We had been carrying out all this exercise of building the journal in a specific format. The target is to collect all the information relating to an element at a single place.

Does the Journal take us to the Target?

The Journal does not take us there.

In preparing the journal, we have taken a transaction and presented it as a statement in a specific format debiting an account and crediting another account. This gives us a list of journal entries in place of the transactions.

If we stop with preparing the journal and if we are to find the information relating to an element we have to conduct a heavy exercise, similar to the one that we conducted when there were no special accounting records and the transactions were recorded in a book in the form of a diary.

Ascertaining the Net amount due to or due from Mr. Shyam Rao

To ascertain the amount due from or due to a particular person (an element in accounting), we have to conduct the following exercise

• Mark the entries where the element/account head is either debited or credited.

  • Note the debits with amounts at a place.
  • Note the credits with amounts at another place.
• Add up all the debit amounts.
• Add up all credit amounts.
• Set off the sum of debits against the sum of credits to obtain the net balance.

This would give us the required information relating to the element Mr. Shyam Rao.

Net Balance

Since debits and credits are acts of opposing nature, we can set off the two totals and obtain the net balance. Here it is 119 debit ( 8,125 debit − 8,006 credit).

We can say that Mr. Shyam Rao, has received a net benefit of 119 (since we debit his account when he receives a benefit from us) which implies he is still due to us to that extent.

Debit amounts and Credit amounts are amounts of opposing nature.

Setoff implies cancelling the amounts of opposing nature against each other. It is like adding up a negative and a positive amount.

It would be convenient to assume that a smaller amount is being setoff against (deducted from) the larger amount. The balance is the difference between the two amounts being set off. The balance left would always carry the nature of the larger amount.

Eg : If a debit amount of 5,00,000 and a credit amount of 4,00,000 are being set off, we assume that the credit amount of 4,00,000 is being deducted from the debit amount of 5,00,000, thereby leaving a balance of 1,00,000 ( 5,00,000 − 4,00,000) debit.

The journal in itself does not collect the information relating to an element at a single place. But it enables the preparation of another record called the ledger which provides all the information relating to an element at a single place.

Ledger

A LEDGER is an accounting record (book) with each element or Account Head having its own allotted place. It is a collection of all the ledger accounts in the accounting system.

Ledger Account

Each element or accounting head in the organisational accounting system has a unique identity and distinct presence in the ledger and is called a LEDGER Account. It contains all the information relating to the element it represents.

No Journal ⇒ No Ledger

A ledger account is a derivative. It has no independent existence. It is derived from the journal. The Ledger is prepared by carrying the information in the journal to it. There is no other way a Ledger Account can be prepared. Therefore we say "No Journal No Ledger".

No Journal ⇒ No Accounting

At the starting stage, we learnt that the target to be achieved through this method being adopted for writing the journal is to collect all the information relating to an element at a single place. Accomplishing that target is achieved by preparing the LEDGER.

Thus we can say that the target to be achieved through this exercise is preparation of the LEDGER.

Since a Ledger cannot be prepared without the journal, we cannot achieve the target without the Journal. Thus, we can say "No Journal No Accounting"

The task of writing up the ledger based on the entries in the Journal is called POSTING. We Post information into the Ledger.

Posting

• Cause to be directed or transmitted to another place.
• putup
• send

Once a Journal is prepared, posting would involve just replicating the information in the ledger.

Journal : Recording :: Ledger : Posting

The act of writing down the journal is called recording and the act of writing down the ledger is called posting. The nature and the activity involved in the two acts is different.

• Preparing the Journal involves considering the proof an accounting transaction, analysing it, deciding the two accounts affected by the transaction, deciding which account is to be debited and which to be credited and then writing down the journal entry.
• Preparing the ledger involves just replicating the information in the journal into the ledger in a specified manner and format. There is no analysis involved.

We should be able to identify the intended book/record, based on the term in use.

• Recording ⇒ Writing in the Journal and
• Posting ⇒ Writing in the ledger.

Mechanised/Computerised Accounting

The fact that the information in the ledger is derived from the Journal has made it possible to mechanise/automise the preparation of the ledger. In computerised accounting, once a Journal entry is recorded, the ledger posting is accomplished automatically without any manual effort.

A ledger account has a format which in its simplest form is known as the "T" Format as it looks like a large "T".

