What is a Ledger Account and How to Make A Ledger Account? Key Points Ledger accounts document date-wise transactions made by any company. It is drawn in tabular format by classifying columns as date, description, debit, and credit. An Accounting Ledger can have an opening balance, which is the company’s previous year’s closing balance. A ledger in accounting is prepared after journal accounting and follows the principle of the Double-Entry Bookkeeping system.
A Ledger account is the final book of accounting entries of the business that contains accurate financial statements in a classified manner. Having said that, an accounting ledger provides insights into the financial health of the business and has the potential to make or break the monetary roots of any business if not done correctly. This article will take you through the fundamentals of the ledger in accounting, and how to make a ledger account accurately.
What is A Ledger in Accounting?
A ledger, meaning in accounting, is the record of transactions documented with the date for a particular account. The accounting ledger includes different accounts consisting of Cash, accounts receivable, inventory, investments, deposits, and expenses.
Ledger accounts have an opening balance, record each transaction in a credit or debit column, and end with a closing balance. It is also known as a secondary or final entry because this accounting sheet can only be prepared after the journal entries, which is the primary recording.
Fast Fact : Accounting Ledger depends on the Journal entries. Transaction = Journal (Recording) = Ledger (Classification)
The chief objective of a ledger in accounting is to create a company’s financial reports, such as balance sheets, revenue sheets, and cash flow statements. Now that you know what ledger means, let’s dive into the types of accounting ledger and ledger account examples.
Types of Ledger Accounts
Ledgers in accounting are further classified into different types, as explained below:
General Ledger is considered a business’s records of all transactions over a period of its running. It includes assets, liabilities, revenue, equity, expenses, and changes in the company. The general ledger can be further classified as:
Private Ledger: It is a set of accounts that can be accessed by only selected people of the business entity. This includes capital accounts and goodwill accounts. Nominal Ledger: It is an account sheet that depicts loss, gains, income, and expenses. This includes rent, salary, loans on interest, cost of appliances in business, etc. Sales Ledger
A sales ledger records all the credit sales of the customers. This account sheet has layers of credit sales history of each customer of the business.
Every Ledger account is prepared with an accounting format, which we have explained in the next section.
Ledger Account Format and Template
The image below is the template used for preparing an accounting ledger.
The image above is the template for writing an accounting ledger, now let’s explain what each column and rows signify.
Ledger Account Format Explanation Number: The order of recording each transaction on the sheet in sequence. Date: Fill in the exact date of the transaction for which the balance is to be calculated. Details: Write the particulars or describe the transaction with a name. Credit: Write the amount received in the transaction. Debit: Write the amount paid in the transaction. Balance: Subtract the aggregated number of debits from the aggregated number of credits for a given accounting period.
Ledger in accounting follows the system of Double Entry Bookkeeping for accurate results and systematizing account maintenance. So, first, let’s learn about Double-entry bookkeeping in the next section.
Double Entry Bookkeeping
In this accounting system, the transactions are recorded as debits and credits. Double-entry bookkeeping standardizes the accounting process of a company and improves the accuracy of financial statistics, allowing easy detection of errors. The calculations of double-entry bookkeeping are based on the equation;
Assets = Liabilities + Owner’s Equity.
Assets= The total amount of money and resources the company owns. Liabilities= Anything the company owes to the lenders. Owner’s equity= Investments made by the company.
The most crucial thing to note is that both sides of the account must be balanced out. Let’s understand it with an example, suppose that you are recording transactions of your company for 30 days using double-entry Bookkeeping.
The initial balance for the month is $4500, and you pay rent of $1500 on the initial days of the month.
Account Debit Credit Rent $1500 Cash $1500
You purchase equipment for $500.
Account Debit Credit Equipment $500 Cash $500
One of your clients pays you $1000.
Account Debit Credit Cash $1000 Client $1000
If you add the debit column and credit column separately, you can observe the total is equal to $3000 each.
Once you have balanced out your journal entries, you can now post the data in the ledger. Let’s learn how to make a ledger account in the coming section.
Fast Fact : Double Entry Bookkeeping was first formulated in the mercantile period of Europe to make trading more businesslike and to justify commercial transactions with exact numbers on the sheet. How to Make a Ledger Account?
There are many companies that use accounting software to record their day-to-day transactions, which can later post all the entries into a ledger automatically. However, if you want to make your own account, then you need to follow the principles of Double Entry Bookkeeping.
As already explained above, in Double Entry Bookkeeping, every business transaction is recorded in two accounts; debit and credit. The amount in debit must be equal to the amount recorded in credit. Now, hereon, let’s see how to make a
ledger account. Step 1: Set Up A Ledger Account
Start creating a ledger accounting with 5 account types; asset, liabilities, revenue, expense, and equity.
Step 2: Create sections
On the left side, draw columns for date, transaction, journal entry number, and description. On the right side, draw columns for debit, credit, and running balance.
Step 3: Note down the figures of the transactions
Write down all the day-to-day transactions made by the business. Once the journal entry is prepared, revise the numbers and post it into the ledger.
Step 4: Create a trial balance sheet
End the ledger accounting sheet by creating a trial balance report. In the trial balance sheet, the totals of the accounts are matched and then added to the financial reports.
This is how you can easily create your account ledger, but there are some rules of ledger posting that need to be followed for an accurate accounting sheet. Let’s discuss these rules in the next section.
