Basics of Ledger Accounts in Accounting

You already know that business transactions are recorded in various Accounting books. The Accounting process does not stop here. The transactions are written in several Accounting books in chronological order. Such recording of business transactions only serves little purpose in the Accounting process. Items of the same name under all the books need to be recorded under a special place called to Account. Every item has a separate Account and all these Accounts are recorded in a book called Ledger.

Meaning and Features of Ledger

All the Accounts recognized based on transactions recorded in different journals will be opened and maintained in a separate book called Ledger. 

So a Ledger is a book of Accounts; in which all types of Accounts relating to assets, liabilities, capital, expenses and revenues are maintained. It is a complete set of Accounts of a business enterprise.

Ledger is in a  book with pages consecutively numbered. It can also be a bundle of sheets.

All the items from the journal are recorded in Ledger Accounts and this process is known as posting entries from Journal to Ledger Accounts.

Features of Ledger Account

1. A Ledger book is an Accounts book to which various transactions of an enterprise are posted under different Accounts.

2. It follows the double-entry system.

3. It is also known as the Principal book of Account as it is the book of final entry of transactions after the journal or all-purpose books. 

4. In the Ledger, all the types of Accounts relating to assets, liabilities, capital and revenue are maintained. 

5. It is the only record of the business transaction classified into relevant Accounts.

6. It facilitates the preparation of financial statements in future.

Format of a Ledger Account

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Types of Ledger Accounts

1. General Ledger- 

A general Ledger is the master collection of all the Accounts that summarize all transactions occurring within an enterprise. There may be a small set of Ledgers that fall under the general Ledger. The general Ledger is used to record all the transactions in the financial statements of the business.  

It comprises a debit and credit entry for every transaction recorded into it, to match the total debit and credit balance. It has to match to prepare the financial statements from it. 

They are of two types-

1. Nominal Ledger-  As the name suggests it contains all nominal Accounts i.e. expense, losses, incomes and gains. Examples – Salaries, Sales, Purchases, Returns Inward/Outward, Rent, Stationery, Insurance, Depreciation, etc.

2. Private Ledger- Private Ledger consists of Accounts that are confidential such as capital, drawings, salaries, etc. These Accounts are only accessible by selected individuals.

2. Purchase Ledger

Purchase Ledger records all the transactions the company has done with the suppliers. It shows which purchases are paid and which are outstanding. If the purchasing volume is relatively low, then there is no need for a purchase Ledger. Instead, this information is recorded directly within the general Ledger. 

Each Account will generally have a credit balance and this shows the amount owed to a supplier by the business. The Sum of all the money owed by a business to its suppliers is known as Accounts payable. 

3. Sales Ledger- 

If the business just has one customer, it will not need to maintain a sales Ledger but just one Account in the Nominal Ledger will be enough. But, many businesses sell in credit and have many customers, for them maintaining a sales Ledger is very important.

This Account records all the transactions in which the goods have been sold to the customer in credit. The Sum of all the money which has been given on credit is called Accounts receivable.

Importance of Ledger Balance

Ledger is the spine of business Accounting as it has all the records of all the transactions in separate Accounts. Towards the end of the Accounting period, all Accounts will contain the entire information of all the transactions relating to it. 

1. Core information about business

Ledger provides a comprehensive report of all the transactions which helps the business to look through the expenses and incomes. If there are any discrepancies are found amongst both, then necessary actions are taken.

2. Knowledge of book value of assets

Ledger is a hub of all the assets related records of the business.it keeps a separate Account for each asset and all the transactions relating to it. The book value of any asset can be derived from the Ledger at any time.

3. Useful for management

Information given by the Ledger Accounts is used further in financial statements to derive the company’s growth or reasons for any loss. Management can make effective decisions based on it.

4. Reason for the disparity in expenses or incomes

The Ledger records all the expenses of the business and all the incomes too. So if there is any difference in their balance, then they have to reevaluate and fix the problem.

Posting a Ledger Entry

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Posting-

1. Every journal entry will have to be posted into all separate and respective Accounts which have been debited and credited in the journal entry. For example, for purchase machinery, machinery a/c is debited and purchases a/c  is credited in the journal. When this entry is posted in the Ledger, it must be posted in machinery a/c and as well as in Sales Account. 

2. Posting will be done on the debit side of the Account which has been debited in the journal book, and the credit side of the Account which has been credited in the journal book. In the case of the above example of the machinery purchase, posting will be made on the debit side of the machinery a/c Account, as it has been debited in a journal and the credit side of Purchases a/c as it had been credited in the journal. 

3. The date of the transaction has to be put in the date column. The method of recording the data in the Ledger is the same as in a journal. 

4. While posting on the debit side of an Account, in the particulars column we should write the name of the Account which had been credited in the journal and add the word 'To' before the name. 

5. Similarly while posting on the credit side of an Account, we should put the name of the Account which has been debited in the journal and add the word 'By' before the name. In the case of the above example, we shall write 'To purchases A/c' in the particulars column on the debit side of the Cash Account; and 'By Machinery A/c' in the particulars column on the credit side of the Sales Account. 

6. Posting in both sides, debit and credit should have entries then only a Ledger Account is complete.

7. In the folio column, we have to mention the page number of the journal where the concerned journal entry is recorded. At the same time, the page number of the Ledger Accounts will be entered in the Ledger folio.' column in the journal to complete the cross-reference. 

8. The amount is written in the journal entry must be entered in both the amount columns of the Ledger Account.

The Definition of a Ledger Account

A Ledger Account is a book in which a business keeps track of all of its transactions and financial statements. The balance sheet is arranged under the general Ledger with many Accounts such as assets, Accounts receivable, Accounts payable, stockholders, liabilities, equities, revenues, taxes, expenses, profit, loss, funds, loans, bonds, stocks, salaries, wages, and so on. In this article, we'll go through the format and examples of Ledger Accounts, as well as the many types of Ledgers, Ledger posting, and Ledger Account templates in Excel, Google Sheets, and PDF.

Meaning of Ledger Accounts

A Ledger is a book in which the Accounts are kept. Only the Accounts produce any financial statement relating to the company's financial status. As a result, this Ledger is referred to as the main book. As a result of all of this, it is important to link all of the data for any Account available in the Ledger. This Accounting book is the most significant in every firm, which is why it is referred to as the "King of All Books." In addition, the Ledger book is often known as the final entry book. The Ledger Account is the book that contains all of the company's Accounting information.

The Different Types of Ledgers

There are three different types of Ledgers:

1. Sales Ledger - A sales Ledger is a book in which a corporation records the sale of products, services, or the cost of things to clients. The sales revenue and income statement are depicted in this Ledger.

2. Purchase Ledger - A purchase Ledger is a Ledger in which a corporation records the transactions of purchasing services, products, or goods from other companies. It allows you to see how much money the company has paid out to other companies.

3. General Ledger - There are two types of the general Ledger: nominal Ledger and private Ledger. The nominal Ledger records spending, revenue, depreciation, insurance, and other financial transactions. Private Ledgers contain private information such as salary, wages, capital, and so on. A private Ledger is not accessible to everyone.

7 Key Features of a Ledger

The following are Ledger's seven most important features:

• In Ledger, each Account will have its heading.

• A special table is used to keep track of Account transactions.

• The Account's transactions are organised by date.

• Each Ledger contains a two-amount column. Debit and credit are used to write the transaction amount in each column.

• On both sides of the Account, there is a column where you may write the ref number.

• At the end of the period, the Account balance is calculated.

• The Debit and Credit Columns are closed after the calculation is completed by drawing two parallel lines underneath the sum of both sides.