Ledger in Accounting

What is Ledger in Accounting?

Ledger in accounting, also known as the second book of entry, is defined as a book that summarizes all the journal entries in the form of debit and credit so that they can be used for future reference and for creating financial statements.

Ledger in Accounting

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Ledger Formats and Accounting Entries

Example#1

Mr. M buys goods in cash. What would be the ledger entry in accounting?

Here the journal entry is –

Purchase A/C…..Debit

To Cash A/C…..Credit

Here, we will have two accounts – “purchase” account and “cash” account.

Purchase A/C

Dr                                                                     Cr

DateParticularsAmount ($)DateParticularsAmount
9.9.17To Cash A/C10,000   
      

Cash A/C

Dr                                                                     Cr

DateParticularsAmount ($)DateParticularsAmount
   9.9.17By Purchase A/C10,000
      

Example#2

G Co. sells goods in cash. Which account will be debited and which account will be credited?

In this case, the journal entry is –

Cash A/C……Debit

To Sales A/C…..Credit

The ledger accounts for this journal entry would be as follows –

Cash A/C

Dr                                                                     Cr

DateParticularsAmount ($)DateParticularsAmount
11.9.17To Sales A/C50,000   
      

Sales A/C

Dr                                                                     Cr

DateParticularsAmount ($)DateParticularsAmount
   11.9.17By Cash A/C50,000
      

Example#3

Mr. U pays off his long term debt in cash. What would be the ledger entry?

In this example, the journal entry is –

Long term debt A/C……Debit

To Cash A/C……..Credit

The ledger for this journal entry would be as follows –

Long Term Debt A/C

Dr                                                                Cr

DateParticularsAmount ($)DateParticularsAmount
14.9.17To Cash A/C100,000   
      

Cash A/C

Dr                                                  Cr

DateParticularsAmount ($)DateParticularsAmount
   14.9.17By Long Term DebtTerm DebtLong-term debt is the debt taken by the company that gets due or is payable after one year on the date of the balance sheet. It is recorded on the liabilities side of the company's balance sheet as the non-current liability.read more A/C100,000
      

Example#4

More capital is being invested in the company in the form of cash.

In this example, the journal entry is –

Cash A/C……Debit

To Capital A/C……Credit

The ledger entry for this journal entry would be as follows –

Cash A/C

Dr                                                                     Cr

DateParticularsAmount ($)DateParticularsAmount
15.9.17To Capital A/C200,000   
      

Capital A/C

Dr                                                                  Cr

DateParticularsAmount ($)DateParticularsAmount
   15.9.17By Cash A/C200,000
      

One thing that should be mentioned here: In normal situations, we need to balance the ledgers. But since we don’t have the full information about the last transaction of the year (or a particular period), we have kept the ledger accounts open.

When we balance the account, we use “balance c/d,” which means that the balance has been carried down in the next period. So that means the account is balanced until this period, and we can transfer it to the trial balance, income statement, and balance sheet for that particular period, usually a year.

Why is Ledger Important?

Ledger in accounting book is a source of trial balance, income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more, and balance sheet.

Ledger, in its truest sense, is a source of all other financial statements. By looking at the ledger, one can understand what transactions are recorded, what happened during a particular period, and how one looks at a company should.

For example, by balancing the ledger, we will either have a debit balanceDebit BalanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction.read more or credit balance in each account. These accounts are then taken into account, and a trial balance is made to see whether two sides (debit and credit) are matching. If the two sides don’t match, the accountant needs to see through the entries and find out whether there is an error in recording transactions. If the accountant isn’t able to find the error immediately, an account is created to balance two sides. It is called a “suspense” account. This “suspense” account can be on the debit side or the credit side, depending upon which side is lower than the other.

Ledger in Accounting Video

 

This article has been a guide to what is Ledger in Accounting and its definition? Here we discuss the format of the ledger along with accounting entries and its explanation. You may also have read through our other articles on basic accounting –

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