Journals and Ledgers Explained

In this tutorial we get to know about Journals and Ledgers which is a very important part of accounting. We prepare Journals and Ledgers to keep track of our company's transactions. Recording of transactions in a systematic manner comes under the process of Bookkeeping. So, lets find out what are these topics Journals and Ledgers meant to be.

Meaning of Journal

Under the system of Double Entry Bookkeeping transactions are primarily recorded in the Journal, Journal is the primary book of accounts in which transactions are first recorded in the books of accounts in a chronological order(dates as they occur).

In other words, a journal is a detailed account which records all the financial transactions of a business in a chronological order, it is a book of original entry in which transactions are written before they are posted in a ledger.

Journal helps to review the effect of the transaction on the business which is shown for each transaction, the transaction date, name of account, amount of debit and credit. For better understanding take a look on Fig-1 which is the format of Journal that how it is prepared under the books of accounts.

An entry which is recorded in a journal is called a Journal Entry, the process of recording the transaction in Journal is known as Journalising and the transfer of Journal Entry to a Ledger account is known as Posting.

Journal Format

Date	Particulars	L.F	Amount  (Debit)	Amount (Credit)
The transaction date is written in this column	The name of accounts which are affected by the transaction. Debited account       Credited account	The number of Ledger page is written to which the amount posted in the ledger (filled at the time of posting into the ledger)	Debited amount is written	Credited amount is written

Fig-1

👉Must Read Meaning and Concept of Accounting Equation
👉Must Read Cash and Accrual Basis of Accounting

Meaning of Ledger

A Ledger is a book which contain accounts in which the classified and summarized information from the Journals are posted. As we know, Journal is a primary book of recording the transactions where Ledgers are the secondary book of recording the transactions in the books of accounts. Ledgers are prepared from Journal.

All accounts put together in a classified and summarized way becomes a ledger. A ledger may be defined as, a book which contains, in a summarized and classified form, a permanent record of all business transactions which are financial in nature.

A Ledger is a master record of all the accounts of a business. Trial Balance is drawn from Ledger accounts and Financial statements are prepared with Trial Balance, hence ledger accounts are the most important part in the books of accounts. Ledger account summarises the effect of transactions upon assets, liabilities, capital, incomes and expenditures. 

Let's take a look on the Format of Ledger account in Fig-2 

Ledger Format

Date	Particulars	L.F	Amt	Date	Particulars	L.F	Amt
Date of the transaction	Name of the other account	Page/ Reference number of subsidiary book where the entry was  first recorded	Amount of the transaction	Date of the transaction	Name of the other account	Page/ Reference number of subsidiary book where the entry was  first recorded	Amount of the transaction

Fig-2

Difference between Journal and Ledger

Under Double Entry System of Bookkeeping every transaction affects two accounts and this process starts from Journal which is followed by Ledger, Trial Balance and Final Accounts. The Journal is the primary book of accounts in which transaactions are recorded immediately when they occured which is then classified and posted into a related account which is called a Ledger.

While posting entries in the Ledger, individual account should be opened for each account. Ledger is the master record of all accounts in a business in which similar transactions relating to an asset, Liability, Revenue, Expenses etc are recorded.Let us see the differences between the Journal and Ledger.

Basis for Comparison	Journal	Ledger
Meaning	A journal is a detailed account which records all the financial transactions of a business in a chronological order	A Ledger is a master record of all the accounts of a business. A Ledger is a book which contain accounts in which the classified and summarized information from the Journals are posted.
Another name	Book of Original Entry	Book of Secondary Entry
Order	Records in chronological order	Records in Analytical order
Process	The process of recording transactions into Journal is known as Journalising	The process of transferring entries from Journal to Ledger is known as Posting
Recording System	Journal entries are recorded Sequentially as they occurred.	Account-wise entries are recorded under Ledger account according to their nature.
Trial Balance	Trial balance cannot be prepared on the basis of Journal only.	Trial Balance is prepared from the Ledger.
Folio	While preparing Journal Ledger, Ledger Folio (L.F) is written	While preparing Ledger accounts, Journal Folio (J.F) is written.
Narration	While recording entries in Journal, narration is mandatory to write under each entry.	Narration is not necessary
Results	The total results of transactions cannot be determined from the Journal	Results of a particular head of accounts can be determined from the Ledger.
Source	Journal Entries are recorded with the help of evidences of transactions like Invoice, Cash memo etc.	Ledger requires only journal entries to post them in related head.

👉Also Read Golden Rules of Accounting Explained
👉Also Read International Financial Reporting Standards

Rules of Debit and Credit

In an account Debit means the left side of the account and credit means the right side of the account.  Debit is abbreviated as "Dr" and Credit is abbreviated as "Cr". We either debit an account or Credit an account in relation to the accounting transaction.

