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
Mr. M buys goods in cash. What would be the ledger entry in accounting?
Here the journal entry is –
To Cash A/C…..Credit
Here, we will have two accounts – “purchase” account and “cash” account.
|9.9.17||To Cash A/C||10,000|
|9.9.17||By Purchase A/C||10,000|
G Co. sells goods in cash. Which account will be debited and which account will be credited?
In this case, the journal entry is –
To Sales A/C…..Credit
The ledger accounts for this journal entry would be as follows –
|11.9.17||To Sales A/C||50,000|
|11.9.17||By Cash A/C||50,000|
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
|14.9.17||To Cash A/C||100,000|
|14.9.17||By 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. A/C||100,000|
More capital is being invested in the company in the form of cash.
In this example, the journal entry is –
To Capital A/C……Credit
The ledger entry for this journal entry would be as follows –
|15.9.17||To Capital A/C||200,000|
|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 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., 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. 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 –