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Ledger in Accounting

Updated on January 3, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Ledger in Accounting?

Ledger in accounting records and processes a firm’s financial data, taken from journal entries. This becomes an important financial record for future reference. It is used for creating financial statements. It is also known as the second book of entry.

The entries are used to formulate a company’s trial balanceTrial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more, 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 sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more. This secondary book of account is categorized into assetsAssetsAssets in accounting refer to the organization's resources that hold specific economic value and facilitate business operations, meet expenses, and generate cash flow. They create the company's worth and are recorded in the balance sheet.read more, liabilitiesLiabilitiesLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more, revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more, expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more, and equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet.read more. Thus, the second book of entry systematically displays all transactional information associated with a particular account.

Key Takeaways

  • The ledger in accounting records journal entries from separate accounts in a chronological manner. It is maintained in a T format. For closing balance, It shows a debit or credit balance—at the end accounting period.
  • All ledger balances are transferred to the trial balance. Ledgers contain important data— income statements and balance sheets are formulated based on that information.
  • The second book of the entry contains eight columns—four on the debit side and four on the credit side—Date, Particulars, Reference Number, and Amount.

Ledger in Accounting

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Ledger in Accounting Explained

A ledger is a date-wise record of all the transactions related to a particular account. Ledgers are also called the secondary book of accounts or the second book of entry. It is represented in a tabular double-entry systemDouble-entry SystemDouble Entry Accounting System is an accounting approach which states that each & every business transaction is recorded in at least 2 accounts, i.e., a Debit & a Credit. Furthermore, the number of transactions entered as the debits must be equivalent to that of the credits. read more consisting of the debit and credit sides. Account balance is the debit or creditDebit Or CreditA debit is a left-hand accounting entry that increases an asset or expense account while decreasing a liability or equity account. Credit, on the other hand, is a right-hand accounting entry that decreases an asset or expense account while increasing a liability or equity account.read more surplus from the transactions pertaining to a particular account. The balance is acquired at the end of an accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more and transferred to the company’s trial balance.

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Ledgers are crucial sources of financial records. An organization initially records every financial transaction in a journal. The next step involves classifying journal entries into separate accounts and posting them in the ledger—cash account, salary account, and payables account.

The creation of a ledger involves the following steps:

  1. Approve all the journal entries and tally them for accuracy.
  2. Formulate a format by drawing debit and credit sides—modern format divides debit and credit sides further into four or three columns.  
  3. Label each of these four columns—Date, Particulars, Reference Number, and Amount.
  4. Now, post every journal entryJournal EntryJournal Entry format is the standard format used in bookkeeping to keep a record of all the business transactions of the company and is mainly based double-entry bookkeeping system of the accounting and ensures that the debit side and credit side are always equal. The standard format contains 5 columns – 1) Transaction Date 2) Particulars of Business Transaction 3) Folio Number 4) Debit Entry and 5) Credit Entry.read more into individual ledger accounts.
  5. At the end of the accounting year, calculate the final balance of every ledger account.

Ledger balancing assists in computing how much assets, liabilities, or revenue is left with the firm at the end of the year. Using this computation, an organization prepares its financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. Many accounting software is used for maintaining books of accounts.

There is a key difference between a journal and a ledger. A journal is the first step of financial reportingFinancial ReportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making.read more—all the accounting transactionsAccounting TransactionsAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. read more are analyzed and recorded as journal entries. In contrast, the ledger is the extension of the journal. Journal entries are recorded by the company in its general ledger.

Ledger in Accounting Video

 

Format

Ledgers have a T format where the debit is depicted on the left side, and credit is shown on the right side. Each side has four columns: date, particulars, reference number, and amount. New formats do not include reference number columns.

The template of a ledger is as follows: 

 Dr.                                                                      Cr.                           

DateParticularsRAmountDateParticularsRAmount
        

The book of accounts has two sides:

  1. Debit Side: The debit side of an account represents all the debit increases.
  2. Credit Side: This side shows all the credit increases of the account.

Different ledger columns are as follows:

  1. Date: The date of executing a particular transaction.
  2. Particulars: The contra accountContra AccountContra Account is an opposite entry passed to offset its related original account balances in the ledger. It helps a business retrieve the actual capital amount & amount of decrease in the value, hence representing the account’s net balances. read more of the concerned account in the double-entry system.
  3. Reference Number (R): It comprises the serial number of the journal entry. The number is mentioned in ledgers—journal folio.
  4. Amount: It is the amount debited or credited to the particular account during the transaction.

