Peter Marshall Bsc (Econ) BA MBIM is a Fellow of the Society of Business Teachers, and an experienced educator in business subjects. He is also a prolific author and his books have been translated and sold worldwide. He lives in London, UK.
The firm’s official record
The ledger is the ‘official’ record of a firm’s accounts. We sometimes speak of the general ledger, the bought ledger, sales ledger and cash book separately—as if they were separate ‘ledgers’. But to an accountant the ledger is a single unit, even if it is made up of physically separate books. The ledger is really a ‘system’ rather than a book. Whatever form it takes—books or computer disks, etc—’the ledger’ means the master record of all the firm’s financial affairs.
Divisions of the ledger
We have already discovered two parts of the ledger—the cash book and the petty cash book—which also happen to be books of prime entry. The only difference in the ruling between that and the other divisions we will now deal with is that the latter are simpler. The cash book has three cash columns on each side; the other divisions of the ledger have only one. (However where ledger posting is done on a computer the format involves three columns, a debit and credit column and a running balance column. This is because the running balance can easily be calculated electronically—it doesn’t call on the time and effort of the book-keeper. In manual systems, working out such running balances is considered a waste of time.)
The other ledger divisions are:
- the general ledger (often called the nominal ledger)
- the personal ledger, subdivided into bought ledger (or purchase ledger) and sales ledger (or debtors ledger)
- a private ledger is sometimes kept, in which capital items are posted, for example proprietor’s drawings. It is sometimes kept away from staff because the proprietor considers such information confidential.
The nominal and personal ledger
In the nominal ledger the impersonal aspects of transactions are posted, for example purchases, sales figures, wages, stationery and asset purchases. In the personal ledger the personal side of each transaction is posted, i.e. the credit to suppliers’ accounts when the firm has purchased something, and the debit to customers’ accounts when the firm has sold something.
Different accounts within the ledger
Each part of the ledger contains a number of different accounts—one for each expense item, revenue asset or liability, as they will appear in the final accounts. For example, there will be an account for purchases, an account for sales, an account for wages, and a separate account for each asset such as Motor car 1 account, Motor car 2 account or Printing machine account, and so on.
A variety of forms
Though the ruling of each type of book is reasonably standard, both the ledger and books of prime entry are found in a variety of forms. Indeed, they don’t have to be ‘books’ at all. They can be sheets of analysis paper in a loose leaf binder, or written into a computer program so that the rulings appear on a VDU screen. Entries are then made via the keyboard rather than with pen and paper.
In a looseleaf ledger system these divisions (sales, purchases, nominal, etc) may take the form of cardboard page dividers. If bound books are used, each division may be a physically separate bound book. The personal ledger (purchase ledger/sales ledger) will contain a separate account for each supplier and customer. The arrangement of accounts in each division is flexible.
Post only from books of prime entry
Nothing should ever be posted into the ledger except from the books of prime entry.
Never, for example, post information into the ledger directly from such things as invoices, bank statements, cheque counterfoils, petty cash receipt slips and so on. These are source documents for the books of prime entry.
Recording each transaction twice
We have already seen how each transaction in double entry book-keeping has two aspects—a debit and a credit. So each transaction has to be recorded in two separate places, on the debit side and on the credit side. It follows that at any moment in time the total number of debit entries must exactly equal the total of credit entries (unless a mistake has been made). In a small office, one ledger clerk will probably handle all the divisions (except perhaps the cash book). In a large firm there may be a separate bought ledger clerk, sales ledger clerk, and so on.