Edexcel IGCSE Accounting: Ledger accounting (4AC1)

This guide covers 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 has two points: explain the purpose of the nominal ledger, the receivables ledger and the payables ledger, and record transactions in ledger accounts using double entry principles. The specification lists no tiers and no paper-only markers for this content. It says Paper 1 draws exclusively from topics 1 to 3, and that Paper 2 builds on the knowledge, understanding and skills from those topics.

Links: Edexcel IGCSE Accounting course hub, printable checklist and all free 10-minute diagnostics. For condensed recall use the ledger accounting revision notes. For exam-style questions use the ledger accounting practice set.

All amounts are in dollars. Every business, person and figure in this guide is invented.

What you need to be able to do

Ref	Specification point	Where it is taught here
2.3a	Explain the purpose of the nominal ledger, the receivables ledger and the payables ledger	The three ledgers
2.3b	Record transactions in ledger accounts using double entry principles	Double entry rules, layout, worked examples 1 and 2, balancing

Why a business keeps ledgers

A transaction is first written in a book of original entry, such as a day book or the cash book (section 2.2). Ledger accounts then sort the same information by account. One page shows everything about rent, another everything about one customer. You can then see a total or a balance at any date without searching through every document. In this guide you record straight from a description of each transaction. Posting from a book of original entry uses the same debit and credit rules.

The three ledgers (2.3a)

Ledger	What it holds	Purpose
Nominal ledger	The accounts for assets, liabilities, capital, drawings, income and expenses: bank, cash, shop fittings, loans, capital, sales, purchases, returns, rent, wages and so on	Shows the total of each type of item and the balance on each account. These are the figures later used for the trial balance and the financial statements
Receivables ledger	One personal account for each customer who buys on credit	Shows how much each customer owes and which invoices, returns and payments make up that balance. A business uses it to send statements of account, chase late payers and decide credit limits
Payables ledger	One personal account for each supplier who sells to the business on credit	Shows how much the business owes each supplier and when it is due. A business uses it to plan payments and to check supplier statements

A cash sale has no customer account, because nobody owes the business anything. It is recorded only in the nominal ledger. The total of all the individual balances in the receivables ledger is what a trade receivables control account checks (Topic 3, section 2). The same applies to payables.

Double entry principles (2.3b)

Every transaction has two effects. You debit one account (left-hand side) and credit another (right-hand side) with the same amount. The side depends on the type of account and on whether it is increasing or decreasing.

Type of account	To increase it	To decrease it
Assets: bank, cash, shop fittings, customers (receivables)	Debit	Credit
Expenses: rent, wages, purchases, sales returns	Debit	Credit
Drawings	Debit	Not decreased by ordinary transactions
Liabilities: suppliers (payables), loans	Credit	Debit
Capital	Credit	Debit
Income: sales, purchases returns	Credit	Debit

Use two questions for every transaction.

1. Which two accounts are affected?
2. Is each one increasing or decreasing, so which side does it go?

Bank and cash are assets. Money coming in is a debit and money going out is a credit. A customer owes you, so the customer account is an asset: a credit sale debits the customer and a payment from the customer credits it. A supplier is owed money, so the supplier account is a liability: a credit purchase credits the supplier and a payment to the supplier debits it.

Layout of a ledger account

Each account has a debit side on the left and a credit side on the right. Each side has a date, a details column and an amount. The details column names the other account in the double entry, never the account you are writing in. An opening balance carried over from the last period is written as Balance b/d (brought down).

Worked example 1: Kiran Kitchenware, May

Kiran starts a kitchenware shop on 1 May. Her transactions, with the two accounts for each, are below.

Date	Transaction	Debit	Credit	Amount
1 May	Kiran pays 40,000 of her own money into the business bank account	Bank	Capital	40,000
2 May	Shop fittings bought, paid by bank	Shop fittings	Bank	9,000
3 May	Inventory bought on credit from Bashir Metals	Purchases	Bashir Metals	6,500
5 May	Rent paid by bank	Rent	Bank	1,200
8 May	Goods sold on credit to Hina Caterers	Hina Caterers	Sales	4,800
10 May	Faulty goods returned to Bashir Metals	Bashir Metals	Purchases returns	500
12 May	Cash sales	Cash	Sales	2,300
14 May	Hina Caterers returns goods	Sales returns	Hina Caterers	400
16 May	Cash withdrawn from the bank for the till	Cash	Bank	1,000
20 May	Bashir Metals paid by bank	Bashir Metals	Bank	3,000
24 May	Hina Caterers pays by bank	Bank	Hina Caterers	2,400
28 May	Kiran takes cash for private use	Drawings	Cash	800
30 May	Wages paid in cash	Wages	Cash	600

Look at 3 May. Purchases is an expense, which increases on the debit side. Bashir Metals is a supplier, a liability, which increases on the credit side. On 14 May Hina Caterers is an asset that decreases, so it is credited, and Sales returns is an expense that increases, so it is debited.

The accounts that hold a customer or a supplier belong to the receivables or payables ledger. All the others are nominal ledger accounts. Here are four of them, balanced at 31 May.

