What is Ledger in Accounting with Example?
What is Ledger in Accounting with Example?
Ledge is a book of accounts wherein a specific type of business transaction is recorded from journal entries. This is also known as principal book of accounts or the book of final entry. In ledge account both types of entries, debit or credit entry, are recorded.
For every type of business transaction separate ledge account is opened. First accountants of companies prepare journal entry for every financial transaction and thereafter this entry is recorded in their respective ledges.
A ledger account is consolidation of all ledgers incorporating seprate kind of business activity of a company. This ledger account of the company is very important book of accounts because it helps in compilation of trial balance from which financial statements of the company are prepared.
For better understanding of ledgers and ledger account we have to go through the following entries:
Example - Suppose ABC Co sales goods to A Bros worth Rs 10,000 on 30 days credit then journal entry for this transaction will be:
A Bros. Dr. 10,000
To Goods A/c. 10,000
Being goods sold to A Bros on credit worth Rs 10,000.
In this financial transactions two separate ledge are to made. One ledge account for A Bros and second for Goods Account. So, every transaction of company will be recorded atleast in two different ledger accounts.
Example 2 - Suppose in above case ABC Co received payment of above transaction in cash and gave discount of Rs 500 for early payment then the journal entry will be:
Cash A/c. Dr. 9500
Discount A/c. Dr. 500
To A Bros. 10,000
Being payment received from A Bros against bill number...... and allowed discount of Rs 500.
So in this case this entry will be recorded in three separate ledgers i.e. in cash ledger, discount ledger and A Bros ledger. Therefore every entry will be recorded in separate ledger and total thereof will be entered into ledger account after a specific period which will help in creating trial balance and financial statements of the company.
What is a Sub Ledger?
Sub ledger is an accounting record recording all the transactions of an specific finance account like purchase, sale, inventory or bills receivable etc. Sub Legers are prepared for recording different business transactions for detailed reporting after properly analysis.
A company prepares large number of sub ledgers for recording all business transaction in a particular head which taken place within the company during a specific period. So if a company made 500 cash transactions (Dr. and Cr.) During financial year 2023-2024 then all these 500 cash transactions will be recorded in cash sub-ledger and then transferred to ledger account for preparing trial balance.
Journal vs Ledger in Accounting
In accounting, both a journal and a ledger are essential tools for recording and tracking financial transactions, but they serve different purposes:
1. Journal (Book of Original Entry):
Purpose: It is the first place where financial transactions are recorded chronologically.
Details: Each transaction is recorded with details such as the date, accounts involved, amounts, and a brief description.
Double-entry accounting: Involves recording both the debit and credit sides of a transaction.
Types of Journals: General journal (for all transactions) or specialized journals like sales, purchases, cash receipts, etc.
Example:
January 1: Debit Inventory $1,000, Credit Cash $1,000.
2. Ledger (Book of Final Entry):
Purpose: It is where journal entries are posted to individual accounts, organized by account type (assets, liabilities, equity, etc.).
Details: Each account shows the cumulative effect of all transactions, providing a running balance.
Types of Ledgers: General ledger (for all accounts) and subsidiary ledgers (e.g., accounts receivable, accounts payable).
Example:
Inventory Account: Increases by $1,000 based on the journal entry.
Cash Account: Decreases by $1,000.
Key Differences:
Chronology: The journal records transactions in order of occurrence, while the ledger organizes them by account.
Level of Detail: The journal contains detailed transaction descriptions, while the ledger focuses on account balances.
Purpose: The journal is for recording; the ledger is for summarizing and tracking balances.
In summary, the journal captures every transaction as it happens, and the ledger consolidates those transactions into individual accounts to show the financial position of the business.
What are the five primary types of General Ledger (G/L)
The five primary types of General Ledger (G/L) accounts are:
1. Assets: These represent resources owned by a company that provide future economic benefits, such as cash, inventory, accounts receivable, and equipment.
2. Liabilities: These are obligations or debts that a company owes to others, like accounts payable, loans, or mortgages.
3. Equity: Also known as owner's equity or shareholder's equity, this represents the owner's claim on the company's assets, including retained earnings and common stock.
4. Revenue: This account tracks income earned from selling goods or providing services, such as sales revenue or service revenue.
5. Expenses: These are the costs incurred by the company in the process of earning revenue, such as wages, rent, utilities, and supplies.
These accounts provide the foundation for a company’s financial reporting and are used to prepare the balance sheet and income statement.
Conclusion
A ledger is a book or digital record used in accounting to track all financial transactions of a business or individual. It categorizes entries into accounts like assets, liabilities, income, and expenses.
The ledger is the foundation of financial reporting, allowing businesses to see the flow of money, track balances, and prepare financial statements. Each transaction is recorded with a date, description, and amount, ensuring transparency and accuracy.
Double-entry bookkeeping, a common practice, involves recording debits and credits in the ledger to maintain balance. Ledgers can be kept manually or using software for efficiency.