You already know that business transactions are recorded in various accounting books. The accounting process does not stop here. The transactions are written in a number of accounting books in chronological order. Such recording of business transactions only serves little purpose of 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.
All the accounts recognized on the basis of transactions recorded in different journals will be opened and maintained in a separate book called Ledger.
So a ledger is a book of account; 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 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.
Ledger book is an accounts book to which various transactions of an enterprise are posted under different accounts.
It follows the double-entry system.
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.
In the ledger, all the types of accounts relating to assets, liabilities, capital and revenue are maintained.
It is the only record of the business transaction classified into relevant accounts.
It facilitates the preparation of financial statements in future.
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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 transaction in the financial statements of the business.
It comprises of a debit and credit entry for every transaction recorded into it, in order to match the total of debit and credit balance. It has to match in order to prepare the financial statements from it.
They are of two types-
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.
Private Ledger- Private ledger consists of accounts which are confidential in nature such as capital, drawings, salaries, etc. These accounts are only accessible by selected individuals.
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. Sum of all the money owed by a business to its suppliers is known as Accounts payable.
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, there are many businesses which 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. Sum of all the money which has been given on credit is called Accounts receivable.
Ledger is a spine of business accounting as it has all the record 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.
Ledger provides a comprehensive report of all the transactions which helps the business to look through the expenses and incomes. If there are any discrepancy is found amongst both, then necessary actions are taken.
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. Book value of any asset can be derived from the ledger any time.
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.
The ledger records all the expenses of the business and all the incomes too. So if their is any difference in their balance, then they have to reevaluate and fix the problem.
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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.
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 case of the above example of the machinery purchase, posting will be made on the debit side of 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.
Date of the transaction has to be put in the date column. The method of recording the date in the ledger is the same as in a journal.
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.
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 case of the above example, we shall write 'To purchases A/c' in particulars column on the debit side of Cash Account; and 'By Machinery A/c' in particulars column on the credit side of the Sales Account.
Posting in both sides, debit and credit should have entries then only a ledger account is complete.
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 so as to complete the cross-reference.
The amount is written in the journal entry must be entered in both the amount columns of ledger account.