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7 Min. Read


WHAT IS A LEDGER IN ACCOUNTING?

 1. Hub
 2. Accounting
 3. What Is a Ledger in Accounting?

August 10, 2022

A ledger is a book or digital record containing bookkeeping entries. Ledgers may
contain detailed transaction information for one account, one type of
transaction, or—in the case of a general ledger—summarized information for all
of a company’s financial transactions over a period.

Ledgers are also known as the second book of entry.

Ledgers contain the necessary information to prepare financial statements.

What this article covers:

 * What Is a Ledger?
 * What Is a Ledger Account?
 * How Do You Write a Ledger?
 * General Ledger Example
 * 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.


WHAT IS AN ACCOUNTING LEDGER?

A ledger is a book or digital record that stores bookkeeping entries. The ledger
shows the account’s opening balance, all debits and credits to the account for
the period, and the ending balance.

Companies can maintain ledgers for all types of balance sheet and income
statement accounts, including accounts receivable, accounts payable, sales, and
payroll. Transactions from subsidiary ledgers are periodically summarized and
transferred to the general ledger, which contains transaction data for all
accounts in the chart of accounts.

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 create financial
statements.


WHAT IS A LEDGER ACCOUNT?

A ledger account is a record of all transactions affecting a particular account
within the general ledger. Individual transactions are identified within the
ledger account with a date, transaction number, and description to make it
easier for business owners and accountants to research the reason for the
transaction.

Examples of common ledger accounts include:

 * Asset accounts, such as cash, prepaid expenses, accounts receivable, and
   furniture and fixtures
 * Liability accounts, including accounts payable, accrued expenses, lines of
   credit, and notes payable
 * Equity accounts, such as common stock, retained earnings, shareholder
   distributions, and paid-in capital
 * Revenue accounts, including sales and service fees
 * Expense accounts, such as advertising expenses, utilities, rent, salaries and
   wages, and supplies
 * Other income and expenses, such as interest, investment income, and gains or
   losses from the disposal of an asset

Check out the post “Maintaining a General Ledger” from Wolters Kluwer for a more
extensive list of general ledger accounts that might apply to medium to large
businesses.

How Bookkeepers Use Ledger Accounts

The company’s bookkeeper records transactions throughout the year by posting
debits and credits to these accounts. The transactions result from normal
business activities such as billing customers or purchasing inventory. They can
also result from journal entries, such as recording depreciation.

The ledger might be a written record if the company does its accounting by hand
or electronic records when it uses accounting software. According to CPA
Practice Advisor, only 18% of small- to medium-sized businesses do not use
accounting software.


HOW DO YOU WRITE AN ACCOUNTING LEDGER?

Most businesses use accounting software that posts all financial transactions
directly to the general ledger. However, if you want to create your own general
ledger, you’ll first need to understand the basics of double-entry bookkeeping.

In the double-entry system, each financial transaction affects at least 2
different ledger accounts. Each entry is recorded in two columns, with debit
postings on the left and credit entries on the right of the ledger. The total of
all debit and credit entries must balance.

Here is how to create your ledger and put it to use:

Step 1: Set Up Ledger Accounts

Start with the 5 account types: Assets, Liabilities, Equity, Revenue, and
Expenses (and perhaps Other Income and Expenses). Within each account type, list
the accounts you need. For example, under the Asset account type, you’ll create
a Cash account and an Accounts Receivable account.

Step 2: Create Columns

Make columns on the far left of the page for the date, transaction or journal
entry number, and description.

Make columns on the right side for debits, credits, and running balance. Debits
increase asset and expense accounts and decrease liability, revenue, and equity
accounts. Credits increase liability, revenue, and equity accounts and reduce
assets and expenses.

Step 3: Record Financial Transactions

Day-to-day, record your business transactions as they occur. If you’ve made a
journal entry, post it to the ledger immediately.

Step 4: Create a Trial Balance

Summarize the ending balances from the general ledger and present account level
totals to create your trial balance report. The trial balance totals are matched
and used to compile 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.

Check out this downloadable general ledger template if you want to create your
own General Ledger.


WHAT'S THE DIFFERENCE BETWEEN A JOURNAL AND A LEDGER?

Both the accounting journal and ledger play essential roles in the accounting
process. Bookkeepers primarily record transactions in a journal, also known as
the original book of entry.

After that, the bookkeepers can post transactions to the correct subsidiary
ledgers or the proper accounts in the general ledger. 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.


LEDGER MEANING VS. JOURNAL MEANING IN ACCOUNTING

In the double-entry bookkeeping method, financial transactions are initially
recorded in the journal. It’s also known as the primary book of accounting or
the book of original entry. The journal must include detailed descriptions for
every transaction.

On the other hand, the ledger is the second book of entry because it has
summarized information from the journal in the “T-account” format. It is used to
create the trial balance, which is also the source of financial statements such
as the income statement and the balance sheet


RECORDING TRANSACTIONS

Journalizing is the process of recording transactions in a journal as journal
entries. Posting is the process of transferring the all the transactions to the
ledger.

Journal entries are recorded in chronological order, making it easy to identify
the transactions for a given business day, week, or another billing period. By
contrast, entries in a ledger might group like transactions into specific
accounts to assess the data for internal financial and accounting purposes.

Transactions that occur frequently—such as revenues, cash receipts, purchases,
and cash payments—are typically recorded as journal entries first.


FORMAT

A journal format is simple. It includes the transaction date, particulars of the
transaction, folio number, debit amount, and credit amount. There’s no need to
balance journal entries.

The ledger uses the T-account format, where the date, particulars, and amount
are recorded for both debits and credits.

Ledger accounts almost always start out with an opening balance. For balance
sheet accounts, the opening balance is usually the closing balance from the
previous period. Income statement accounts start with an opening balance of zero
because revenues and expenses should have been closed to retained earnings at
the end of the prior period. At the end of the period, all ledger amounts should
balance. In other words, debts must equal credits.

Preparing a ledger is vital because 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 enables you
to compile a trial balance and helps you spot unusual transactions and create
financial statements.

Using a ledger, you can maintain an accurate record of your business’s financial
transactions, generate financial reports, and monitor business results.

But you don’t have to be intimately acquainted with journals and ledgers to keep
tabs on the financial health of your business. Using accounting software or
working with a professional bookkeeper or accountant makes it easier to record
every transaction and make sure they balance every time.

--------------------------------------------------------------------------------

RELATED ARTICLES


What Is Accounting? the Basics, Explained

What Is Management Accounting?

What Are Liquid Assets? A Primer for Small Businesses

Allowance for Doubtful Accounts: Deduction Technique Explained

How to Close the Books: 8 Steps for Small Business Owners

When Should I Hire an Accountant

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