Key Concepts
Reading a ledger account means translating each entry into a plain-English description of the transaction. Use the date, the account name in Particulars, and whether the entry is a debit or credit.
How to describe a ledger entry:
- State the date.
- Name the transaction type (purchase, sale, payment, return, etc.).
- State the accounts and amounts involved.
Tip:A good interpretation should give the reader enough information to reconstruct the journal entry — date, what happened, which accounts were affected, and the amount. If your description covers all four, you have answered the question fully.
Common entry types — quick reference:
| Entry in the ledger | What it means |
|---|---|
| CR "Sales returns" in a Trade receivables account | Customer returned goods previously bought on credit to the business |
| DR "Inventory" in a Trade payables account | Business returned goods previously bought on credit to the supplier |
| CR "Cash at bank" in a Trade receivables account | Customer paid the amount owing by cheque / bank transfer |
| DR "Cash at bank" in a Trade payables account | Business paid the amount owing to supplier by cheque / bank transfer |
| CR "Cash in hand" in a Trade receivables account | Customer paid the amount owing in cash |
| CR "Discount allowed" in a Trade receivables account | Cash discount granted to credit customer for early payment |
| DR "Discount received" in a Trade payables account | Cash discount received from credit supplier for early payment |
| DR "Interest income" in a Trade receivables account | Interest charged to credit customer for overdue debt |
| CR "Drawings" in an Inventory account | Owner withdrew goods from the business for personal use |
| DR Balance b/d in a Trade receivables account | Amount owed to the business at the start of the period |
| CR Balance b/d in a Trade payables account | Amount owed by the business to its supplier at the start of the period |
Double entries for purchase returns and sales returns:
- Purchase return (business returns goods to supplier): DR Trade payables — [Supplier] / CR Inventory
- Sales return (customer returns goods to business): DR Sales returns / CR Trade receivables — [Customer] (and separately: DR Inventory / CR Cost of sales to restore the goods)
Interest charged to customers:
When a customer's account is overdue, the business may charge interest — a fee for allowing the customer to continue owing money past the due date. In simple terms, interest is the cost of paying late.
- DR Trade receivables — [Customer] (debt increases)
- CR Interest income (business earns income)
Drawings of goods:
When the owner takes goods from the business for personal use:
- DR Drawings
- CR Inventory
| Date | Particulars | Dr ($) | Cr ($) | Balance ($) |
|---|---|---|---|---|
| 20X6 | ||||
| 1 Mar | Balance b/d | 1,200 Dr | ||
| 5 Mar | Sales revenue | 800 | 2,000 Dr | |
| 12 Mar | Cash at bank | 1,140 | 860 Dr | |
| 12 Mar | Discount allowed | 60 | 800 Dr | |
| 20 Mar | Sales returns | 200 | 600 Dr | |
| 28 Mar | Interest income | 30 | 630 Dr | |
| 1 Apr | Balance b/d | 630 Dr |
This is a Trade receivables — Yi Fei account. The debit balance means Yi Fei owes Firefly Traders money.
Description of each entry:
- On 1 Mar 20X6, Yi Fei owed Firefly Traders $1,200 carried forward from the previous period.
- On 5 Mar 20X6, Firefly Traders sold goods worth $800 to Yi Fei on credit.
- On 12 Mar 20X6, Yi Fei paid $1,140 by cheque for the amount owing. A cash discount of $60 was given.
- On 20 Mar 20X6, Yi Fei returned goods worth $200 previously bought on credit to Firefly Traders.
- On 28 Mar 20X6, Firefly Traders charged Yi Fei $30 interest for overdue payment.
- On 1 Apr 20X6, the balance of $630 was brought forward — Yi Fei owed Firefly Traders $630 at the start of April.
Why Each Step Matters
12 Mar: Two separate entries are used for the payment — one for the cash received and one for the discount given. Students sometimes combine them into a single entry, which loses the information about the discount given.
20 Mar: A sales return reduces what the customer owes — it is a credit entry in the Trade receivables account. Students sometimes debit this entry instead.
Confusing the direction of entries in Trade receivables. A credit entry in Trade receivables reduces what the customer owes (payment, return, discount given). A debit entry increases it (new sale, interest charged).
Misidentifying an interest charge as a sale. Interest charged to an overdue customer is credited to Interest income, not Sales revenue — no goods are involved.
Mixing up purchase returns and sales returns. Purchase return: DR Trade payables — [Supplier] / CR Inventory (goods go back, liability reduces). Sales return: DR Sales returns / CR Trade receivables — [Customer] (goods come back, amount owed reduces).