THE LEDGER AND THE CASH ACCOUNT – TRADING AND PROFIT AND LOSS ACCOUNT
The average business man has so many matters to attend to and his transactions are so numerous that it is obviously impossible for him even to attempt to remember everything that happens.
For this reason he considers a written record essential to the proper conduct of his affairs and engages clerks to make permanent records of his correspondence, his purchases and sales and cash dealings.
Book-keeping is the name given to the record of the transactions which involve the transfer of money or money’s worth to or from the business.
The primary value of any record is that it is available for ready reference when required. Therefore, if the record is properly kept, it should be possible to find immediately how the firm stands in relation to its customers, what is owed to the firm and what is owed by the firm.
Further, it should show the purchases and sales made during a period of trading and from these figures, after taking into consideration the expenses paid or incurred, it should be possible to ascertain the profit made during that period.
This is sufficient, for the present, to indicate the purpose of book-keeping. The need for it is clear the moment one appreciates from experience the tremendous number of dealings in business houses today.
Not every trader, however, keeps his records in exactly similar form. There is more or less general agreement on the rules to be followed, but a trader adapts these rules to the special needs of his particular business.
The student, making his first acquaintance with the subject, is instructed in the general rules or principles and may thereafter proceed to study their application to the requirements of particular types of businesses.
This set of generally-accepted rules is known as the system side, known as the credit side, are both ruled in the same way.
Each side of the Ledger sheet has a narrow column on the extreme left for the date; a wider column next to it for the particulars of each transaction;
Next a narrow column headed “Folio” for reference purposes; and, finally, on the extreme right of each side is the money column ruled for £ and p.
In the past, Ledger sheets ruled in this way were bound together in a volume known as the Ledger.
Even today there are many small businesses in which all book-keeping is completed by hand and Ledgers ruled in this way are used.
Each sheet (or folio) of the Ledger is numbered and contains an account. There is a separate account for each aspect of the affairs of the business.
Thus all cash transactions are recorded in the Cash Account; the sale of goods is shown in the Sales Account; the payment of wages appears in the Wages Account and so on.
Today large businesses and many not so large businesses use accounting machines; much of the routine book-keeping, including completion of the Ledger accounts, is done by machinery.
Of course, office workers are still needed to operate these machines but in such businesses the labour of writing accounts by hand is no longer necessary.
In a mechanized accounts office the Ledger sheets cannot be bound together since a Ledger sheet must be inserted in the machine when an entry is to be made.
Loose-leaf Ledger sheets which are ruled in a slightly different way are used and these are filed in steel trays or boxes.
At this stage, however, we are concerned with the principles of book-keeping and variations in the details of presentation can be considered at a later stage.
The double-entry system involves the recording in the Ledger of the two aspects of every transaction.
If goods are bought for cash two things happen to the buyer which he records in his books, and two things happen to the seller, which he records in his books.
The buyer has parted with or “lost” money and has received or “gained” goods: the seller has parted with or “lost” goods and “gained” money.
The buyer will therefore record in his Cash Account the “loss” of money by crediting that account (entering on the right-hand side) and record in his Goods Received Account on the debit side that goods were received.
The seller in his books will debit his Cash Account showing money received and credit his Goods Sold Account, showing goods parted with.
Here, then, is a fundamental rule. Whenever a debit is made in one account a corresponding credit must be made in another account.
To enable the beginner to become better acquainted with the form an account takes in the Ledger, it would not be out of place at this point to prepare a Cash Account.
Such an account is a record of money received and money paid away, and is necessary not only for reference purposes but as a check on the amount of money in the firm’s till or cash box.
Without a separate record, it would not be possible to say whether the cash in hand at the close of business for the day is the correct sum or not, as it merely represents the difference between the cash placed in the till and the amounts taken out.
But we may assume the sum to be correct if it agrees with what the written record of cash takings and payments shows it should be.