prepare ledger accounts

Cambridge IGCSE Accounting 0452 – Double‑Entry System of Book‑keeping (Sections 2.1 & 2.2)

Learning Objective

By the end of this lesson you should be able to:

• Identify the accounts affected by a transaction and apply the correct debit‑credit rules.
• Record transactions in the appropriate book of prime entry.
• Post journal entries to the correct ledger accounts (sales, purchases and nominal).
• Balance each ledger account and prepare a trial balance.
• Explain how the double‑entry system keeps the accounting equation in balance.
• Recognise the business documents that give rise to entries and understand the imprest system for petty cash and electronic bank transfers.

1. The Double‑Entry Principle

Every financial transaction affects at least two accounts, and the total amount debited must equal the total amount credited. This guarantees that the accounting equation remains in balance after each entry.

2. Debit‑Credit Rules – Quick‑Reference Table

Account Type	Increase (Debit / Credit)	Decrease (Debit / Credit)	Typical Example
Assets	Debit	Credit	Cash purchase of furniture – Debit Furniture, Credit Cash
Liabilities	Credit	Debit	Repayment of a loan – Debit Loan, Credit Cash
Equity (Capital)	Credit	Debit	Owner withdraws cash – Debit Capital, Credit Cash
Revenue (Sales)	Credit	Debit	Credit sale of goods – Credit Sales, Debit Debtors
Expenses	Debit	Credit	Rent paid – Debit Rent Expense, Credit Cash

3. Business Documents that Generate Entries

Document	Purpose (what it records)
Invoice (sales)	Credit sale of goods or services to a customer
Invoice (purchase)	Credit purchase of goods or services from a supplier
Debit note	Increase a supplier’s amount payable (e.g., additional charges)
Credit note	Decrease a customer’s amount receivable (e.g., sales return)
Statement of account	Summarises amounts owed by or to a party at a point in time
Cheque	Payment by the bank to a supplier or employee
Receipt	Proof of cash received from a customer
Paying‑in slip	Cash or bank deposit made by the business
Bank statement	Record of all transactions that have passed through the bank account

4. Books of Prime Entry (Journals)

Transactions are first recorded in specialised journals. Grouping similar transactions speeds up posting and reduces errors.

Journal	Transactions Recorded	Why It Is Used	Typical Format (columns)
Cash Book	All cash receipts and payments (cash & bank)	Provides a running balance of cash and bank at all times	Date, Details, Ref., Debit, Credit, Balance
Sales Journal	All credit sales	Groups credit sales so the Sales Ledger can be posted in one step	Date, Customer, Invoice No., Amount, Ref.
Purchases Journal	All credit purchases	Groups credit purchases for quick posting to the Purchases Ledger	Date, Supplier, Invoice No., Amount, Ref.
Sales Returns Journal	Goods returned by customers	Separates returns from normal sales for clear tracking	Date, Customer, Credit Note No., Amount, Ref.
Purchases Returns Journal	Goods returned to suppliers	Separates returns from normal purchases	Date, Supplier, Debit Note No., Amount, Ref.
General Journal	All other transactions (e.g., depreciation, opening balances, adjustments, electronic transfers)	Catch‑all journal for items that do not fit in the specialised journals	Date, Account, Debit, Credit, Narration, Ref.

Note – What You Do NOT Need to Do

The Cambridge syllabus does **not** require folio columns or three‑column running‑balance accounts in the ledger. Simple two‑column T‑accounts are sufficient.

5. Division of the Ledger

• Sales Ledger (Debtors Ledger) – records all credit sales and receipts from customers. The total of this ledger is shown in the Debtors Control Account in the nominal ledger.
• Purchases Ledger (Creditors Ledger) – records all credit purchases and payments to suppliers. The total appears in the Creditors Control Account.
• Nominal (General) Ledger – contains all other accounts: assets, liabilities, capital, revenue and expense accounts, plus the control accounts for debtors and creditors.

Purpose of Control Accounts

Control accounts summarise the totals of the sales and purchases ledgers. They are not required for the IGCSE posting exercise, but you should recognise them as the link between subsidiary ledgers and the nominal ledger.

6. The Imprest System for Petty Cash

• Imprest amount – a fixed cash fund (e.g., $200) kept for small, routine expenses.
• When the fund is used, each expense is recorded in the Petty‑Cash Book (a simplified cash‑book).
• When the balance is low, the fund is re‑impressed by writing a cheque for the total of the receipts and restoring the cash to its original amount.

Journal entry to re‑impress a $200 fund (assuming $70 of receipts have been recorded):

Date	Account	Debit ($)	Credit ($)
—	Petty‑Cash (Asset)	130
—	Cash/Bank (Asset)		130

7. Recording Electronic Bank Transfers

• Electronic transfers (e.g., direct debits, online payments) are recorded in the Bank column of the Cash Book.
• They are treated exactly like any other cash receipt or payment – debit the appropriate expense or asset, credit the bank.

