What is a Ledger in Accounting? Posting, Balancing & Examples Explained

The ledger, known as the principal book of accounts, is where all journal entries are classified and summarized account-wise into personal, real, and nominal accounts. The process of transferring entries from the journal to the ledger is called posting, using traditional terms “To” (debit) and “By” (credit).

Each ledger account is balanced by totaling both sides and calculating the difference, which becomes the closing balance (c/d) and is carried forward as the opening balance (b/d) in the next period. While real and personal account balances appear on the balance sheet, nominal account balances are transferred to the profit and loss account at the end of the accounting period.

Unit 2: Ledgers – Exam Notes

Key Concepts

1. Ledger

• Principal book of accounts.
• Contains all personal, real, and nominal accounts.
• Used to classify and summarize transactions from the Journal.

2. Ledger Format

• Two sides: Debit (Dr) and Credit (Cr).
• Columns: Date, Particulars, Journal Folio (J.F.), Amount.

3. Posting

• Transferring journal entries to appropriate ledger accounts.
• Rules of Posting:
  1. Open separate account for each entry.
  2. Use “To” (for debit side) and “By” (for credit side) for clarity.
  3. Ensure debits in journal go to debit side of ledger and vice versa.

4. Balancing an Account

• Total both sides of an account.
• If debit > credit, it’s a debit balance (recorded as By Balance c/d).
• If credit > debit, it’s a credit balance (recorded as To Balance c/d).
• The closing balance is brought forward as opening balance in the next period using To/By Balance b/d.

5. Types of Accounts

• Nominal accounts (e.g., sales, expenses): Not carried forward, transferred to Profit & Loss A/c.
• Personal & Real accounts: Carried forward, shown in Balance Sheet.

Important Illustrations Covered

• Illustration 1: Stationery account with opening balance and purchases (cash + credit).
• Illustration 2: Full set of ledger accounts based on transactions (Cash, Bank, Inventory, Sales, Purchases, etc.).
• Illustration 3: Preparation of personal accounts of Mr. H and Mr. R with adjustments like discount, returns, insolvency.

Summary Points

• Posting = Transferring entries from Journal to Ledger.
• Ledger = Principal book, gives account-wise details.
• Nominal account balances → Profit & Loss A/c.
• Real & Personal account balances → Balance Sheet.
• “To” and “By” are traditional markers; no actual accounting value.

True/False Sample Answers

1. Ledger = Principal book of accounts → ✅ True
2. Cash account has debit balance → ✅ True
3. Posting is from ledger to journal → ❌ False
4. Nominal accounts are balanced → ❌ False (they are closed, not balanced)
5. Ledger records in chronological order → ❌ False (Journal does; Ledger is analytical)

MCQ Practice

1. Posting refers to? → (a) Posting
2. Finding net balance is called? → (c) Balancing of an account
3. Journal vs Ledger order? → (a) Chronological and Analytical
4. Ledger book is? → (b) Principal book of accounts
5. Nominal accounts at year end? → (c) Not balanced, transferred to P&L

Theory Questions (Prepare Brief Answers)

1. Principal Book of Accounts: Ledger is the main book summarizing transactions per account.
2. Rules of Posting:
   • Open separate ledger for each account.
   • Use “To” and “By” for debit and credit respectively.
   • Mirror the journal’s debit/credit in the ledger.

FAQs on Ledger Accounting

1. What is a ledger in accounting?
   A ledger is the principal book of accounts that contains all personal, real, and nominal accounts used to classify and summarize financial transactions.
2. Why is the ledger called the principal book of accounts?
   Because it is the final repository of all accounting entries and is used to prepare the trial balance and financial statements.
3. What is the purpose of a ledger?
   To maintain a detailed and classified record of all transactions related to individual accounts (assets, liabilities, income, expenses, etc.).
4. What are the types of accounts in a ledger?
   Personal, Real, and Nominal accounts.
5. What is posting in accounting?
   Posting is the process of transferring journal entries to the respective accounts in the ledger.
6. What are the rules of posting?

• Each account must be posted separately.
• Use “To” for debit entries and “By” for credit entries.
• Ensure correct referencing from journal to ledger.

7. What does ‘To’ and ‘By’ mean in a ledger?
   They are traditional markers used in ledger accounts to indicate debit (To) and credit (By) sides, respectively; they have no accounting value.
8. What is a Journal Folio (J.F.)?
   It is the page number of the journal from where the transaction is posted to the ledger.

9. What is balancing of an account?
   Balancing means totaling both sides of a ledger account and finding the difference, which is carried forward to the next period.
10. What is Balance c/d and Balance b/d?

• Balance c/d = Carried Down (closing balance of the current period).
• Balance b/d = Brought Down (opening balance of the next period).

11. What if debit > credit in an account?
    The account has a debit balance.
12. What if credit > debit in an account?
    The account has a credit balance.
13. Are nominal accounts balanced?
    No, they are closed at the end of the year and transferred to the Profit & Loss account.
14. Which accounts are shown in the balance sheet?
    Only real and personal accounts appear in the balance sheet.
15. When should a ledger account be balanced?
    Typically at the end of a month, year, or reporting period.

16. How is a cash account recorded in the ledger?
    All cash receipts are debited, and all cash payments are credited.
17. What is a compound journal entry and how is it posted?
    It involves multiple debits or credits and is posted separately in each related ledger account.
18. What is a personal account example?
    Accounts of people or firms, like creditors or debtors (e.g., Mr. A’s Account).
19. What is a real account example?
    Asset accounts like Building, Cash, Inventory.
20. What is a nominal account example?
    Revenue and expense accounts like Sales, Rent, Commission, Salary.

21. How do ledger and journal differ?

• Journal records transactions chronologically.
• Ledger classifies and summarizes those entries account-wise.

22. Can a ledger exist without a journal?
    No, journal entries form the basis for ledger postings.
23. What happens if ledger accounts are not balanced?
    Trial balance and financial statements may be inaccurate or misleading.
24. What is the role of the ledger in preparing trial balance?
    Trial balance is prepared by taking closing balances from the ledger accounts.
25. What is the impact of incorrect posting?
    It can cause imbalances in accounts, wrong financial reports, and errors in the trial balance.

The ledger is a cornerstone of the accounting process, serving as the principal book where all journal entries are systematically classified into individual accounts. Through the process of posting, transactions are organized, making it easier to track the financial activities of a business. Balancing each account ensures accuracy and helps identify the financial position at any point in time.

While nominal accounts are closed to the profit and loss account, real and personal account balances are carried forward and reflected in the balance sheet. Mastering ledger posting and balancing not only strengthens fundamental accounting skills but also lays the groundwork for preparing accurate financial statements.