so helps managers to keep to organisational deadlines (eg provision of monthly profit figures for
management purposes).
2 The nominal ledger
The principal accounts are contained in a ledger called the
general or
nominal ledger.
The
nominal ledger is an accounting record which summarises the financial affairs of a business.
The nominal ledger is sometimes called the
'general ledger'. The information contained in the books of
prime entry (see
Chapter 4
) is
summarised and
posted to accounts in the nominal ledger.
It contains details of assets, liabilities, capital, income and expenditure, and so profit and loss. It consists of a
large number of different accounts, each account having its own purpose or 'name' and an identity or code.
There may be various subdivisions, whether for convenience, ease of handling, confidentiality, security, or
to meet the needs of computer software design. For example, the ledger may be split alphabetically, with
different clerks responsible for sections A-F, G-M, N-R and S-Z. This can help to stop fraud, as there
would have to be collusion between the different section clerks.
Examples of accounts in the nominal ledger include the following.
(a)
Plant and machinery at cost (non-current asset)
(b)
Motor vehicles at cost (non-current asset)
(c)
Plant and machinery, provision for depreciation (liability)
(d)
Motor vehicles, provision for depreciation (liability)
(e) Proprietor's
capital
(liability)
(f)
Inventories – raw materials (current asset)
(g)
Inventories – finished goods (current asset)
(h)
Total trade accounts receivable (current asset)
(i)
Total trade accounts payable (current liability)
(j)
Wages and salaries (expense item)
(k)
Rent and local taxes (expense item)
(l)
Advertising expenses (expense item)
(m) Bank charges (expense item)
(n)
Motor expenses (expense item)
(o)
Telephone expenses (expense item)
(p) Sales
(revenue
item)
(q)
Total cash or bank overdraft (current asset or liability)
When it comes to drawing up the financial statements, the revenue and expense accounts will help to form
the income statement; while the asset and liability accounts go into the statement of financial position.
2.1 The format of a ledger account
If a ledger account were to be kept in an actual book, rather than as a computer record, it might look
like this:
Key term
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74
5: Ledger accounts and double entry Part C The use of double entry and accounting systems
ADVERTISING EXPENSES
Date Narrative
Ref. $ Date Narrative
Ref. $
20X6
15 April JFK Agency for quarter
to 31 March
PL 348 2,500
For the rest of this chapter, we will assume that a manual system is being used, in order to illustrate fully
the working of the ledger accounts. However, a computerised system performs the same functions
although the actual ledger accounts may be 'hidden' inside the computer!
There are two sides to the account, and an account heading on top, and so it is convenient to think in
terms of 'T' accounts.
(a)
On top of the account is its name.
(b)
There
is a left hand side, or debit side.
(c)
There is a right hand side, or credit side.
NAME OF ACCOUNT
DEBIT SIDE
$
CREDIT SIDE
$
We will look at ‘debits’ and ‘credits’ in detail in Section 4, but first we shall consider the accounting
equation.
3 The accounting equation
The
accounting equation emphasises the equality between assets and liabilities (including capital as
a liability).
We will start by showing how to account for a business's transactions from the time that trading first
begins. We will use an example to illustrate the 'accounting equation', ie the rule that the assets of a
business will at all times equal its liabilities. This is also known as the
statement of financial position
equation.
3.1 Example: The accounting equation
Business entity concept. Regardless of how a business is legally set up, in accounting a business is
always treated separately from its owners(s).
Liza Doolittle starts a business. The business begins by owning the cash that Liza has put into it, $2,500.
The business is a separate entity in accounting terms and so it owes the money to Liza as
capital.
In accounting,
capital is an investment of money (funds) with the intention of earning a return. A business
proprietor invests capital with the intention of earning profit. As long as that money is invested,
accountants will treat the capital as money owed to the proprietor by the business.
When Liza Doolittle sets up her business:
Capital invested
=
$2,500
Cash =
$2,500
Capital invested is a form of liability, because it is an amount owed by the business to its owner(s).
Adapting this to the idea that assets and liabilities are always equal amounts, we can state the accounting
equation as follows.
Key term
Key term
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