Debit & Credit Sides

The total space is divided into two equal sides vertically. One on the left called the "Debit Side" of the account and the other on the right called the "Credit Side" of the account.

Header

The row just above the "T" is the header for the Ledger Account. It carries the words "Dr" (read debit) to the left most end and "Cr" (read credit) to the right most end. The name of the account head (element name) whose data/information is present in that ledger account, is written in the center.

Sub Divisions of a Side

Each side of the ledger account is further sub divided into four columns – Date, Particulars, J/F and Amount. Both the sides of the account look similar and the account and is vertically symmetrical about the center.

A ledger account with headings for columns and no data in it would look as below:

Date : Transaction date

Particulars : Account Head

The account head that appears in the particulars column is the account (other than the one represented by the Ledger Account) that is affected in the transaction whose data is being posted here.

J/F : Journal Folio

The page number of the Journal Record/Book where the transaction which is being posted here appears. This serves as a reference to go back to the Journal if needed.

Amount

The amount of the transaction.

Based on the Dual Entity Concept, we can say that every transaction has its effect on two elements. Each element or Ledger Account has its own place in the Ledger. Thus each transaction effects two ledger accounts.

Preparing the ledger involves posting the information in the journal to the two Ledger Accounts (elements/account heads) effected by the transaction. Ledger posting can be understood from the manner in which a journal entry is read.

Reading the Journal entry

Consider the following accounting transaction and its journal entry

June 15^th: Bought Furniture for cash 12,000.

The Journal entry can be read in two different ways.

• Normal Order

  Furniture a/c "Debtor (pronounced detor) To" Cash a/c.

  We begin reading with the debits in the entry.

• Reverse Order

  Cash a/c "Credited By" Furniture a/c.

  We begin reading with the credits in the entry.

Order of Reading helps posting

The two accounts involved in the transaction are "Furniture a/c" and "Cash a/c". Thus, the information in the Journal entry is to be posted into these two accounts.

Each of the two orders of reading can be related to one of the postings to be made.

In the above example, to post the entry into

1. Furniture a/c

   Read the journal entry starting with "Furniture a/c", which is the normal order

   Furniture a/c	debtor (read detor)	to Cash a/c
   (1)	(2)	(3)

   Furniture a/c (1)

   Dr (2)
   Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
   –	To Cash a/c   (3)	–	–

   The account other than the account being dealt with here is "Cash a/c".

   It is prefixed by "To" and written in the particulars column on the debit side of the Furniture a/c.

2. Cash a/c

   Read the journal entry starting with "Cash a/c", which is the reverse order

   Cash a/c	credited	by Furniture a/c
   (1)	(2)	(3)

   Cash a/c (1)

   (2) Cr
   Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
   				–	By Furniture a/c   (3)	–	–

   The account other than the account being dealt with here is "Furniture a/c".

   It is prefixed by "By" and is written in the particulars column on the credit side of the Cash a/c.

The date of the transaction and the amount of the transaction are also recorded on the same side in the relevant columns, taking the information from the journal.

The Ledger accounts with all the information filled would look as follows:

An account with a number of postings

The journal is a book of prime entry. It is the first and important book that is written in accounting. The information in the ledger flows from the journal and therefore we cannot think of the ledger without the journal.

In many problem solving tasks we straight away prepare the ledger, as we find it easier doing so. Because we are able to prepare the ledger directly we cannot say that we can prepare it without the journal. What we do is, assume the presence of the journal and prepare the ledger directly.

If we are required to prepare the journal in situations where we have prepared the ledger directly, we may write back the journal based on the ledger.

Read the postings and you get the journal entries from which these postings have been made.

• Normal Entry

  June 15^th : Cash a/c debtor To Capital a/c

• Reverse Entry

  June 17^th : Cash a/c credited By Furniture a/c

  ⇒ Furniture a/c debtor To Cash a/c.

Please practice reading the journal starting with both the debited account as well as the credited account till you get accustomed to it.

The process of accounting that we are dealing with is based on the dual entity concept -"Every transaction has its effect on two accounts/elements" and is aptly called the "Double Entry System of Accounting".

One another interpretation being - every transaction has its effect on two Ledger Accounts i.e. it has got two entries in the ledger.

This is the accounting system that is predominantly in use in most parts of the world.