Step by step to design a Ledger Account using Debit & Credit rules with a clear example
Table of Content:
📘 What is a Ledger Account?
A Ledger Account is where all transactions related to a particular account (like Cash, Sales, Purchases, Capital, etc.) are posted after recording in the Journal.
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Debit (Dr.) side → Left side
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Credit (Cr.) side → Right side
Rule:
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Debit → what comes in / assets increase / expenses increase
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Credit → what goes out / liabilities increase / revenues increase
📝 Step-by-Step Example
We’ll use 3 simple transactions:
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Owner invests $10,000 cash into business.
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Purchased Goods for $2,000 cash.
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Sold Goods for $3,000 cash.
Step 1: Journal Entries
| Date | Particulars | Debit ($) | Credit ($) |
|---|---|---|---|
| 01-01-XX | Cash A/c Dr. | 10,000 | |
| To Capital A/c | 10,000 | ||
| 02-01-XX | Purchases A/c Dr. | 2,000 | |
| To Cash A/c | 2,000 | ||
| 03-01-XX | Cash A/c Dr. | 3,000 | |
| To Sales A/c | 3,000 |
Step 2: Design Ledger Accounts
1️⃣ Cash Account
| Date | Particulars | Debit ($) | Credit ($) | Balance ($) |
|---|---|---|---|---|
| 01-01-XX | Capital | 10,000 | 10,000 Dr | |
| 02-01-XX | Purchases | 2,000 | 8,000 Dr | |
| 03-01-XX | Sales | 3,000 | 11,000 Dr |
Explanation:
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Cash increased by owner investment → Debit
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Cash decreased by purchase → Credit
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Cash increased by sales → Debit
2️⃣ Capital Account
| Date | Particulars | Debit ($) | Credit ($) | Balance ($) |
|---|---|---|---|---|
| 01-01-XX | Cash | 10,000 | 10,000 Cr |
Explanation:
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Capital is an equity account → increases on Credit
3️⃣ Purchases Account
| Date | Particulars | Debit ($) | Credit ($) | Balance ($) |
|---|---|---|---|---|
| 02-01-XX | Cash | 2,000 | 2,000 Dr |
Explanation:
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Expense (Purchases) increases → Debit
4️⃣ Sales Account
| Date | Particulars | Debit ($) | Credit ($) | Balance ($) |
|---|---|---|---|---|
| 03-01-XX | Cash | 3,000 | 3,000 Cr |
Explanation:
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Revenue increases → Credit
Step 3: Trial Balance
A Trial Balance is a financial report that lists all the final balances of a company's general ledger accounts at a specific point in time. It is a fundamental tool in the double-entry accounting system used primarily to check for the mathematical accuracy of the bookkeeping.
| Account Name | Debit ($) | Credit ($) |
|---|---|---|
| Cash A/c | 11,000 | |
| Purchases A/c | 2,000 | |
| Sales A/c | 3,000 | |
| Capital A/c | 10,000 | |
| Totals | 13,000 | 13,000 |
✅ Debits = Credits → Ledger is correct
Step 4: Financial Statements
Income Statement (Profit & Loss)
| Particulars | Amount ($) |
|---|---|
| Revenue (Sales) | 3,000 |
| Less: Purchases | (2,000) |
| Net Profit | 1,000 |
Balance Sheet
| Liabilities & Equity | Amount ($) | Assets | Amount ($) |
|---|---|---|---|
| Capital | 10,000 | Cash | 11,000 |
| Add: Net Profit | 1,000 | ||
| Total Equity | 11,000 | Total | 11,000 |
✅ Key Takeaways
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Ledger shows all transactions for an account with Debit & Credit.
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Each account has a running balance.
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Ledger is used to prepare Trial Balance → then Financial Statements.
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Debit = Assets increase / Expenses increase
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Credit = Liabilities increase / Revenue increase / Equity increase