post transactions to the ledger accounts

2.1 The Double‑Entry System of Book‑keeping

Learning Objective

To record financial transactions in the journal, post them accurately to the appropriate ledger accounts, and understand how the ledger links to trial balances, control accounts and other bookkeeping documents required by the Cambridge IGCSE Accounting (0452) specification.

1. Fundamentals of Accounting

• Purpose of accounting: to provide reliable, comparable and understandable information about a business’s financial performance and position so that owners, managers and external users can make informed decisions.
• Book‑keeping vs. Accounting:
  • Book‑keeping – the systematic recording of all financial transactions (chronological entry in journals, posting to ledgers, preparation of trial balance).
  • Accounting – the interpretation, analysis and presentation of the recorded information (preparing profit‑or‑loss accounts, balance sheets, cash‑flow statements, and using the information for decision‑making).
• Accounting equation (the foundation of double entry):

  Assets = Liabilities + Owner’s Equity

  • Every transaction must keep this equation in balance.
  • The equation links directly to profit‑or‑loss measurement: Owner’s Equity (end) = Owner’s Equity (begin) + Capital + Profit – Drawings.
• Users of accounting information:
  • Owners / shareholders – assess profitability and return on investment.
  • Managers – plan, control and evaluate performance.
  • Creditors / banks – judge creditworthiness.
  • Government – tax assessment and regulatory compliance.

2. Sources and Recording of Data

2.1 Double‑Entry Principles

• Each transaction affects at least two accounts (debit + credit).
• The total of the debit entries equals the total of the credit entries.
• Debits are recorded on the left side of a T‑account; credits on the right side.
• Normal balances:
  • Assets & expenses – increase on the debit side.
  • Liabilities, equity & revenue – increase on the credit side.
• Ledger classification:
  • Real (permanent) accounts – assets, liabilities, capital.
  • Nominal (temporary) accounts – revenue, expenses, gains, losses.

2.2 Books of Prime Entry (Business Documents)

Document / Business Event	Purpose	Book of Prime Entry (Cambridge terminology)
Sales invoice (credit sale)	Record revenue earned on credit	Sales journal (Sales day book)
Sales return (credit)	Record goods returned by customers	Sales returns journal
Purchase invoice (credit purchase)	Record goods bought on credit	Purchases journal (Purchases day book)
Purchase return (credit)	Record goods returned to suppliers	Purchases returns journal
Cash receipt (cash or bank)	Money received from customers or other sources	Cash book – receipts side
Cash payment voucher	Money paid out (expenses, purchases, etc.)	Cash book – payments side
Bank receipt / bank payment	Bank transactions (deposits, withdrawals)	Bank column of the cash book (dual function)
Petty‑cash imprest slip	Small cash payments – imprest system	Petty‑cash book (subsidiary to cash book)
Debit / credit note	Adjustments to previously recorded amounts	General journal (or appropriate day book)
Trade discount note	Discount given to customers for bulk purchases	General journal (or sales journal if recorded at point of sale)
Cash discount note	Discount allowed for early payment	General journal (or cash book when received)

2.3 Cash Book – Dual Function & Imprest System

• The cash book records both cash and bank transactions in separate columns, acting as a primary book of entry for cash‑related activity.
• Imprest system for petty cash:
  • A fixed amount (e.g., $200) is kept in a petty‑cash box.
  • When cash is spent, a receipt is recorded in the petty‑cash book and the amount is replenished to the original imprest level.
  • The imprest amount is the balance carried forward each period.

3. Posting to Ledger Accounts

3.1 Steps for Posting

1. Identify the accounts involved in the journal entry.
2. Open a separate T‑account (ledger page) for each account.
3. Enter the date and reference (journal page number) on the appropriate side (debit or credit).
4. Transfer the amount from the journal to the ledger.
5. After all postings, total each side of the T‑account.
6. Calculate the closing balance:
   • If total debits > total credits → Debit balance (write on the credit side).
   • If total credits > total debits → Credit balance (write on the debit side).

3.2 Example Transaction – Posting to the Ledger

Transaction: On 5 March the business purchased goods on credit for $1,200.