Example

Let us assume LMN Ltd. approves the following journal entries for the year ending on December 31, 2021:

  1. Machinery purchased for $17000 through cheque—January 1, 2021.
  2. Goods sold for $1950—March 18, 2021.
  3. Goods sold to XYZ Ltd. for $3600—May 20, 2021.
  4. DepreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more on machinery charged $1700—December 31, 2021.

Solution:

Journal Entries in the Books of LMN Ltd. for the year ending December 31, 2021:

S.N.DateParticularsDr. ($)Cr. ($)
101/01/21Machinery A/c                                    …. Dr. To Bank A/c17000 – 17000
218/03/21Cash A/c                                              …. Dr    To Sales A/c1950 – 1950
320/05/21XYZ Ltd. A/c                                        …. Dr    To Sales A/c3600 – 3600
431/12/21Depreciation A/c                               …. Dr    To Machinery A/c1700 – 1700

LMN Ltd. Ledger for the year ending December 31, 2021:

Machinery A/c

Dr.                                                                       Cr.                           

Date  ParticularsRAmount ($)DateParticularsRAmount ($)
01/01/21To Bank A/c117000  31/12/21  By Depreciation A/c  4  1700

Bank A/c

Dr.                                                                       Cr.                           

DateParticularsRAmount ($)DateParticularsRAmount ($)
    01/01/21By Machinery A/c117000

Cash A/c

Dr.                                                                       Cr.                           

DateParticularsRAmount ($)DateParticularsRAmount ($)
  18/03/21  To Sales A/c  2  1950    

Sales A/c

Dr.                                                                       Cr.                           

DateParticularsRAmount ($)DateParticularsRAmount ($)
    18/03/21

20/05/21
By Cash A/c

By XYZ Ltd. A/c
2

3
1950

3600

XYZ Ltd. A/c

Dr.                                                                       Cr.                           

DateParticularsRAmount ($)DateParticularsRAmount ($)
20/05/21To Sales A/c33600    

Depreciation A/c

Dr.                                                                       Cr.                           

DateParticularsRAmount ($)DateParticularsRAmount ($)
31/12/21To Machinery A/c41700    

Types

Given below are the three types of ledgers maintained by a business entity:

#1 – General Ledger

It is a collection of all the ledger accounts made during a certain period. It records various financial transactions of the business in separate accounts—assets, liabilities, revenues, expenses, and shareholders’ equityShareholders' EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders' Equity Statement on the balance sheet details the change in the value of shareholder's equity from the beginning to the end of an accounting period.read more. It is categorized as follows:

  1. Private Ledger: It is the restricted set of confidential accounts and can be accessed by very few people—capital accounts, goodwillGoodwillIn accounting, goodwill is an intangible asset that is generated when one company purchases another company for a price that is greater than the sum of the company's net identifiable assets at the time of acquisition. It is determined by subtracting the fair value of the company's net identifiable assets from the total purchase price.read more accounts, etc. 
  2. Nominal Ledger: It includes accounts related to income, expenses, losses, and gains—rent, salary, interest on loansInterest On LoansThe term “interest on loan” refers to the amount that a borrower is obligated to pay or a depositor is supposed to earn on a principal sum at a pre-determined rate, which is known as the rate of interest and the formula for interest can be derived by multiplying the rate of interest, the outstanding principal sum and the tenure of the loan or deposit.read more, etc.
General Ledger Functions

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#2 – Purchase Ledger

It specifically records high-value transactions which involve suppliers. Therefore, it represents the overall outstanding amount payable to a supplier. However, for low purchase volumes, entries can be made to the general book of accounts instead of the purchase book of accounts.   

#3 – Sales Ledger

A sales ledgerSales LedgerA sales ledger is a ledger entry that records any sale in the book of records, even if the payment is received or not yet received. It records the sales and the cash when received and the amount owed to the business.read more keeps a record of all credit salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more transactions made by customers. It shows individual accounts of each customer.

Frequently Asked Questions (FAQs)

How to make a ledger in accounting?

First, approve the journal entries by eliminating errors. Then create a format comprising all the accounts mentioned in the journal. Next, record each journal entry in the relevant ledger. Finally, find the balance for each account.

Is cash book a journal or ledger?

A cash book is both a journal and a ledger. Cash transactions are first entered into a cash book; then, it is recorded into the respective ledger— it acts as a journal. However, as it provides the closing cash balance at the end of the accounting period, it can also be used as the second book of entry.

How many ledger accounts are there?

Companies prepare three kinds of ledger:
1. General ledger
2. Sales ledger
3. Purchase ledger

This article has been a guide to what is Ledger in Accounting. Here is a tutorial on how to make & format ledger in accounting books/software along with its types. You may also have a look at other basic accounting articles –

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  2. clement mbowe says

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