Accounting Ledgers Explained

[Gaetan Horton]

Companiescan maintain ledgers for all types of balance sheet and income statement accounts, including accounts receivable, accounts payable, sales, and payroll. Transactions from subsidiary ledgers are periodically summarized and transferred to the general ledger, which contains transaction data for all accounts in the chart of accounts.

Preparing a ledger is important as it serves as a master document for all your financial transactions. Since it reports revenue and expenses in real-time, it can help you stay on top of your spending. The general ledger also helps you compile a trial balance, spot unusual transactions, and create financial statements.

A ledger account is a record of all transactions affecting a particular account within the general ledger. Individual transactions are identified within the ledger account with a date, transaction number, and description to make it easier for business owners and accountants to research the reason for the transaction.

The ledger might be a written record if the company does its accounting by hand or electronic records when it uses accounting software. According to CPA Practice Advisor, only 18% of small- to medium-sized businesses do not use accounting software.

In the double-entry system, each financial transaction affects at least 2 different ledger accounts. Each entry is recorded in two columns, with debit postings on the left and credit entries on the right of the ledger. The total of all debit and credit entries must balance.

Make columns on the right side for debits, credits, and running balance. Debits increase asset and expense accounts and decrease liability, revenue, and equity accounts. Credits increase liability, revenue, and equity accounts and reduce assets and expenses.

Summarize the ending balances from the general ledger and present account level totals to create your trial balance report. The trial balance totals are matched and used to compile financial statements.

Following is an example of a general ledger report from FreshBooks. It shows all of the activity for accounts receivable for the month of April, including debits and credits to the general ledger account and the net change to the account for the month.

After that, the bookkeepers can post transactions to the correct subsidiary ledgers or the proper accounts in the general ledger. While many financial transactions are posted in both the journal and ledger, there are significant differences in the purpose and function of each of these accounting books.

Journal entries are recorded in chronological order, making it easy to identify the transactions for a given business day, week, or another billing period. By contrast, entries in a ledger might group like transactions into specific accounts to assess the data for internal financial and accounting purposes.

Ledger accounts almost always start out with an opening balance. For balance sheet accounts, the opening balance is usually the closing balance from the previous period. Income statement accounts start with an opening balance of zero because revenues and expenses should have been closed to retained earnings at the end of the prior period. At the end of the period, all ledger amounts should balance. In other words, debts must equal credits.

Preparing a ledger is vital because it serves as a master document for all your financial transactions. Since it reports revenue and expenses in real-time, it can help you stay on top of your spending. The general ledger also enables you to compile a trial balance and helps you spot unusual transactions and create financial statements.

For many people, the idea of a general ledger might conjure up images of visor-wearing accountants wielding quill-and-ink pens, scribbling numbers and notes in large, dusty parchment books. While many fundamentals of the general ledger remain intact more than 500 years after it was established as a cornerstone of modern accounting, technology has moved it light-years into the future.

For a large company, the general ledger could contain thousands of accounts, known as the chart of accounts, representing balances resulting from journals, subledgers, and external system transaction data.

A subledger contains a specific subset of financial transactions, such as accounts receivable, accounts payable, or fixed assets. Subledgers generally contain information about one type of transaction.

Transactions in a subledger are periodically recorded in the general ledger. Depending on how they are structured by an organization, subledger transactions are generally recorded on a daily, weekly, or monthly basis.

A general ledger is used to record every financial transaction made by an organization and serves as the basis for various types of financial reports. It provides details about finances such as cash flows, assets, liabilities, inventory, purchases, sales, gains, losses, and equity.

A general ledger can have any number of subledgers, sometimes also known as journals. Some of the most common types of subledgers include accounts payable, accounts receivable, cash, assets, expenses, and income.

With its focus on reporting what happened (past transactions), some of the information in a general ledger might already be out of date, or it might not sufficiently reflect significant recent developments.

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A general ledger records transactions and helps generate financial statements for investors, creditors, or even regulators. This information can help management make financial and data-based decisions. For example, a bookkeeper or accountant could use an accounting ledger, or general ledger, to identify the source of increased expenses and make the necessary corrections.

The double-entry accounting method requires every transaction to have at least one debit (incoming money) and one credit (outgoing money) entry, which must always balance out. It is important to note, however, that the number of debit and credit entries does not have to be equal, as long as the trial balance is even.

Your ledgers should always have the information you need to be able to accurately track where money is coming from and where it's going. QuickBooks Online can connect you to experts to answer your questions about general ledger accounting through its QuickBooks Live Expert Assisted, with verified expertise to support your whole business.*

Think of your accounting journal as the first record of each transaction. Every transaction should be recorded in chronological order in a journal with as much detail as needed to ensure that it can be transferred to a ledger and serve as a resource for anyone who needs more information about an entry.

A ledger is an aggregation of data from relevant journals. One key difference between a journal and a ledger is that the ledger is where double-entry bookkeeping takes place. That's why there are two sides to a ledger, one for debits and one for credits.

In addition to the accounting ledger, there are several kinds of ledgers that you might use in the course of bookkeeping for your business. Most accounting software will compile some of these ledgers while still letting you view them independently. Depending on the size of your business and what your business does, you might not need to use all of them. Here are some common types of ledgers and when to use them.

A sales ledger is a detailed list in chronological order of all sales made. This ledger is often also used to keep track of items that reduce the number of total sales, such as returns and outstanding amounts still owed.

Understanding what an accounting ledger is and its importance to your business finances can help you organize and track transactions more easily. You can save time on bookkeeping tasks with QuickBooks experts by your side. QuickBooks Online users have access to QuickBooks Live Expert Assisted, where experts provide guidance, answer questions, and show you how to do tasks in QuickBooks. Have more time to work on what you love when you spend less time on bookkeeping.

Yes. Double-entry bookkeeping uses a ledger to track credits and debits with a trial balance to assure that everything is accurately tracked. With QuickBooks Live Assisted Bookkeeping, experts can save QuickBooks Online users time and streamline how they work by helping them to automate tedious tasks.*

Sub-ledgers (subsidiary ledgers) within each account provide additional information to support the journal entries in the general ledger. Sub-ledgers are great for accounts that require more details to review the activity, such as purchases or sales.

A cash book functions as both a journal and a ledger because it contains both credits and debits. Because a cash book is updated and referenced frequently, similar to a journal, mistakes can be found and corrected day-to-day instead of at the end of the month.

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