Ledger & Trial Balance

Learning Objective: Post journal entries to ledger and prepare trial balance

After recording transactions in the journal, the next step is to organize them by account in the ledger. Think of it this way: the journal records events as they happen (like a diary), while the ledger groups all entries for each account in one place (like a filing cabinet). A tea estate in Ilam would have separate ledger pages for Cash, Tea Sales, Wages, and Fertilizer Purchases.

What Is a Ledger?

The ledger (or principal book of accounts) contains individual accounts where journal entries are posted. Each account has its own page with a debit (left) and credit (right) side.

Posting means transferring entries from the journal to the respective ledger accounts.

Example: Posting to a Cash Account

From our earlier journal entries (Ram's clothing business):

              Cash Account
 ──────────────────────────────────────
  Dr.                  |  Cr.
 ─────────────────────|────────────────
  2081/01/01           | 2081/01/10
  To Capital  3,00,000 | By Rent   10,000
                       | 2081/01/31
                       | By Balance c/d
                       |          2,90,000
 ─────────────────────|────────────────
              3,00,000 |          3,00,000

Steps for Posting:

1. Open the relevant ledger account.
2. Enter the date and amount on the correct side (debit or credit).
3. In the particulars column, write the name of the opposite account (e.g., "To Capital" or "By Cash").
4. At the end of the period, balance the account.

Preparing a Trial Balance

A trial balance is a list of all ledger account balances arranged in debit and credit columns. Its main purpose is to check the arithmetical accuracy of the ledger -- if double entry has been followed correctly, total debits must equal total credits.

Format:

| Account Name | Debit (Rs.) | Credit (Rs.) | |-------------|-------------|--------------| | Cash | 2,90,000 | | | Capital | | 3,00,000 | | Purchases | 50,000 | | | Hari (Creditor) | | 50,000 | | Rent | 10,000 | | | Total | 3,50,000 | 3,50,000 |

Errors Not Revealed by Trial Balance

Even when the trial balance agrees, certain errors may still exist:

• Error of Omission: A transaction is completely left out
• Error of Commission: Entry made in the wrong account of the same type (e.g., debiting Hari instead of Ram, both being debtors)
• Error of Principle: Entry made in the wrong type of account (e.g., recording machinery purchase as an expense)
• Compensating Errors: Two errors of equal amount cancel each other out

Key Term: Balancing an account means finding the difference between the debit and credit totals and carrying it forward to the next period.

Summary

• The ledger organizes journal entries by individual accounts.
• Posting transfers journal entries to the correct ledger accounts.
• A trial balance verifies that total debits equal total credits.
• Some errors (omission, commission, principle, compensating) are not detected by the trial balance.