Journal Entry

Date	Account	Debit ($)	Credit ($)	Reference
5 Mar	Purchases	1,200		J1
5 Mar	Creditors (Accounts Payable)		1,200	J1

Posting to Ledger Accounts

Purchases Account

Date	Reference	Debit ($)	Credit ($)	Balance ($)
5 Mar	J1	1,200		1,200 Dr

Creditors (Accounts Payable) Account

Date	Reference	Debit ($)	Credit ($)	Balance ($)
5 Mar	J1		1,200	1,200 Cr

3.3 Practice Exercise – Posting & Balancing

Post the following journal entries to the ledger accounts shown. Record the balance after each posting.

Date	Account	Debit ($)	Credit ($)	Reference
10 Mar	Cash	2,500		J2
10 Mar	Sales Revenue		2,500	J2
12 Mar	Rent Expense	800		J3
12 Mar	Bank		800	J3

Suggested Ledger Layout (T‑accounts)

• Cash
• Bank
• Sales Revenue
• Rent Expense

Remember to carry the reference (J2, J3) and write the closing balance on the opposite side of the account.

4. Verification of Accounting Records

4.1 Trial Balance

• After posting all transactions, list every ledger account with its closing balance in a trial‑balance worksheet.
• Debit balances go in the debit column; credit balances in the credit column.
• The two column totals must be equal – this checks the arithmetic accuracy of the ledger.

Simple Trial‑Balance Example (after the exercise above)

Account	Debit ($)	Credit ($)
Cash	2,500
Bank		800
Rent Expense	800
Sales Revenue		2,500
Total	3,300	3,300

4.2 Types of Errors (Cambridge syllabus)

Error Type	Description (what went wrong)	Effect on Trial Balance	Typical Correction
Omission	Transaction not recorded at all.	No effect – totals remain equal.	Enter the missing journal entry with correct date and reference.
Commission	Correct amount recorded, but in the wrong account.	Totals remain equal, but individual balances are wrong.	Reverse the wrong entry (debit/credit) and re‑post to the correct account.
Principle	Transaction recorded in an inappropriate type of account (e.g., expense recorded as revenue).	Totals remain equal.	Make a correcting entry that removes the amount from the wrong account and places it in the right one.
Transposition	Digits reversed (e.g., $540 recorded as $450).	Totals will differ by a multiple of 9.	Debit the correct amount and credit the same amount to reverse the error.
Complete reversal	Both debit and credit sides are posted to the opposite accounts.	Totals remain equal.	Reverse the entire entry and repost correctly.

4.3 Bank Reconciliation Statement (BRS)

The BRS adjusts the cash‑book balance to agree with the bank statement balance.

Typical BRS Layout

Bank Statement Balance	Adjustments
+ Deposits not yet credited (deposits in transit)
+ Interest earned
- Cheques issued but not yet presented (outstanding cheques)
- Bank service charges
- Direct debits / standing orders not yet recorded
Adjusted Cash‑Book Balance

Example (simplified)

Cash‑book balance: $5,200
Outstanding cheques: $300
Bank charges: $20
Adjusted cash‑book balance = $5,200 – $300 – $20 = $4,880, which should agree with the bank statement after adding any deposits in transit.

4.4 Control Accounts

• Purpose: To summarise large numbers of individual debtor or creditor balances in a single “control” ledger account, keeping the main ledger concise.
• Two control accounts required by the syllabus:
  • Sales Ledger (Debtors) Control Account – total amounts owed by all customers.
  • Purchases Ledger (Creditors) Control Account – total amounts owed to all suppliers.
• Individual customer/supplier balances are kept in subsidiary ledgers; the totals of these subsidiary ledgers feed the control account.

Step‑by‑Step Example – Sales Ledger Control Account

1. Record total credit sales in the control account (debit side).
2. Record total cash receipts from customers in the control account (credit side).
3. Post any sales returns, discounts or bad‑debt write‑offs as appropriate.
4. The closing balance of the control account equals the total of the individual debtor balances in the subsidiary ledger.

