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 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
| Date | Particulars | Amount ($) | Date | Particulars | Amount |
| 9.9.17 | To Cash A/C | 10,000 | |||
Cash A/C
Dr Cr
| Date | Particulars | Amount ($) | Date | Particulars | Amount |
| 9.9.17 | By Purchase A/C | 10,000 | |||
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
| Date | Particulars | Amount ($) | Date | Particulars | Amount |
| 11.9.17 | To Sales A/C | 50,000 | |||
Sales A/C
Dr Cr
| Date | Particulars | Amount ($) | Date | Particulars | Amount |
| 11.9.17 | By Cash A/C | 50,000 | |||
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
| Date | Particulars | Amount ($) | Date | Particulars | Amount |
| 14.9.17 | To Cash A/C | 100,000 | |||
Cash A/C
Dr Cr
| Date | Particulars | Amount ($) | Date | Particulars | Amount |
| 14.9.17 | By Long Term Debt A/C | 100,000 | |||
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
| Date | Particulars | Amount ($) | Date | Particulars | Amount |
| 15.9.17 | To Capital A/C | 200,000 | |||
Capital A/C
Dr Cr
| Date | Particulars | Amount ($) | Date | Particulars | Amount |
| 15.9.17 | By Cash A/C | 200,000 | |||
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 statement, 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 balance 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
Recommended Resources
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 –
