Edexcel IGCSE Accounting: Ledger accounting (4AC1) – Revision Notes

These notes condense section 2.3, Ledger accounting, of Topic 2, Introduction to bookkeeping, in the Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016. The section asks you to explain the purpose of the nominal, receivables and payables ledgers (2.3a) and to record transactions in ledger accounts using double entry principles (2.3b). The specification lists no tiers or paper-only markers for it. For full explanations and worked examples, read the ledger accounting study guide.

Links: Edexcel IGCSE Accounting course hub, printable checklist, all free 10-minute diagnostics and the ledger accounting practice set. Amounts below are in dollars and every business is invented.

The three ledgers (2.3a)

Ledger	Contains	Purpose in one line
Nominal	Every account that is not a credit customer or credit supplier: assets, liabilities, capital, drawings, income, expenses	Totals and balances for each item, used for the trial balance and financial statements
Receivables	One account per credit customer	Who owes the business money, how much, and why
Payables	One account per credit supplier	Whom the business owes, how much, and when to pay

Cash sales and cash purchases need no personal account. They stay in the nominal ledger.

Writing the purpose of a ledger (2.3a)

A purpose answer needs what the ledger holds and why that helps the business. Model sentences:

• The receivables ledger holds an account for each credit customer, so the business can see how much each one owes and send a statement of account.
• The payables ledger holds an account for each credit supplier, so the business knows how much it owes, to whom, and when to pay.
• The nominal ledger holds the accounts for everything else, such as sales, expenses, assets, capital and loans, so the business has a balance for each item to use in the trial balance and financial statements.

Debit and credit rules (2.3b)

Account	Increase	Decrease
Assets (bank, cash, equipment, customers)	Debit	Credit
Expenses (rent, wages, purchases, sales returns)	Debit	Credit
Drawings	Debit	–
Liabilities (suppliers, loans)	Credit	Debit
Capital	Credit	Debit
Income (sales, purchases returns)	Credit	Debit

Memory aid: assets, expenses and drawings go up on the debit side. Everything else goes up on the credit side. Money in is a debit to Bank or Cash. Money out is a credit.

Standard entries to know

Transaction	Debit	Credit
Owner pays money into the bank	Bank	Capital
Asset bought, paid by bank	The asset	Bank
Goods bought on credit	Purchases	Supplier
Goods sold on credit	Customer	Sales
Goods returned to a supplier	Supplier	Purchases returns
Goods returned by a customer	Sales returns	Customer
Customer pays by bank	Bank	Customer
Supplier paid by bank	Supplier	Bank
Expense paid by bank or cash	The expense	Bank or Cash
Owner takes cash	Drawings	Cash
Cash taken out of the bank	Cash	Bank
Loan received into the bank	Bank	Loan

Method in steps

1. Read the transaction and name the two accounts.
2. Decide for each whether it increases or decreases.
3. Use the table to choose debit or credit.
4. Enter the date, the name of the other account and the amount on that side. Do it in both accounts.
5. At the end of the period, total each side, insert the Balance c/d on the smaller side, show equal totals, then bring the balance down on the other side.

Worked reminder: Sadiq Stationers, June

On 1 June, Rubina Offices owes Sadiq Stationers 1,800 and Sadiq owes Nisar Paper Mills 2,700. During June the following happen.

• 4 June: goods sold on credit to Rubina Offices for 3,200.
• 6 June: goods bought on credit from Nisar Paper Mills for 4,100.
• 9 June: Rubina Offices returns goods worth 350.
• 15 June: Rubina Offices pays 1,800 by bank.
• 18 June: Nisar Paper Mills is paid 2,700 by bank.
• 22 June: goods worth 600 are returned to Nisar Paper Mills.

Rubina Offices account (receivables ledger)

Date	Details (Dr)	Amount	Date	Details (Cr)	Amount
1 Jun	Balance b/d	1,800	9 Jun	Sales returns	350
4 Jun	Sales	3,200	15 Jun	Bank	1,800
			30 Jun	Balance c/d	2,850
	Total	5,000		Total	5,000
1 Jul	Balance b/d	2,850

Nisar Paper Mills account (payables ledger)

Date	Details (Dr)	Amount	Date	Details (Cr)	Amount
18 Jun	Bank	2,700	1 Jun	Balance b/d	2,700
22 Jun	Purchases returns	600	6 Jun	Purchases	4,100
30 Jun	Balance c/d	3,500
	Total	6,800		Total	6,800
			1 Jul	Balance b/d	3,500

Rubina Offices owes 2,850 at the end of June, a debit balance because it is an asset. Sadiq owes Nisar Paper Mills 3,500, a credit balance because it is a liability.

