Definition: A ledger is an organized book of all the transactions that occurred in the business related to income, expenses, assets, liabilities. The entries in the ledger are posted from the journal entries passed; thus posting in the ledger is treated as the second step of preparing the financial books of accounts.
- Classification of the Ledger
- Types of Ledger
- Importance of ledger
- Ledger in Accounting
- Format of Ledger
- Ledger Balancing
- Examples of ledger accounts maintained
- Difference between Journal and Ledger
- Points to remember
Classification of the Ledger
The ledgers can also be classified in the following two categories-
- Permanent Ledger: These are the ledgers having opening and closing balances which get forwarded to the next year.
- Temporary Ledger: They don’t have any opening and closing balance, and the account gets closed by transferring the amount to the profit and loss account at the end of the year.
Types of Ledger
Bought Ledger/Creditors Ledger: This ledger is prepared for recording the transactions from whom the goods have been acquired in credit. It can also be termed as a purchase ledger.
Sales Ledger/Debtors Ledger: In this ledger, the transaction of the debtors, i.e. to whom goods have been depleted in credit is recorded.
General Ledger: In General ledger, all the other account’s entries are recorded other than sales and purchase account. It can also be termed as a summarise ledger of all the nominal and real accounts such as a/c receivable, inventory account, cash account, investment account, machinery account, etc.
Various subsidiary ledgers are prepared for providing details to the general ledger, and at last, all are sum-up in one ledger called general ledger; thus this account is also termed as master account or main account.
Private Ledger: This ledger is prepared to maintain the personal records of the proprietor or the owner of the business such as capital account, current account, drawing account.
Importance of ledger
- Calculation of profit/Loss: Ledger preparation is an unescapable step for any organization for calculating the position of profit or loss in their business because it is impossible to make further accounts without preparing relevant ledgers.
- Exact position of an account: The ledger clearly signifies the position of the accounts whether they have an outstanding or owing balance at the time of closing the account.
- Time saver: As all the entries are recorded in one place, it becomes easier and time- saving while preparing further accounts such as trading, profit, and loss accounts.
- Imperative: It facilitates in maintaining the correctness or accuracy of the transactions held during the life span of the company.
Ledger in Accounting
In a deal with accounting, the ledgers are the second most important step after passing journal entries, in which various transactions are recorded in separate account heads, such as sales, purchase, investment, inventory, etc.
Especially it can be said that accounting ledgers are the collection of various account details in one place which is essential for preparing further accounts. In accounting, the ledger can be specified as the book of final entry because it delivers all the transactions to its destination.
Format of Ledger
The ledger can be prepared in any of the following two formats-
—–(Name of account) —– —-Ledger Folio no.—-
—–(Name of account) —– —-Ledger Folio no.—-
At the last of the year, all the ledgers get closed by balancing the Debit and Credit balances of the accounts to find the difference amount amongst Debit and Credit items.
If any account’s debit balance exceeds the credit balance, then that account will be considered as an account with debit balance visa-versa if credit balance exceeds it will be regarded as a credit balance account.
At the time of closing of accounts, their balances get balanced or become nil and the accounts which do not get balanced (nominal account) will be transferred to trading, profit, and loss a/c.
Examples of Ledger accounts maintained
Assets: Some heads of ledgers under asset are as follows:
- Cash-in-hand account
- Building account
- Machinery account
- Furniture account
- Receivable account
- Debtors account
- Goodwill account
Liabilities: Some heads of ledgers under liabilities are as follows:
- Bank overdraft account
- Creditors account
- Bills payable account
- Loans and advances account
- Taxes payable account
Operating expenses: Some heads of ledgers under operating expense are as follows:
- Wages and salaries account
- Depreciation account
- Electricity account
- Stationery account
Difference between Journal and Ledger
|Basis for comparison||Journal||Ledger|
|On the basis of recording||Recording transactions in the journal is the first stage of accounting||Recording in the ledger is the second stage of accounting.|
|On the basis of nature||Journal is the book of prime or original entries||Ledgers are the books of final entry.|
|On the basis of method/ process of recording||Process of recording entries is known as journalization||The method of recording in the ledger is known as posting.|
|On the basis of use||Journal is used on a daily basis to record transactions in a chronological manner||Ledgers are used periodically such as weekly, monthly.|
|On the basis of preparation||Journals are prepared on the basis of source documents such as vouchers, bills||Ledgers are prepared on the basis of a journal.|
|On the basis of balancing||Journal cannot be balanced||Except nominal account, all other accounts will get balanced in the ledger.|
|On the basis of narration||Narration is given after each journal entry showing the details of the transaction||No such narration is required in the ledger.|
|On the basis of information||In the journal, complete information about accounts transactions is not possible at a time||In ledger make it possible to provide full and complete information.|
Points to remember
- It expedites the preparation of books of accounts
- It is the second stage of recording entries.
- It is termed as a book of final entry.
- It is a preparation of accounts under different heads.
Ledger is a compiled book of all the journal transactions including all the assets and liabilities, income and expenses items of the financial statement and the balance gets transferred to trial balance for further records, hence preparing ledger is an essential part of the accounting process.