A ledger is a financial book containing a written or digital record of all completed business transactions. It is used for posting and balancing cash transactions in a summarized pattern in a business during its financial year.
Together we will go through everything you need to know.
What Is A Ledger Account?
A ledger account often refers to a general ledger – used by various companies to summarize and organize all of their records in the accounting system.
In the past – a ledger was a large book with financial information [bookkeeping] recorded by hand. But in modern times, as the records by hand became complex and time-consuming, the use of bookkeeping software came to light.
Sub-ledgers vs. General ledgers
Sub-ledgers are books used to document business transactions whereas, general ledgers are used as the master notebook to summarize information from the sub-ledger. Here are a few examples of a sub-ledger:
- Inventory: Is a current asset with all the items, goods, and materials held by business owners for selling to their clients to earn profit [asset account].
- Accounts receivable: Refers to the number of money buyers owe to sellers for their purchases [asset account].
- Cash and cash equivalents: Are liquid assets your company owns that are readily cashable [equity account].
- Accounts payable: Accounts payable are any sum of money owed by a business to its suppliers [expense account].
There are five categories of the general ledger;
Let us go through the different categories of a general ledger:
- Assets: These are resources owned or controlled by business owners/ individuals to produce positive economic value.
- Liabilities: Liabilities are future financial debt and obligations of the business. They represent a creditor’s claim on business assets. Examples are taxes, employee wages, mortgages, e.t.c.
- Equity: There exists both positive and negative equity. If the proportion of assets is more than that of the liabilities, it is a case of positive equity. An opposite situation is called negative equity.
- Revenue: This refers to income earned by business owners through the sale of their goods and services. These include all earnings made by business such as sales royalties, e.t.c.
- Expenses: This occurs when a business owner pays in return for goods and services purchased. Examples are rent, travel expenses, e.t.c.
How Do You Write A Ledger?
Here are steps on how best to write a ledger:
- For each account you are working on, make a ledger. For unusual or odd expenses – create a general ledger account.
- Create columns on the far left of the page for the date, journal number, and description.
- Create columns on the left side for debit, credit, and balance; Debit refers to the money you receive, credit refers to the money you paid or owed. Balance is the difference between both.
- Input the information from the journals into related accounts; Place debits and credits side by side. Calculate the balance you have earned or owe.
- Document and adjust changes to the transactions as they occur. For example, If you have made a journal entry, post it to the ledger instantly.
- Combine the different accounts to make a complete ledger. The front page includes the chart of accounts, listing each account in the ledger and its number.
- Preparing a trial balance is the next step in an accounting period. The trial balance totals are matched and used to organize financial statements.
What is a Journal?
A journal keeps a record of all transactions made in a business. It is a book of the original entry because if any financial transaction occurs, the business owner/accountant will first record this transaction in its journal.
Journal vs. Ledger
The difference cuts across multiple areas:
- Recording/ documentation: Recording of transactions in the journal happens in the first stage of accounting. On the other hand, in the case of a ledger, it occurs in the second stage.
- Nature: In nature, a ledger is a book of final entries, whereas, in the journal, they are books of original entries.
- Use: Journals are used daily to record transactions as they happen, whereas ledgers are used periodically, like monthly or weekly.
- Preparation: Ledgers are prepared on the basis/ information from journals whereas, journals are based on the source documents.
- Balancing: Journals can’t be balanced, whereas all accounts will be balanced in the ledger, except nominal accounts, e.t.c.
Why are Ledgers important?
They are important because,
- Calculation of profit and loss in every company: Every company needs to create a profit and loss statement on accounting to determine the position of their financial records as it is impossible to make without creating relevant ledger accounts.
- It saves time: With the feature of all entries recorded in one place, it becomes less time-consuming in preparing accounts like trading, profit, and loss.
It’s imperative: Every business owner is obliged to prepare ledger accounts of the parties involved in every transaction for maintaining the correctness or accuracy of the transactions that occurred during the year/ business cycle. You can learn more about the importance of accounting reports in this blog
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