Article : Organizing The Book of Account

A. Ledgers

Each account code represents an individual T account. In a manual accounting system used by the smallest of businesses all T accounts may fit into one book or ledger. In most businesses, however, the volume of transactions, and the need for more than one person to have access to make entries, means that similar transactions are entered into one particular ledger. This is also true of computerized accounting systems. Typically there are three main ledgers: sales ledger, purchases ledger, nominal ledger.

The sales and purchases ledgers contain the T accounts for each individual credit customer and supplier whilst the nominal ledger contains the T accounts for total sales, total purchases and every other expense, income, asset and liability.

B. Journals

Double entries are not made directly into the ledgers, but are first entered in a book of prime entry from which postings to the two relevant ledger accounts are made later. These books of prime entry are: sales day book or sales journal, purchases day book or purchases journal, journal, and cash book(s).

The sales and purchase day books act as a kind of diary where all sales and purchases are entered in chronological order. At a later date each transaction is entered in the named account of the customer or supplier in the sales or purchases ledger respectively whilst the total of a batch of similar transactions is entered in the sales account or purchases account in the nominal ledger, so completing the double entry. Since the advent of value added tax (VAT) some years ago, a further entry in the sales and purchase journals is needed to record these tax amounts which are posted to the relevant side of the VAT account in the nominal ledger in batch totals. In this way large volumes of individual sales and purchases are kept out of the nominal ledger by only posting batch totals for a day or a week at a time.

In a similar way, large amounts of cash transactions are first entered in a cash receipts book or a cash payments book, both of which act as books of prime entry and as ledgers. These cash transactions are later posted to the named account of the customer or supplier in the sales ledger or purchases ledger respectively. This again completes the double entry.

The journal proper is a book of prime entry used to make the initial record of non-routine transactions which are later posted to two ledger accounts to preserve the double entry principle. Typical entries in a journal might relate to : the correction of errors, adjustments for prepayments and accruals, the creation of provisions for bad debts or any other purpose, and adjustments for stocks on hand at the end of an accounting period.

We have now seen how financial transactions are routinely recorded in journals and ledgers, and how a chart of accounts identifies each ledger account in a double entry bookkeeping system, all enabling the final accounts to be produced. The following chapters now examine each of these financial accounting statements in turn.

From : Graham Mott