The accounting term ledger applies to a record-keeping system where a company’s sales, purchases and other financial data are reported. Also known as a second book of entry, they are used to store detailed credit and debit account records.
While they are often digital, they are still referred to as books, although some smaller businesses may still use paper ledger books. Larger businesses, however, typically need to use enterprise resource planning (ERP) software. The records held in ledgers provide the basis for preparing tax returns and (for limited companies) financial statements.
Examples of ledgers
The general ledger is the main repository for all financial transactions. For ease of management, however, general ledgers are usually subdivided into separate accounts. Each account will hold the transactions for a particular type of transaction.
Smaller businesses with fewer transactions might have accounts that cover relatively broad categories, for example, assets, liabilities, owners’ equity, revenues, and expenses. Larger businesses with numerous transactions will often have accounts that reflect key categories in their financial statements, especially their profit-and-loss statement and their balance sheet.
The mechanics of ledgers
In traditional ledger books, pages are divided into two columns. Debit transactions are entered into the left-hand column. Credit transactions are entered into the right-hand column. If the records are correct, the debit and credit transactions should always be equal. This is what it literally means to say that “the books are balanced”.
If companies still use paper ledger books then a bookkeeper or accountant must periodically check for errors. This is done by creating a trial balance. A trial balance is essentially a snapshot of a company’s accounts at a given point in time (rather like a balance sheet).
The credit entries and debit entries in the trial balance should be equal. If they are not, there is a problem with the accounts and hence the general ledger. It is, however, important to note that getting the trial balance correct does not guarantee that the general ledger is correct. This is one of the reasons why it’s important to double-check bookkeeping entries for errors.
Ledgers vs journals
An accounting journal contains the same information as a ledger but it is presented in chronological order rather than by category. A company’s general journal is the everyday repository for transactional information.
Companies may also keep special journals that break out information related to specific transaction types. Special journals tend to be used for high-volume transaction types. This helps to stop the general journal from becoming overwhelmed.
As journals fulfil the same purpose as ledgers, physical books tend to be formatted the same way. They have two columns with debits being entered on the left and credits on the right. In some cases, however, companies will use single-entry bookkeeping in journals. This means that each transaction will be recorded as either a debit or a credit, not both.
Single-entry bookkeeping is not as robust as double-entry bookkeeping. It is, however, simpler and therefore usually faster. This can make it a practical option for special journals which tend to fill up very quickly.
The importance of ledgers
There are two main reasons why ledgers are hugely important for businesses. The first is the law. Depending on a company’s business sector and structure, this can mean a lot more than just tax. For example, a company’s ledger records can be proof that it presented accurate information to shareholders or creditors.
The second is that details can often make a huge difference to decisions, especially when it comes to financial matters. High-level indicators such as ratios can be useful as a convenient way to make quick and relatively minor decisions. When it comes to important decisions, however, people often want to see a lot more detail. That’s where a company’s ledger comes in.
These two points are actually closely related. When information is summarised errors can be made (or fraud can come into play). Even if it isn’t, summaries, literally by definition, miss out a lot of detail. This can make them highly misleading. Being able to check the original ledger records is, therefore, an important safeguard.
How to write an accounting ledger
While many businesses use software platforms to create and update their ledgers, it is worth knowing how to create one from scratch. In order to write an accounting ledger, one must use the double-entry system, where each transaction is posted as an entry on both the credit and the debit accounts.
In order to write an accounting ledger, companies must:
- set up ledger accounts for assets, liabilities, revenue, equity and expenses
- create columns for date, transaction number, and particulars on the left
- create columns for debits, credits, and running balances on the right
- record financial transactions as and when they occur
- summarise the ending balances to create a trial balance report. This will form the basis of your financial statements
Ledger table format
Although there is no legal requirement to use a specific ledger format, most businesses use the T-account format. This is where the dates, particulars and amounts are recorded for both credits and debits with a line going down the middle to divide the two.
A ledger table that uses this method might look something like this:
|Date||Transaction #||Particulars||Amount (£)||Date||Transaction #||Particulars||Amount (£)|
Why should companies keep a ledger?
A ledger is essential for keeping track of the company’s ongoing transactions. Within a ledger, individual accounts are set up for a company’s assets, liabilities, revenues, equity and expenses. This provides a more holistic view of the company’s finances than simple journal entries and forms the basis for the company’s financial statements.
What is a double-entry?
A double entry is an entry into a ledger where each transaction is logged as both a credit to one account and a debit to another. Both columns should be equal to ensure that the books are properly balanced.
How is a ledger different from a journal?
A ledger’s meaning is slightly different to that of a journal. While both are used to keep track of business transactions, a journal is a list of single entries into one credit or debit account, while a ledger will log entries into both credit and debit accounts.