Rules of Writing A Ledger Account
Whenever a business makes a transaction, it is recorded in a journal in the form of a journal entry. This data is then posted in journal accounts. This method falls under the double-entry principle. After preparing a clear journal record, the number is then posted into accounts. There are a few accounting rules that must be adhered to while writing the journal:
Liabilities: Decreases on the side of debit and increases on the side of credit. Assets: Increases on the side of debit and decreases on the credit side. Capitals: Decreases on the debit side and increases on the credit side. Income: Decreases on the debit side and increases on the credit side. Expenses: Increases on the debit side and decreases on the side of credit. Credit: For goods, it shows the value has decreased. For dividends or interests, it shows the company has made gains. Debit: For goods, it shows the value has increased. For expenses or loss, it shows the company has made a loss. Ledger Account Example
Let’s understand with a general ledger example for better insights. Suppose BBN Pvt. Ltd. has the following journal entries for the year ending 31 December 2022.
Inventory and equipment purchased for $12000 through check on February 1, 2022. Products sold for $1950 on May 20, 2022, Products sold to KBC Ltd. for $4600 on July 10, 2022, Depreciation on equipment charged $1700 on December 31, 2021,
Journal entry of the year ending on 31 December 2022 (BBN Pvt. Ltd.)
S. No. Date Particulars Dr. ($) Cr. ($) 01. 1/2/22 Equipment and inventory A/c …. Dr. To Bank A/c $12000 -$12000 02 20/5/22 Cash A/c … Dr. To Sales A/c $1950 -$1950 03 10/7/22 KBC Ltd. A/c … Dr. To Sales A/c $4600 -$4600 04 31/12/22 Depreciation A/c … Dr. To Equipments A/c $1700 – $1700 Equipments and inventory A/c
Date Particulars R Amount ($) Date Particulars R Amount ($) 1/2/22 To Bank A/c 1 $12000 31/12/22 By Depreciation A/c 4 $1700 Bank A/c
Date Particulars R Amount ($) Date Particulars R Amount ($) 1/2/22 By Inventory A/c 1 $12000 Cash A/c
Date Particulars R Amount ($) Date Particulars R Amount ($) 20/5/22 To Sales A/c 2 $1950 Sales A/c
Date Particulars R Amount ($) Date Particulars R Amount ($) 20/5/22 By Cash A/c 2 $1950 KBC Ltd. A/c
Date Particulars R Amount ($) Date Particulars R Amount ($) 10/7/22 To Sales A/c 3 $4600 Depreciation A/c
Date Particulars R Amount ($) Date Particulars R Amount ($) 31/12/22 To Equipments A/c 4 $1700
This ledger account example must have cleared all your doubts, now moving on, let’s look at the benefits you can get by maintaining a ledger accounting for your company.
Benefits of Maintaining A Ledger Account
Maintaining a proper account plays a crucial role in forecasting the financial future of any business. Slacking the ledger accounts of business entities can break the financial systems, leading to consequences of debt and loss. Therefore, maintaining a ledger creates a strong foundation for any company. In addition to that, you must be a part of
Group Purchasing Organizations for businesses to save tons of money on inventory and equipment.
Here are some of the benefits of maintaining an accounting ledger:
Analysing Financial Position
You can determine the growth depending on the financial position of a company that is depicted on the final entry of the accounting ledger. It shows the loss, profits, revenue, and expenses of the company in detail.
Maintaining a ledger account is important, but it is tough at the same time because of these reasons:
These are sensitive financial documents that need special protection. Preparing these account sheets can be time-consuming. It depends on the data of the journal account. In case any journal account sheet shows inaccurate numbers, the accounting ledger sheets will also be unreliable. How Do Bookkeepers Use Ledger Accounts?
The company’s bookkeeper records all the transactions made over a period of a year in the form of a journal account. The transactions can be different billings, inventory purchases, equipment, sourcing, money that need to be paid, and the amount that has been paid with proper description and date. All of these transactions are then converted into an accounting ledger, which is then presented to everyone.
The point to be noted is that a journal account is prepared initially, and a ledger in accounting is prepared from the journal account. Let’s understand the difference between the Ledger and Journal accounts in the next section.
Difference Between Journal and Ledger
Both Journal and Ledger work hand-in-hand in accounting and are crucial in maintaining correct finance records. An accounting journal is a document that is used by financial experts to record transactions. It is different from a ledger as a ledger account is a final entry that is prepared with the data from the journal, but in a more classified manner to present as an accounting statement.
For a better understanding, here are the key points that differentiate a journal account from a ledger in account :
Differentiating Points Account Journal Ledger Account Meaning Journal is a secondary, or you can say rough book where one can write all the day-to-day expenses. It is a final entry that puts all the expenses in a particular section in a classified manner to make it more presentable. Format Journal accounts can be recorded in three columns; credit, debit, and balance. This account’s format includes the date, transaction description, journal folio, debt amount, and transaction amount. Documenting order The transactions are noted in chronological order as per the date of occurrence. The transactions are segregated and are written in a classified field to increase readability and to make the accounting spreadsheet more presentable. Trial Balance You can not prepare a trial balance sheet with a journal account directly. A Trial balance sheet that can be maintained easily after preparing this account. Narration Journal involves the description of the money received, money spent, remaining balance, date of transaction, and additional information related to the transactions. It does not have a detailed explanation of each transaction, rather it just highlights the particulars or name of the transaction. Balance Journal account does not consist of opening or closing balance, it only shows current transactions on a day-to-day basis. This account can have an opening balance, that is carried forward from the previous year’s closing balance. Format of a Journal account : Frequently Asked Questions
Ans: A journal is a secondary book of accounts that records transactions, while a ledger is a final account with classified entries of the record of transactions documented in the journal. Ans: Ledger is prepared to separate each data from the journal to a particular accounting section for better readability of the documented and recorded transactions. Ans: Ledger is a final book of accounts, with the main objective of transferring various transactions from journals and diversifying them into separate accounts. Ledger is a final entry that is used to prepare final accounting statements of businesses. Sources: