Accounting Entries are recorded in ledger accounts. Debit entries are made on the left side of the ledger account whereas Credit entries are made to the right side. Ledger accounts are maintained in respect of every component of the financial statements. Ledger accounts may be divided into two main types: balance sheet ledger accounts and income statement ledger accounts.
Balance Sheet Ledger Accounts
Balance Sheet ledger accounts are maintained in respect of each asset, liability and equity component of the statement of financial position.
Following is an example of a receivable ledger account:
- Balance brought down is the opening balance is in respect of the receivable at the start of the accounting period.
- These are credit sales made during the period. Receivables account is debited because it has the effect of increasing the receivable asset. The corresponding credit entry is made to the Sales ledger account. The account in which the corresponding entry is made is always shown next to the amount, which in this case is the Sales ledger.
- This is the amount of cash received from the debtor. Receiving cash has the effect of reducing the receivable asset and is therefore shown on the credit side. As it can seen, the corresponding debit entry is made in the cash ledger.
- This represents the balance due from the debtor at the end of the accounting period. The figure has been arrived by subtracting the amount shown on the credit side from the sum of amounts shown on the debit side. This accounting period's closing balance is being carried forward as the opening balance of the next period.
Similar ledger accounts can be made for other balance sheet components such as payables, inventory, equity capital, non current assets and so on.
Income Statement Ledger Accounts
Income statement ledger accounts are maintained in respect of incomes and expenditures.
Following is an example of electricity expense ledger:
|Electricity Expense Account|
- This is the amount of cash paid against electricity bill. The expense ledger is being debited to account for the increase in expense. The corresponding credit entry has been made in the cash ledger.
- This represents the amount of expense charged to the income statement. The balance in the ledger has been recycled to the income statement which is being debited by the same amount. Unlike balance sheet ledger accounts, there is no balance brought down or carried forward. Instead, the income statement ledger is closed each accounting period end with the balancing figure representing the charge to income statement.
Similar ledger accounts can be made for other income statement components.