A ledger serves as a comprehensive record, either in book or digital form, that encompasses bookkeeping entries. It can encompass detailed transaction data related to a specific account, a particular type of transaction, or, in the case of a general ledger, condensed information summarizing all financial transactions conducted by a company over a defined period.
Often referred to as the second book of entry, ledgers play a crucial role in providing the essential details required for the preparation of financial statements.
This article delves into various aspects related to ledgers, including their definition, the concept of ledger accounts, the process of ledger writing, an illustrative example of a general ledger, and a comparison between journals and ledgers.
It’s important to note that while the FreshBooks Support team can assist with inquiries about FreshBooks, they are not certified income tax or accounting professionals. For advice in these areas, particularly concerning income tax, it is recommended to consult with a qualified accountant.
What Is an Accounting Ledger?
An accounting ledger, whether in physical or digital form, serves as a repository for bookkeeping entries. It displays the opening balance of an account, all debits and credits recorded during a specific period, and the concluding balance.
Businesses can uphold ledgers for various balance sheet and income statement accounts, encompassing accounts receivable, accounts payable, sales, and payroll. Transactions from subsidiary ledgers are periodically consolidated and moved to the general ledger, which contains transaction details for all accounts listed in the chart of accounts.
The preparation of a ledger is vital as it functions as a comprehensive record for all financial transactions. By providing real-time reporting of revenue and expenses, it facilitates effective financial monitoring. Additionally, the general ledger aids in generating a trial balance, identifying unusual transactions, and crafting financial statements.
What Is a Ledger Account?
A ledger account constitutes a log of all transactions impacting a specific account within the general ledger. Each transaction within the ledger account is specified with a date, transaction number, and description, simplifying research for business owners and accountants seeking to understand the rationale behind each transaction.
Common ledger accounts include:
- Asset accounts, such as cash, prepaid expenses, accounts receivable, and furniture and fixtures
- Liability accounts, encompassing accounts payable, accrued expenses, lines of credit, and notes payable
- Equity accounts, including common stock, retained earnings, shareholder distributions, and paid-in capital
- Revenue accounts, involving sales and service fees
- Expense accounts, covering advertising expenses, utilities, rent, salaries and wages, and supplies
- Other income and expenses, such as interest, investment income, and gains or losses from asset disposal
For a more comprehensive list of general ledger accounts applicable to medium to large businesses, refer to Wolters Kluwer’s post on “Maintaining a General Ledger.”
How Bookkeepers Use Ledger Accounts
Throughout the year, the company’s bookkeeper logs transactions by recording debits and credits to various accounts. These transactions stem from routine business operations like invoicing customers or procuring inventory, as well as from journal entries, such as noting depreciation.
The ledger can take the form of a written record for manual accounting or electronic records when accounting software is utilized. According to CPA Practice Advisor, a mere 18% of small- to medium-sized businesses opt not to employ accounting software.
How Do You Write an Accounting Ledger?
While many businesses leverage accounting software for direct posting to the general ledger, creating a manual general ledger requires a grasp of double-entry bookkeeping basics.
In the double-entry system, each financial transaction impacts at least two distinct ledger accounts. Entries are documented in two columns, with debits on the left and credits on the right. The sum of all debit and credit entries must reconcile.
Here’s a guide to creating and using your ledger:
Step 1: Set Up Ledger Accounts
Commence with the five account types: Assets, Liabilities, Equity, Revenue, and Expenses (potentially Other Income and Expenses). Under each account type, list the specific accounts needed. For instance, within the Asset account type, establish a Cash account and an Accounts Receivable account.
Step 2: Create Columns
Designate columns on the left for date, transaction or journal entry number, and description. On the right, allocate columns for debits, credits, and running balance. Debits augment asset and expense accounts while diminishing liability, revenue, and equity accounts. Credits boost liability, revenue, and equity accounts and decrease assets and expenses.
Step 3: Record Financial Transactions
Record daily business transactions promptly as they occur. If a journal entry is made, promptly post it to the ledger.
Step 4: Create a Trial Balance
Compile ending balances from the general ledger, presenting account-level totals to generate a trial balance report. The trial balance totals are reconciled and used in the compilation of financial statements.
General Ledger Example
Following is an example of a general ledger report from FreshBooks. It shows all of the activity for accounts receivable for the month of April, including debits and credits to the general ledger account and the net change to the account for the month.
|————|—————————-|—————————-|————|————-|———————-|
| 2023-04-01 | JE-001 | Invoice #1234 | 1,000.00 | | 1,000.00 |
| 2023-04-05 | JE-002 | Payment from Customer A | | 800.00 | 200.00 |
| 2023-04-10 | JE-003 | Invoice #1235 | 1,500.00 | | 1,700.00 |
| 2023-04-15 | JE-004 | Adjustment – Credit Memo | | 200.00 | 1,500.00 |
| 2023-04-25 | JE-005 | Payment from Customer B | | 1,000.00 | 500.00 |Net Change for April: $500.00
This example provides a snapshot of the transactions affecting the accounts receivable ledger throughout April, showcasing the meticulous recording of debits and credits, along with the resulting net change in the account for the month.
If you’re considering creating your own General Ledger, you can explore this downloadable general ledger template.
Now, let’s delve into understanding the key differences between a Journal and a Ledger in accounting:
Ledger Meaning vs. Journal Meaning in Accounting: In the double-entry bookkeeping method, financial transactions find their initial recording in the journal, also known as the primary book of accounting or the book of original entry. Each transaction in the journal requires detailed descriptions.
On the contrary, the ledger, considered the second book of entry, presents summarized information from the journal in the “T-account” format. It serves the purpose of creating the trial balance, a crucial source for financial statements like the income statement and the balance sheet.
Recording Transactions: The process of recording transactions in a journal is known as journalizing, where entries are made in chronological order. Posting, on the other hand, involves transferring all transactions to the ledger. While many financial transactions appear in both the journal and ledger, each serves distinct functions.
Transactions that occur frequently, such as revenues, cash receipts, purchases, and cash payments, are typically first recorded as journal entries. Entries in a ledger may group similar transactions into specific accounts for internal financial and accounting analysis.
Format: The journal follows a straightforward format, including the transaction date, particulars of the transaction, folio number, debit amount, and credit amount. Unlike the ledger, there’s no need to balance journal entries.
In summary, the journal and ledger are integral components of the accounting process, with the journal serving as the initial record of transactions and the ledger providing summarized information in a structured format for further financial analysis and reporting.
The ledger uses the T-account format, where the date, particulars, and amount are recorded for both debits and credits.
Ledger accounts typically commence with an opening balance, and for balance sheet accounts, this is usually the closing balance from the preceding period. On the other hand, income statement accounts initiate with an opening balance of zero because revenues and expenses are expected to have been closed to retained earnings at the conclusion of the prior period. It is crucial that, by the end of the period, all ledger amounts align, meaning that debits must equal credits.
The preparation of a ledger is indispensable as it functions as a central document for all financial transactions. By providing real-time reporting of revenue and expenses, it facilitates effective monitoring of spending. Additionally, the general ledger aids in compiling a trial balance, identifying unusual transactions, and crafting financial statements.
The use of a ledger allows for the accurate maintenance of a record of a business’s financial transactions, the generation of financial reports, and the continuous monitoring of business results.
While a comprehensive understanding of journals and ledgers is beneficial, it’s not essential for effectively managing the financial health of your business. Leveraging the best accounting software or collaborating with a professional bookkeeper or accountant simplifies the recording of every transaction, ensuring balance and accuracy consistently.
