Welcome to week 4
Week 3: Task 1 answer:
| Date | From (Credit) | To (Debit) | Amount |
| xx.xx.xxxx | Sales | Bank | 1000 |
Week 3: Task 2 answer:
| Date | From (Credit) | To (Debit) | Amount |
| xx.xx.xxxx | Sales | Debtors (Unpaid Invoices) | 500 |
Week 3: Task 3 answer:
| Date | From (Credit) | To (Debit) | Amount |
| xx.xx.xxxx | Consultancy | Bank | 300 |
Week 3: Task 4 answer:
| Date | From (Credit) | To (Debit) | Amount |
| xx.xx.xxxx | Bank | Fuel | 60 |
Week 3 : Task 5 answer:
| Date | From (Credit) | To (Debit) | Amount |
| xx.xx.xxxx | Bank | Credit Card | 600 |
Get the from/to credit/debit concept fixed in your mind and you will be able to figure out almost all transactions using logic. This is one of the most important things you will learn in order to pass any type of bookkeeping exam, or accurately record transactions in traditional bookkeeping and accounting books or software.
The Ledger
So far we have looked at places to record day to day transactions. These are day books, journals and a host of other names, but they all do the same thing: you record what is happening. And you record it chronologically. One transaction after another in date order, regardless of account.
The Ledger is just another book in the accounting system. But there is one important difference. It takes all your day book entries, and re-orders them by account. Yes, everything is recorded twice! Once in the journal, then once again in the ledger. That, by the way has nothing to do with the term double-entry. Remember, double-entry means recording the from/to credit/debit aspect of a transaction.
The entries from our daybooks or journals get into the ledgers via the system of posting. So we say we ‘post a journal to the ledger’. And why exactly do we go to all the bother of doing all the work again? Simple, once reordered by account, we will be able to work out the balance of each account. And that is at the core of why we keep books in the first place. To report to the Inland Revenue and the business owners.
We can see whether we are making a profit or loss. We can see how much money has been invested. We can find out how much money is owed by our customers (Debtors), and we can see how much we owe our suppliers (Creditors). In short, we will get the full picture and a feel or understanding of the finances of the business.
A ledger consists of all the accounts in a system. There may also be sub-ledgers. The balance of the sub-ledgers will be recorded in the main ledger. For example, a typical system will comprise of the following:
- General Ledger (aka Nominal Ledger – UK)
- Sales Ledger (sub-ledger)
- Purchase Ledger (sub-ledger)
The general ledger contains everything we need in order to complete a set of books either for management reports or for tax period ends. So lets take a look at an account and how it looks in the ledger (nb. there are other formats, most notably the ‘T’ account, covered later). This example is the simplest form and misses out important columns such as transaction numbers and references, but that is so you can appreciate exactly what it does:
| BANK | ||
| Date | Debit | Credit |
| xx.xx.xxxx | 500 | |
| xx.xx.xxxx | 50 | |
| xx.xx.xxxx | 225 | |
All your accounts have the same format. If you add up all the debits and all the credits, and subtract one from the other, you end up with the balance for that account:
| BANK | ||
| Date | Debit | Credit |
| xx.xx.xxxx | 500 | |
| xx.xx.xxxx | 50 | |
| xx.xx.xxxx | 225 | |
| Sum columns | 500 | 275 |
| BALANCE | 225 | |
We can see that this account (BANK) has a debit balance of 225 (we have used a simple method to balance this account, balancing is covered in detail in the next part). For a trained bookkeeper or accountant, they now know exactly what a debit balance means. But to a layperson, you can only guess whether that means the account has a positive balance, or is overdrawn, right? This is one of the first questions I ask when I am giving a talk to groups of people who are not bookkeepers/accountants. In every case, the majority gets it wrong.
But luckily, we have our little memory aid to help us: Debit = To. Therefore more money has flowed to the bank rather than from it, therefore the account has money in it. If this is your bank account shown in your set of books, it is good news!
Posting
So how do we get the journals into the ledger? This is the simplest thing in bookkeeping. It is pure copying. If the journal entry is a debit, then it is also a debit in the ledger. If it is a credit in the journal, it is a credit in the ledger. You are literally going to copy every entry in the journal directly into its relevant account in the ledger. Same date, same credit/debit column, same reference etc.
Up until software came along, that is what every bookkeeper did. It was open to error on a massive scale, so safeguards were put in place in order to ensure some kind of accuracy or checking. The most important of these is called the Trial Balance (covered in detail shortly). But the basic concept of recording the flow of money from somewhere to somewhere else, remains the best checking system. If the from and to sides, the credits and debits do not add up (when looking at all the accounts in a system), then there is an error.
Imagine a system where you only recorded one side. Say, a sale. Great. You would know whether you were making a profit or not, but you would have no idea how much you were owed or whether you had any money in the bank. Think of that as single entry. Hopefully, you can now appreciate why double-entry is the world standard, and why it has been around for 600 years.
A ledger consists of a table for each account. Each table contains the account name followed by as many rows as necessary to show all the individual entries for that account. Here’s an example shown in a single table so you get the idea of a single ledger showing all accounts. Extra rows will be required when we come to balance each account, but that is for later:
| Date/Account | Debit | Credit |
| BANK | ||
| xx.xx.xxxx | 100 | |
| xx.xx.xxxx | 50 | |
| SALES | ||
| xx.xx.xxxx | 150 | |
| xx.xx.xxxx | 200 | |
| xx.xx.xxxx | 50 | |
| EXPENSE | ||
| xx.xx.xxxx | 75 |
Task
There is only one task this week.
Task 1: Using the five answers from the previous task (shown at the start of this chapter), post all the entries into the ledger. You will need to draw up a table and convert them into proper journal entries, but you should have that from your working sheet from the last task. The first two are already prepared in that format from the previous chapter.
Hint: start from the first answer. Make sure you record both sides of the transaction. Do not skip. Go from left to right, top to bottom. The most common mistake when posting is to concentrate on just one account at first. Good luck.
Next Week
The ‘T’ Account
Balancing Accounts
The Trial Balance