Bank account

Date	Details (Dr)	Amount	Date	Details (Cr)	Amount
1 May	Capital	40,000	2 May	Shop fittings	9,000
24 May	Hina Caterers	2,400	5 May	Rent	1,200
			16 May	Cash	1,000
			20 May	Bashir Metals	3,000
			31 May	Balance c/d	28,200
	Total	42,400		Total	42,400
1 Jun	Balance b/d	28,200

Cash account

Date	Details (Dr)	Amount	Date	Details (Cr)	Amount
12 May	Sales	2,300	28 May	Drawings	800
16 May	Bank	1,000	30 May	Wages	600
			31 May	Balance c/d	1,900
	Total	3,300		Total	3,300
1 Jun	Balance b/d	1,900

Bashir Metals account

Date	Details (Dr)	Amount	Date	Details (Cr)	Amount
10 May	Purchases returns	500	3 May	Purchases	6,500
20 May	Bank	3,000
31 May	Balance c/d	3,000
	Total	6,500		Total	6,500
			1 Jun	Balance b/d	3,000

Hina Caterers account

Date	Details (Dr)	Amount	Date	Details (Cr)	Amount
8 May	Sales	4,800	14 May	Sales returns	400
			24 May	Bank	2,400
			31 May	Balance c/d	2,000
	Total	4,800		Total	4,800
1 Jun	Balance b/d	2,000

Bank and Cash are nominal ledger accounts. Bashir Metals is in the payables ledger and Hina Caterers is in the receivables ledger. The closing balances say that Kiran has 28,200 in the bank and 1,900 in cash, she owes Bashir Metals 3,000, and Hina Caterers owes her 2,000.

The remaining nominal accounts each need no balancing, because they have entries on one side only or one entry each. Capital is a credit of 40,000. Shop fittings is a debit of 9,000. Purchases is a debit of 6,500. Rent is a debit of 1,200. Sales is two credits, 4,800 and 2,300, giving 7,100. Purchases returns is a credit of 500. Sales returns is a debit of 400. Drawings is a debit of 800. Wages is a debit of 600.

Check your work: every amount in the analysis was entered once as a debit and once as a credit, so the debit entries and the credit entries both total 72,500.

Balancing an account

1. Add up each side separately.
2. Write the larger total in the total boxes on both sides, level with each other.
3. The difference goes on the smaller side as Balance c/d (carried down) on the last day of the period, so that both sides add to the same total.
4. Bring the balance down on the opposite side, dated the next day, as Balance b/d.

A debit balance on Bank or Cash means money held. A debit balance on a customer account means the customer owes the business. A credit balance on a supplier account means the business owes the supplier. A credit balance on Bank means the account is overdrawn.

Worked example 2: the two-question method

For each transaction, name the account debited and the account credited.

Transaction	Debit	Credit	Reason
A customer settles an old invoice in cash	Cash	Customer	Cash asset up, receivable down
A loan is paid into the business bank account	Bank	Loan	Asset up, liability up
Insurance is paid by bank	Insurance	Bank	Expense up, asset down
The owner pays a further sum into the bank	Bank	Capital	Asset up, capital up
A customer returns goods bought on credit	Sales returns	Customer	Expense up, receivable down
Goods are bought for cash	Purchases	Cash	Expense up, asset down

Common errors

• Writing the name of the account you are in, instead of the other account, in the details column.
• Reversing the customer and supplier rules. A customer is debited when it buys on credit. A supplier is credited when the business buys on credit.
• Treating Bank like a liability. Money in is a debit.
• Posting a return to the Sales or Purchases account instead of Sales returns or Purchases returns.
• Making only one entry. Every transaction needs a debit and a credit, including a cash sale.
• Balancing with the totals not level, or bringing the balance down on the same side as the Balance c/d.
• Treating drawings as an expense of the business. They have their own account, debited when the owner takes money or goods.

Next steps

Test yourself with the ledger accounting practice set, revise with the revision notes, tick off topics on the checklist, and try a free diagnostic. The course hub lists the rest of the course.

Frequently asked questions

What are the three ledgers in Edexcel IGCSE Accounting? The 4AC1 specification uses the nominal ledger, the receivables ledger and the payables ledger. Customer accounts go in the receivables ledger, supplier accounts in the payables ledger, and all other accounts, such as sales, purchases, expenses, capital, bank and cash, in the nominal ledger.

How do you decide which side of a ledger account to use? Ask which two accounts are affected and whether each is increasing or decreasing. Assets and expenses increase on the debit side, while liabilities, capital and income increase on the credit side.

What goes in the details column of a ledger account? The details column names the other account in the double entry, never the account you are writing in. Writing the account’s own name is a common error.

How do you balance a ledger account? Add each side, write the larger total on both sides level with each other, and put the difference on the smaller side as Balance c/d. Then bring it down on the opposite side, dated the next day, as Balance b/d.

What does a credit balance on the bank account mean? Bank is normally an asset with a debit balance, meaning money is held. A credit balance on the bank account means the account is overdrawn.

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.