Question

What are the ledgers, why do we use them?

And then HOW do we use them, how does information get into them how do balances get extracted. And then what should the balances for various accounts be, i.e. assets, liabilities, expenses, revenues, equity, dividends. Why SHOULD they have a particular balance as either debit or credit.

Answer 1

Ledgers are the T-shaped accounts which captur the accounting impact of various transactions that are related to a particular account and are prepared by using the information available in journals.

Reason for using the ledgers:
Though the journals capture the entire data regarding a transaction, we cannot find a balance of particular accont using journals. For example, establishing the amount outstanding from a particular customer using journal is tiresome work and hence there is necessity of quick summary information which gives an immediate snapshot of the position of a particular account which is why ledgers are prepared

How to use them?

A typical ledger will have 2 sides. The left-hand side is debit and right hand side is credit. Whenever we post a journal entry pertaining to a particular account the effect of the same is immediately provided in the ledger of that particular account and at regular intervals (say monthly, quarterly or annually, the aggregate of debits and credits are computed and the side of the ledger with surplus amount is said to be the balance side of the ledger and the surplus amount is said to be the balance amount of that particular account

Balances of various accounts:

Assets >> Debit Balance
Liabilities >> Credit Balance
Expenses >> Debit Balance
Revenues >> Credit Balance
Equity >> Credit Balance

The accounts have particular balancfe as either debit or credit owing to many reasons.
1. Normal balance: Every account depending upon its nature will have either debit or credit as their normal balance. The normal balance is that balance which increases the outstanding amount of the particular account. For example, the normal balance of assets account is debit and normal balance of liabilities account is credit

2. Golden Rules of Accounting: If we observe golden rules of accounting, we can clearly understand that whenever we purchase an asset on credit, we will debit such asset since asset is coming into the enterprise while we credit the vendor of machinery (since the vendor is giver and as per golden rule of personal accounts, we should credit the giver). So it can be understood that the increase of an asset is recorded through debit and increase in liability is recorded through credit.This analysis can be extended to all other financial items also.