What Is a Ledger in Accounting?
A ledger is a book containing accounts in which the classified and summarized information from the journals is posted as debits and credits. It is also called the second book of entry.
The ledger contains the information that is required to prepare financial statements. It includes accounts for assets, liabilities, owners' equity, revenues and expenses. This complete list of accounts is known as the chart of accounts. The ledger represents every active account on the list.
What this article covers:
- What Is a Ledger Account?
- How Do You Write a Ledger?
- What's the Difference Between a Journal and a Ledger?
NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.
What Is a Ledger Account?
The accounting ledger contains a listing of all general accounts in the accounting system’s chart of accounts.
Here are the primary general ledger accounts:
- Asset accounts include fixed assets, prepaid expenses, accounts receivable and cash
- Liability accounts which include notes payable, lines of credit, accounts payable and debt
- Stockholders’ equity accounts
- Revenue accounts
- Expense accounts
- Revenue and loss accounts such as interest, investment, disposal of an asset
These transactions are recorded throughout the year by debiting and crediting these accounts. The transactions are caused by normal business activities such as billing customers or through adjusting entries.
The ledger account may be in the form of a written record if accounting is done by hand or in the form of electronic records when accounting software packages are used.
How Do You Write a Ledger?
Businesses that use the double-entry bookkeeping method of recording transactions make the accounting ledger. Each transaction is recorded into at least two ledger accounts. The entries have debit as well as credit transactions and are posted in two columns. The debit
A general ledger is used by businesses that employ the double-entry bookkeeping method, which means that each financial transaction affects at least two general ledger accounts and each entry has a debit and a credit transaction. Double-entry transactions are posted in two columns, with debit postings on the left and credit entries on the right, and the total of all debit and credit entries must balance.
Ledgers break up the financial information from the journals into specific accounts such as Cash, Accounts Receivable and Sales, on their own sheets. This allows you to see the details of all your transactions.
- Make a ledger for each account. For example, a cash account ledger will contain all the cash transactions of your business. For unusual or odd expenses, make a general ledger account
- Make columns on the far left of the page for the date, journal number and description
- Make columns on the left side for debit, credit, and balance. Debit refers to the money you receive while credit refers to the money that you paid or owe. Balance is the difference between the debit and credit
- Enter the information from the journals into related accounts. Place related debits and credits side by side. Calculate the balance you’ve earned or owe
- Record and make changes to the transactions as they occur. If you’ve made a journal entry, post it to the ledger immediately
- Combine the different accounts to make a full ledger. The front page includes the chart of accounts, listing each account in the ledger and its number
The next step in the accounting cycle is to create a trial balance. The information in the ledger accounts is summed up into account level totals in the trial balance report. The trial balance totals are matched and used to compile financial statements.
What's the Difference Between a Journal and a Ledger?
The journal and ledger both play an important role in the accounting process. The business transactions are primarily recorded in the journal and thereafter posted into the ledger under respective heads. While many financial transactions are posted in both the journal and ledger, there are significant differences in the purpose and function of each of these accounting books.
The financial transactions are summarized and recorded as per the double entry system in a journal. It’s also known as the primary book of accounting or the book of original entry.
The ledger, on the other hand, is known as the principal book of accounting. It records the information from the journal in the “T” format. It is used to create the trial balance which is also the source of the financial statements such as the income statement and the balance sheet
The process of recording transactions in a journal is called journalizing while the process of transferring the entries from the journal to the ledger is known as posting.
The transactions in a journal are recorded in a chronological order making it easy to identify the transactions are associated with a given business day, week, or another billing period. By contrast, the arrangement of entries within a ledger has more to do with grouping like transactions together into specific accounts for purposes of assessing the data for internal financial and accounting purposes.
The format of a journal is simple. It includes the transaction date, particulars of the transaction, folio number, debit amount and credit amount. There is no scope for balancing in a journal.
The format of a journal:
|Transaction date||Account title and details||Ledger folio number||Amt.||Amt.|
The ledger uses the “T” format where the date, particulars, and amount is recorded in each side.
The format of a ledger:
|Date||Particulars||Folio Number||Amount||Date||Particulars||Folio Number||Amount|
|Transaction date||Account name||Transaction amount||Transaction date||Account name||Transaction amount|
Unlike a journal, some ledger accounts start with an opening balance that is the closing balance of the previous year. Also, in the end, the ledger amounts should be balanced.
Preparing a ledger is important as it serves as a master document for all your financial transactions. Since it reports revenue and expenses in real time, it can help you stay on top of your spending. The general ledger also helps you compile a trial balance, spot unusual transactions and aids in the creation of financial statements.