Date	Reference	Debit ($)	Credit ($)	Balance ($)
1 Apr	J10 – Credit Sales	3,000		3,000 Dr
5 Apr	J12 – Cash Receipts		1,200	1,800 Dr
8 Apr	J14 – Sales Returns		200	1,600 Dr
30 Apr	Closing Balance			1,600 Dr (equals total of individual debtor balances)

5. Accounting Procedures (Beyond Recording)

5.1 Capital vs. Revenue

• Capital expenditure – creates or enhances a long‑term asset (e.g., purchase of machinery for $5,000). Recorded in an asset account; not shown in the profit‑or‑loss account.
• Revenue expenditure – incurred to earn revenue in the current period (e.g., repair of a machine for $300). Recorded as an expense; shown in the profit‑or‑loss account.
• Capital receipt – e.g., issue of share capital; recorded in the capital account.
• Revenue receipt – e.g., sales revenue; recorded in the profit‑or‑loss account.

5.2 Depreciation

• Systematic allocation of the cost of a tangible asset over its useful life.
• Common methods (Cambridge expects straight‑line):

  Depreciation expense = (Cost – Residual value) ÷ Useful life (years)

• Journal entry each year:

  Depreciation Expense Dr … Accumulated Depreciation – Asset Cr …

5.3 Disposals of Fixed Assets

1. Remove the asset’s original cost and accumulated depreciation from the books.
2. Record any cash received.
   • If cash > net book value → Gain on disposal (credit gain account).
   • If cash < net book value → Loss on disposal (debit loss account).

Example

Machine cost $4,000, accumulated depreciation $2,500, sold for $1,200.

• Remove cost: Accumulated Depreciation – Machine Dr 2,500 Machine Cr 4,000
• Record cash received: Cash Dr 1,200 Loss on Disposal Dr 300 Machine Cr 1,500
• Loss = Net book value ($1,500) – Cash received ($1,200) = $300.

5.4 Accruals and Pre‑payments

• Accrued expenses – costs incurred but not yet paid (e.g., wages owing at month‑end). Recorded as an expense and a liability (Accrued Expenses).
• Accrued income – revenue earned but not yet received (e.g., interest earned). Recorded as revenue and an asset (Accrued Income).
• Pre‑payments – cash paid in advance for a future expense (e.g., insurance premium). Initially recorded as an asset (Pre‑paid Insurance) and expensed over the period covered.
• Deferred income – cash received in advance of providing services (e.g., rent received). Initially recorded as a liability (Unearned Revenue) and recognised as revenue when earned.

5.5 Doubtful Debts (Allowance for Bad Debts)

• Estimate of amounts that may become unrecoverable from debtors.
• Two approaches (Cambridge expects the “percentage of receivables” method):

  Bad‑debt expense = Estimated % × Total debtors

• Journal entry:

  Bad‑Debt Expense Dr Allowance for Doubtful Debts Cr

• If a specific debtor is written off, reverse the allowance against the debtor’s account.

5.6 Inventory Valuation (Closing Stock)

• Closing stock is valued at the lower of cost price or net realisable value (NRV).
• Cost price may be determined using:
  • First‑in, first‑out (FIFO)
  • Weighted‑average cost
  • Specific identification (for unique items)
• Journal entry to record closing stock at year‑end:

  Closing Stock Dr Cost of Goods Sold Cr

6. Common Mistakes to Avoid

• Forgetting to post both the debit and the credit side of a journal entry.
• Placing a debit amount on the credit side (or vice‑versa) of a T‑account.
• Omitting the journal reference number on the ledger posting.
• Incorrectly calculating the closing balance – always total each side first.
• Not checking that the trial‑balance totals agree; a mismatch signals an error.
• Leaving out adjustments (e.g., bank charges, outstanding cheques) when preparing a bank reconciliation.
• Confusing capital and revenue items – remember the impact on the profit‑or‑loss account.

7. Summary Formulae

Closing balance of a ledger account:

\[ \text{Closing Balance}= \begin{cases} \text{Total Debits} - \text{Total Credits}, & \text{if Debits > Credits (Debit balance)}\\[4pt] \text{Total Credits} - \text{Total Debits}, & \text{if Credits > Debits (Credit balance)} \end{cases} \]

Trial‑balance check:

\[ \displaystyle \sum \text{Debit column} = \sum \text{Credit column} \]

Depreciation (straight‑line):

\[ \text{Depreciation expense} = \dfrac{\text{Cost} - \text{Residual value}}{\text{Useful life (years)}} \]

Bad‑debt expense (percentage of receivables):

\[ \text{Bad‑debt expense} = \text{Estimated \%} \times \text{Total debtors} \]