 Debit and Credit are the two actions which opposite in nature, both Debit and Credit may represent either increase or decrease depending upon the nature of the account.

Normal Balance- Each account has a balance, either debit or credit. Normal balance is the side (Debit side or Credit side) where the balance of the account found normally. 

Like, Liabilities account and Capital account always have a credit balance, Assets have Debit balances. Incomes and Gains normally always have a credit balance because it increases capital, on the other hand Expenses and Losses always have a debit balance because it is a loss for business. 

Now, this is the easiest and awesome funda to decide which account is debited or Credited. Simply you keep in your mind the normal balances of the heads. If You add an amount under the head on the normal balance side, then it would mean you are increasing that account but if you add an amount opposite to the normal balance side then it results in decreasing the account.

For example- Cash is an Asset and we know that Assets have a normal debit balance, so if the transaction says to increase the cash, you simply debit the cash account by XXX Rs and vice versa.

Bills Payable are the liabilities for the business and we know that the Liabilities have a normal Credit balance, so if the transaction says to decrease the Bills Payable, you simply debit the Creditor's account with XXX Rs and vice versa.

Take a Look on below table to clarify this concept and then you find on your tips that which account is debited and which is credited but always remember the normal balance of the accounts. You can also read Golden Rules of accounts for better understanding-

Head	Normal Balance	For Increase	For Decrease
Assets	Debit	Debit	Credit
Liabilities	Credit	Credit	Debit
Capital	Credit	Credit	Debit
Drawings	Debit	Debit	Credit
Income	Credit	Credit	Debit
Expenses	Debit	Debit	Credit

From the above table it becomes very easy to decide the concept of Debit and Credit which helps in making Journal Entries. Rules of Debit and Credit is the very important part of accounting because in the absence of this we cannot pass the entries in the Journal book and by this, ledger accounts are also cannot be created. 

So, it is very important to understand the concept of Journal entries which is the very important part of accounts. So, Lets start it by doing some practical questions.

Practical Problems

Problem

Date (2018)	Transactions	Amount(₹)
01Jan	Rajeev started business with cash	1,00,000
03Jan	Cash deposited into the bank	7,800
04Jan	Purchased goods from Sanjay	25,400
05Jan	Sold goods to Vivek	15,900
07Jan	Goods purchased through cheque	9,700
08Jan	Rent paid	5000
08Jan	Goods returned to Sanjay	1,600
09Jan	Paid to Sanjay ₹23000 in full settlement of his account of ₹ 23800 through cheque	24,000
09Jan	Cash withdraw by Rajeev for his personal use	5000
09Jan	Vivek paid his due amount by cheque	15,900
10Jan	Salaries due to staff	8,500
12Jan	Paid Electricity bill	6,200

Solution-

Date 2018	Particulars	L.F	Dr. (₹)	Cr. (₹)
01Jan	Cash A/c                       …Dr        To Capital A/c (Being Business started with cash)		1,00,000	1,00,000
03Jan	Bank A/c                       …Dr        To Cash A/c (Being amount deposited into the bank)		7,800	7,800
04Jan	Purchases A/c               …Dr        To Sanjay (Being the goods purchased from Sanjay)		25,400	25,400
05Jan	Vivek                         …Dr        To Sales A/c (Being the goods sold to Vivek)		15,900	15,900
07Jan	Purchases A/c              …Dr         To Bank A/c (Being the goods purchased through cheque)		9,700	9,700
08Jan	Rent A/c                      …Dr         To Cash A/c (Being Rent paid)		5000	5000
08Jan	Sanjay                          …Dr      To Purchase return A/c (Being the Goods returned to Sanjay)		1,600	1,600
09Jan	Sanjay                           …Dr       To Bank A/c      To Discount received A/c (Being the amount paid to Sanjay in full settlement of his account)		23,800	23,000 800
09Jan	Drawings A/c               …Dr         To Cash A/c (Being the cash withdrawn for personal use)		5000	5000
09Jan	Bank A/c                     …Dr           To Vivek (Being the amount paid by Vivek through cheque)		15,900	15,900
10Jan	Salary A/c                     …Dr      To outstanding salary A/c (Being the salary due)		8,500	8,500
12Jan	Electricity Bill A/c     …Dr      To Cash A/c (Being Electricity bill paid)		6,200	6,200

So, I hope guys you all understand well the concept of Journals and Ledgers. I tried to cover all the basic concepts relating to Journals and Ledgers. If you find any difficulty related to this topic then please tell me in the comment section. And if you want any other post related to Journals and Ledgers then also tell us. Have a good day, Thanks...