Acca f3 Financial Accounting (int) Study Text

Part C  The use of double entry and accounting systems

  5:  Ledger accounts and double entry

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(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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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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