Layout reminders

• Debit side on the left, credit side on the right.
• Each entry has a date, the other account’s name and an amount.
• Opening balances are written as Balance b/d on the side where the account normally sits.
• The two totals must be equal and level with each other.
• Do not write an amount on a line without also making the matching entry in the other account.

Worked reminder: classifying three more

• The owner pays 2,000 of her own money into the bank. Bank is an asset that rises, so debit Bank. Capital rises, so credit Capital.
• A van is bought and paid for by bank. The van is an asset that rises, so debit Vans. Bank falls, so credit Bank.
• A customer who owed 500 pays in cash. Cash rises, so debit Cash. The customer’s receivable falls, so credit the customer.

Must-know distinctions

• Debit and credit are sides of an account, not good or bad. Debit is left, credit is right.
• Customer and supplier: a customer account is normally a debit balance, a supplier account normally a credit balance.
• Nominal ledger and personal ledgers: sales, rent and bank belong to the nominal ledger. Named customers belong to the receivables ledger and named suppliers to the payables ledger.
• Sales and sales returns: a return is not a negative sale entered in the Sales account. It has its own account, and the customer account is credited.
• Balance c/d and Balance b/d: c/d closes the period on the smaller side. b/d opens the next period on the opposite side.
• Purchases and assets: goods bought to resell go to Purchases. Equipment bought to keep and use goes to its own asset account.

Quick self-test

1. Which ledger holds the account of a supplier who is owed money?
2. Which ledger holds the Rent account?
3. Name the accounts debited and credited when the owner takes 600 cash for private use.
4. Name the accounts debited and credited when goods are sold on credit to a customer.
5. Name the accounts debited and credited when goods are returned to a supplier.
6. An account has debit entries of 6,200 and 1,150 and credit entries of 2,400. State the balance and the side it is carried down on.
7. What does a debit balance on the Bank account tell you?
8. Is a supplier account normally a debit balance or a credit balance?
9. A customer pays 900 by cheque, which is banked. Name the accounts debited and credited.
10. Why does a cash sale not appear in the receivables ledger?
11. On which side, and on which date, is the balance brought down?

Answers

1. The payables ledger.
2. The nominal ledger.
3. Debit Drawings 600, credit Cash 600.
4. Debit the customer, credit Sales.
5. Debit the supplier, credit Purchases returns.
6. Total debits 7,350 less total credits 2,400 leaves 4,950. It is a debit balance, so Balance c/d of 4,950 is written on the credit side and brought down on the debit side.
7. The business has money in the bank (an asset).
8. A credit balance, because the business owes the supplier.
9. Debit Bank 900, credit the customer.
10. Nobody owes the business anything after a cash sale, so no personal account is needed.
11. On the side opposite to the Balance c/d, on the first day of the next period.

Where marks are usually lost

• Putting the entry on the wrong side because the account was not classified first as asset, liability, expense or income.
• Writing the account’s own name in the details column.
• Posting a customer return as a debit to the customer, or a supplier payment as a credit to the supplier.
• Leaving out the second entry of a transaction.
• Not dating entries, or omitting the Balance b/d.
• Totals that are not level after balancing, usually from an addition slip.
• Naming the wrong ledger for a customer or supplier.
• Giving a purpose of a ledger that is only a definition, with no reason a business would want it.

Frequently asked questions

Why does a business keep ledgers? Books of original entry record transactions in date order, while ledger accounts sort the same information by account. This lets the business see everything about one expense or one customer and find each balance.

Is a cash sale recorded in the receivables ledger? No. A cash sale has no customer account because nobody owes the business anything, so it is recorded only in the nominal ledger, debiting cash and crediting sales.

How are sales returns recorded in the ledger? A return from a customer is debited to the sales returns account and credited to the customer’s account, because the customer owes less. Posting it to the sales account or debiting the customer are common errors.

Are drawings an expense in ledger accounting? No. Drawings have their own account, debited when the owner takes money or goods from the business. They are not an expense of the business.

Official syllabus

Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016, published by Pearson Education Limited – Topic 2 Introduction to bookkeeping, section 2.3 Ledger accounting, points 2.3a and 2.3b.