Example – Paying a supplier $500 by online bank transfer:

Date	Details	Bank Debit	Bank Credit	Balance
15 Jun	Supplier – Online payment		500	(500)

Corresponding journal entry (General Journal):

Date	Account	Debit ($)	Credit ($)
15 Jun	Purchases (Expense)	500
15 Jun	Bank		500

8. Discounts

Type	Definition	Recording in the Books
Trade Discount	Reduction in the list price given at the point of sale.	Not recorded – only the net amount is entered in the journal.
Cash (Early‑payment) Discount	Discount allowed when the customer pays within an agreed period.	When the discount is taken: Debit Cash (amount received) Debit Discounts Allowed (Expense) Credit Accounts Receivable (gross amount)

9. Steps to Prepare Ledger Accounts (Full Process)

1. Identify the transaction from the source document (invoice, receipt, bank statement, etc.).
2. Select the appropriate book of prime entry and record the transaction using the full journal format (date, details, reference, debit, credit, narration).
3. Determine the accounts affected and apply the debit‑credit rules (see the quick‑reference table).
4. Prepare the journal entry in the chosen journal.
5. Post each line of the journal entry to the relevant ledger accounts (sales, purchases, or nominal).
6. Balance each ledger account:
   • Add the totals of the debit and credit sides.
   • Subtract the smaller total from the larger total.
   • Write the closing balance on the side of the larger total and carry it forward.
7. Prepare a trial balance to verify that total debits equal total credits.

10. Posting Examples

10.1 Sales Journal → Sales Ledger (Accounts Receivable)

Credit sale of $2 800 to “Alpha Ltd” on 10 May.

Sales Journal – 10 May
Customer	Invoice No.	Amount ($)	Narration
Alpha Ltd	S‑0010	2 800	Credit sale of goods

Post to the Sales Ledger (Accounts Receivable):

Accounts Receivable – T‑Account
Debit	Credit
2 800 (Alpha Ltd)

10.2 Purchases Journal → Purchases Ledger (Accounts Payable)

Credit purchase of $1 500 from “Beta Supplies” on 12 May.

Purchases Journal – 12 May
Supplier	Invoice No.	Amount ($)	Narration
Beta Supplies	P‑0125	1 500	Credit purchase of stock

Post to the Purchases Ledger (Accounts Payable):

Accounts Payable – T‑Account
Debit	Credit
	1 500 (Beta Supplies)

10.3 Sales Returns Journal → Sales Ledger

Goods worth $300 returned by “Alpha Ltd” on 20 May.

Sales Returns Journal – 20 May
Customer	Credit Note No.	Amount ($)	Narration
Alpha Ltd	CR‑0205	300	Return of goods

Post to Accounts Receivable:

Accounts Receivable – T‑Account
Debit	Credit
	300 (Alpha Ltd – Return)

10.4 Purchases Returns Journal → Purchases Ledger

Goods worth $200 returned to “Beta Supplies” on 25 May.

Purchases Returns Journal – 25 May
Supplier	Debit Note No.	Amount ($)	Narration
Beta Supplies	DN‑2505	200	Return of defective stock

Post to Accounts Payable:

Accounts Payable – T‑Account
Debit	Credit
200 (Beta Supplies – Return)

11. Worked Example – Purchase of Office Furniture (Cash)

Transaction

On 5 March, ABC Ltd purchased office furniture for $1 200 cash.

Step 1 – Record in the Cash Book (Prime Entry)

Cash Book – 5 Mar
Date	Details	Cash Debit	Cash Credit	Balance
5 Mar	Office Furniture – cash purchase		1 200	(1 200)

Step 2 – Journal Entry (General Journal)

Date	Account	Debit ($)	Credit ($)
5 Mar	Office Furniture (Asset)	1 200
5 Mar	Cash (Asset)		1 200

Step 3 – Posting to Ledger Accounts

Office Furniture – T‑Account		Cash – T‑Account
Debit	Credit	Debit	Credit
1 200			1 200

Step 4 – Balancing the Accounts

• Office Furniture: Debit = 1 200, Credit = 0 → Closing balance **$1 200 (Debit)**
• Cash: Debit = 0, Credit = 1 200 → Closing balance **$1 200 (Credit)**

Step 5 – Trial Balance

Account	Debit ($)	Credit ($)
Office Furniture	1 200
Cash		1 200
Total	1 200	1 200

12. Practice Exercise – Credit Sale with Cost of Goods Sold

Transaction: On 12 April, XYZ Ltd sold goods on credit for $3 500. The cost of the goods sold was $2 200.

1. Identify the accounts affected.
2. Determine the debit and credit entries.
3. Record the transaction in the appropriate journals (Sales Journal for the revenue side and General Journal for the COGS side).
4. Post to the following ledger accounts:
   • Sales (Revenue)
   • Accounts Receivable (Debtors)
   • Cost of Goods Sold (Expense)
   • Inventory (Asset)
5. Balance each ledger account and show the closing balances.
6. Prepare a trial balance to verify that total debits equal total credits.

Suggested Solution – Journal Entries

Journal Entries
Date	Account	Debit ($)	Credit ($)
12 Apr	Accounts Receivable	3 500
12 Apr	Sales		3 500
12 Apr	Cost of Goods Sold	2 200
12 Apr	Inventory		2 200

Post the lines to the four T‑accounts, balance each side, and prepare the trial balance (Debit total = $5 700, Credit total = $5 700).

13. Key Points to Remember

• The double‑entry system provides an automatic error‑checking mechanism.
• Every transaction must keep the accounting equation in balance.
• Use the correct book of prime entry before posting to the ledger.
• Ledger is divided into Sales, Purchases and Nominal sections; control accounts link subsidiary ledgers to the nominal ledger.
• Trade discounts are **not** recorded; cash discounts are recorded as a separate expense (Discounts Allowed) or revenue (Discounts Received).
• Folio columns and three‑column balances are **not** required for the IGCSE.
• Petty‑cash operates on the imprest system – restore the fund to its original amount each time it is topped up.
• Electronic bank transfers are recorded in the bank column of the cash book and posted like any other cash transaction.
• Regularly prepare a trial balance to detect posting errors early.