Bookkeeping Ledger in Accounting
The bookkeeping ledger records all financial transactions, categorising them by type and account. It provides a comprehensive and organised view of a business’s or individual’s financial activity.
If you hear the term bookkeeping or accounting ledger, you might imagine an old-fashioned book completed by hand. This is not the case; even today, ledgers are still used but are mainly part of the computerised system. Some people still prefer to complete their accounts manually; most businesses have now transferred to accounting software.
In this article, we will look at the different ledgers and subsidiary ledgers, how to maintain them and the double entry bookkeeping system.
The meaning of the word ‘ledger’ is a book or record.
General Ledger Accounts
The bookkeeping ledger comprises various accounts, with the general ledger serving as the central repository. This master ledger summarises all financial transactions, categorising them into five main account types: assets, liabilities, equity, revenue, and expenses.
In addition to the general ledger, subsidiary ledgers provide more detailed breakdowns of specific accounts. For instance, accounts receivable and accounts payable ledgers track individual customer and vendor balances, respectively, offering a more detailed view of these transactions. Inventory ledgers track the quantity and value of goods on hand, helping in stock management and valuation.
Ledgers Accounts and Double Entry Bookkeeping
The general ledger acts as the central hub of the double-entry bookkeeping system. This system is based on the fundamental accounting equation: Assets = Liabilities + Equity. Every financial transaction affects at least two accounts within the general ledger, ensuring that this equation remains in balance.
This dual recording of each financial transaction ensures accuracy and helps in detecting errors. By examining the general ledger, one can see the full financial picture of a business, understanding its assets, how they are financed (through liabilities or equity), and the results of its operations (revenues and expenses).
Main Ledger Accounts
The general ledger houses various accounts that collectively reflect a business’s financial status. These accounting ledgers are categorised into five main types:
- Asset Accounts: These accounts track resources owned by the business, including cash, accounts receivable (money owed by customers), inventory, property, plant, and equipment.
- Liability Accounts: Liabilities are obligations or debts owed by the business, such as accounts payable (money owed to suppliers), loans, and accrued expenses.
- Equity Accounts: Equity accounts represent the owner’s investment in the business and the accumulated profits (or losses) retained within the company. Common equity accounts include startup capital, retained earnings, and additional paid-in capital.
- Revenue Accounts: Revenue accounts track the income generated from the sale of goods or services. Examples include sales revenue, service revenue, and interest income.
- Expense Accounts: Expense accounts track the costs incurred to generate revenue, including salaries, rent, utilities, advertising, and depreciation.
Subsidary Ledgers
Subsidiary ledgers complement the general ledger by providing a detailed breakdown of specific accounts. While the general ledger offers a summarised view, subsidiary ledgers delve deeper into individual transactions, offering greater granularity and facilitating more precise analysis.
Common examples of subsidiary ledgers include:
Accounts Receivable Ledger: This ledger tracks individual customer balances, detailing invoices, payments, and outstanding amounts owed. It aids in managing customer accounts and ensuring timely collections.
Accounts Payable Ledger: This ledger tracks individual vendor balances, recording invoices received, payments made, and outstanding amounts owed. It helps in managing vendor relationships and ensuring timely payments.
Inventory Ledger: This ledger tracks the quantity and value of individual inventory items, providing insights into stock levels, turnover, and the cost of goods sold. It aids in inventory management, valuation, and decision-making.
Fixed Assets Ledger: This ledger records details of fixed assets (property, plant, and equipment), including purchase price, depreciation, and book value. It helps in tracking asset values, calculating depreciation expenses, and managing asset lifecycles.
By maintaining subsidiary ledgers, businesses can gain a more comprehensive understanding of their financial transactions. This detailed information enables better decision-making, more effective resource allocation, and improved operational efficiency.
Ledger Accounts and Financial Statements
The information contained within the ledger accounts, both general and subsidiary, forms the foundation for preparing a company’s financial reports. These statements provide a summarised and standardised view of the business’s financial performance and position.
The three primary financial statements are:
Income Statement
This statement details the revenues and expenses over a specific period, ultimately revealing the company’s net income or loss. Information from revenue and expense accounts in the general ledger is used to prepare the income statement.
Balance Sheet
This statement provides a snapshot of the company’s financial position at a specific point in time, showcasing its assets, liabilities, and equity. Data from asset, liability, and equity accounts in the general ledger is used to create the balance sheet.
Cash Flow Statement:
This statement illustrates the inflows and outflows of cash during a given period, categorising them into operating, investing, and financing activities. Information from various accounts in the general ledger, including cash, accounts receivable, accounts payable, and loan accounts, is used to construct the cash flow statement.
By analysing these financial statements, stakeholders such as investors, creditors, and management can assess the company’s profitability, solvency, and liquidity. The accurate recording of transactions in the ledger accounts ensures the reliability and accuracy of these financial statements.
Trial Balance
The trial balance is a summary of all the account balances in the ledger at a given point in time. It lists each account name along with its debit or credit balance, ensuring that the total debits equal the total credits. The trial balance is used by businesses and accountants to get a complete picture of the business accounts.
Accounting Ledger – Computerised Ledgers
In today’s digital age, computerised accounting software like QuickBooks has revolutionised bookkeeping practices. These platforms automate many of the manual processes associated with traditional ledgers, offering increased efficiency, accuracy, and convenience.
QuickBooks, as an example, provides a user-friendly interface that simplifies the recording of financial transactions. It automatically updates the general ledger and subsidiary ledgers, eliminating the need for manual posting. The software also generates various financial reports, including income statements, balance sheets, and cash flow statements, with a few clicks, saving valuable time and resources.
Account Ledger and Journals
Journals and the bookkeeping ledger work in tandem to form a comprehensive record of a business’s financial transactions. The journal serves as the initial point of entry, chronologically recording each transaction as it occurs. This provides a detailed history of financial activities, including dates, accounts involved, and amounts.
Each transaction will have a journal entry consisting of a debit and credit side. The journal entry records the effect of the transaction on the financial statements. You can also post manual journals, these are used to make adjustments to the accounts and might include correcting errors, prepayments and accruals.
T-Accounts
T-accounts are a visual representation of individual ledger accounts used in the double-entry bookkeeping. They resemble the letter “T,” with the account name at the top and two columns below: the left side for debits (Dr) and the right side for credits (Cr).
An example below shows the T account for the bank ledger account.
Accounting Ledger Books
For small businesses or individuals with simple financial transactions, a manual ledger book can be a practical and cost-effective way to maintain financial records. This traditional method involves recording transactions by hand in a physical book.
A manual ledger book typically includes columns for date, description, debit, credit, and running balance. Each transaction is recorded as a journal entry, with the corresponding debit and credit amounts entered in their respective columns. The running balance is updated after each entry, providing a real-time snapshot of the account balance.
Cash Book Template
For a simple accounting ledger, we have created a cashbook. This allows you to record all your financial transactions in one place, making it easier to track and manage your business finances. To use the cashbook, simply download the Excel file and follow the instructions.
