Financial Accounting Notes


What is Ledger

An accounting system includes a separate record for each item that appears in the financial statements. For example, a separate record is kept for the asset cash, showing all increases and decreases in cash resulting from the many transactions in which cash is received or paid. A similar record is kept for every other asset, for every liability, for every owner’s equity, and for every revenue and expenses account appearing in the income statement.

The record used to keep track of the increases and decreases in financial statement items is termed a ledger account or simply an “account”. The entire group of accounts is kept together in an accounting record called a Ledger.       

Debit and Credit:

Debit: An amount entered on the left-hand side of an account. A debit is used to record an increase in an asset and a decrease in a liability or owner’s equity.

Credit: An amount entered on the right-hand side of an account. A credit is used to record a decrease in an asset and an increase in a liability or owner’s equity.

RULES FOR DEBIT AND CREDIT
ASSETS

  • Increase in assets is recorded by debit.
  • Decrease in assets is recorded by credit.

LIABILITIES

  • Increase in liabilities is recorded by credit.
  • Decrease in liabilities is recorded by debit.

OWNER’S EQUITY

  • Increase in owner’s equity is recorded by credit.
  • Decrease in owner’s equity is recorded by debit.

Debit balances in asset accounts:

All asset accounts normally have debit balances; in fact, the ownership of cash, land, or any other asset indicates that the increases (debits) to that asset have been greater than the decreases (credits). It is hard to imagine an account for an asset such as land having a credit balance, as this would indicate that the business had disposed of more land than it had acquired and had reached the impossible position of having a negative amount of land.

 
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