What is Ledger?

What is Ledger?

Ledger is the systematic accounting of transactions summarized from journals and is posted as debit or credit to determine the actual status of transactions i.e. whether the transaction is representing asset or income for the organization or it is a liability or expense for the organization. Through ledgers, each transaction is recorded that takes place during the life of an operating organization.

Explanation

Ledgers contain information that is used for the preparation of the financial statement. Journal is the record of financial transaction of company and it is like data whereas ledger is the systematic arrangement of data i.e. financial transactions of the company into debit and credit form to ascertain the nature of the transaction and classification purpose. The general ledger contains all accounts whether it is asset, liabilities, owner’s equity, income, and expenses. The ledgers are used in a double-entry accounting system. Each transaction has a double effect like sales made increases the revenue plus made inflow of cash. Hence each transaction is recorded in at least two ledgers. 

Different Types of Ledger

There are various types of ledgers all the ledgers are classified as follows:

Balance sheet Ledgers:

Balance sheet ledgers include:

  • Asset Accounts like fixed assets, current assets, investment, loans and advances, prepaid expenses, etc.
  • Liability Accounts like trade payables, Current liabilities, duties, and taxes, etc.
  • Stakeholders’ equity and appropriation of stakeholder’s equity.

Profit and Loss account Ledgers:

Profit and Loss Account Ledgers include:

  • Revenue Accounts like sales and all other income from normal business operations like discount received, income from the sale of scrap, etc.
  • Expenses account like printing and stationery expenses, repairs and maintenance expenses, Wages and Salaries, electricity and telephone bills, etc.
  • Revenue loss such as interest paid, loss on the sale of investment or disposal of assets etc.
  • Non-cash items like write off of preliminary or pre-operating expenses, depreciation on fixed assets etc.

Examples

Example 1:

A Inc. made sales of $ 500 to Mr. J on credit, the credit period allowed is 3 months.

Journal entry for this transaction will be:

Particulars ($) ($)
Mr. J A/c                                 Dr.500 
          To Sales A/c 500
(Being Sales made to Mr. J on credit,
credit allowed is 3 months)
  

Now the ledger posting of the above transaction will be as under:

Sales Account

Dr.                                                                                    Cr.

Particulars($)Particulars($)
  By Mr. J Account
(sales made to Mr. J)
500
To Balance C/d500  
Total500Total500

Mr. J Account

Dr.                                                                                     Cr.

Particulars($)Particulars($)
To Sales A/c
(sales made to Mr. J)  
500  
  By Balance C/d500
Total500Total500

Example 2:

Machinery costing $ 300 Purchased from ABX inc. on credit, amount payable after 7 months. Opening balance of Machinery is $500

Journal entry for this transaction will be:

Particulars($)($)
Machinery A/c                               Dr.300 
                   To ABX Inc. A/c 300
(Being Purchase of machinery made
from ABX Inc. on credit, credit period
allowed is 7 months)
  

Now the ledger posting of the above transaction will be as under:

Machinery Account

Dr.                                                                                    Cr.

Particulars($)Particulars($)
To balance b/d500  
To ABX Inc.
(Purchase made from
ABX inc. on credit)
300  
  By Balance C/d800
Total800Total800

Dr.                                                                                    Cr.

Particulars($)Particulars($)
  Machinery A/c
(Amount Payable to
ABX Inc. )
300
    
To Balance C/d300  
Total300Total300

Advantages

Advantages of ledgers are as under:

  • It helps in the preparation of financial statements.
  • It is a systematic record of the financial transactions of the organization.
  • The Financial position in respect of any account can be known from the ledger promptly.
  • Ledger is made as per the double-entry system of accounting.

Disadvantages

Disadvantages of ledgers are as under:

  • Ledgers are fully dependent on journals. If the information in a journal is wrong it overall affects the financial position due to the wrong posting in the ledger.
  • Sometimes in computerized accounts where everyone can access the accounts, there is a threat to the secrecy of business.

Final Thought

General Ledger is the systematic accounting of all the financial transactions of the company which is prepared based on information in the journal and according to the double-entry accounting system. It helps in the preparation of financial statements. But as the base of ledgers is the journal there are chances of wrong posting in ledgers if there is an error in the journal. There are several types of ledgers commonly classified into income, expenses, liabilities, assets, and owners’ equity accounts. 

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Related Articles

  1. What is Journal?
  2. What is Trial Balance?
  3. What are Assets?
  4. What are Liabilities?
  5. What are Expenses
  6. What is Income?
  7. What is Owner’s Equity?

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