ledger book

Ledger Book: What Is It and What Is Its Significance?

A book that contains accounts showing the debits and credits of a company is called a ledger. All the information that is required to prepare financial statements is contained by the ledger book. There are different accounts shown in a ledger such as assets, liabilities, owners’ equity, revenues, and expenses. 

All these accounts combined are called the chart of accounts. Every active account on the chart of accounts is represented by the ledger. 

The following shown are the primary general ledger accounts:

  • Asset accounts include fixed assets, prepaid expenses, accounts receivable, and cash
  • Liability accounts which include notes payable, lines of credit, accounts payable, and debt
  • Stockholders’ equity accounts
  • Revenue accounts
  • Expense accounts
  • Revenue and loss accounts such as interest, investment, disposal of an asset

Every transaction done by the company is recorded in the ledger. All the money that flows in and flows out from the company is recorded so the total balance can be checked anytime and a perfect watch can be set on the funds. 

Now, there are two ways of how a ledger account can be made. Either it can be done manually where you write all the transactions with your hand on a paper and the second way is to use software to automatically make a ledger for you. In earlier times, the manual method was used but now big companies and businesses use the software to make the ledgers.

Small companies that don’t have the facility to use the software packages still make the ledger by the manual method.  

How to Make a Ledger book?

ledger book

Source: careergirls.org

In a ledger, you will see two columns, one is for the debit and the second column is for credit. A double-entry bookkeeping method is used to record transactions. Debit transactions are kept on the left column while the credit transactions are kept on the right column. The total of both debit and credit entries should balance. 

Each financial transaction affects at least two general ledger accounts. The financial information coming from the journals is divided into specific accounts such as Cash, Accounts Receivable, and Sales, on their sheets in ledgers. 

1. So, you have to create different ledger accounts for as many accounts you have. Like a cash account will be having a cash ledger account and it will contain all the cash transactions happening in your company.

2. The following columns will be there in the ledger

    1. Date
    2. Journal number
    3. Description
    4. Debit
    5. Credit
    6. Balance

The debit is the money that you receive from someone and credit is the money that you owe to someone. Balance is the total amount in your account at the moment. 

3. You have to enter the information from the journals into the different accounts that you create. Enter the transaction information and put it as debit or credit and calculate and enter the balance as well. 

4. One must keep a habit of entering the transactions from the journals to the ledger on a daily basis so that we don’t miss any entry and our ledger is UpToDate. 

5. When you have different accounts, combining them into one account will give you a full ledger. If you have multiple accounts then you have to set the first page as a chart of accounts where each account will be listed along with its page number so that one can directly move to the respective ledger account that one needs to check or update. 

After you have created a successful ledger, the next step will be to create a trial balance. In the trial balance report, ledger account transactions are summed up into account level totals. Now, the process will be to match the trial balance totals, and then financial statements and reports will be made from it.

It will be checked whether the trial balance is perfect or it has some errors and the necessary rectifications will be made and additional entries will be added to adjust it. This trial balance will be now ready to be used to prepare the financial statements and balance sheet.  

Also Read: Business Finance For Strong Financial Grip Of A Company

ledger book

Source: drivenoutside.com

How are journals and ledgers different?

Both are account books used to record the transactions then how are they different? As per the process of accounting, a business transaction will be first recorded in the journal and then it will be posted into the ledger. 

Journal is called the primary book of accounting and the ledger is called the principal book of accounting. The function and purpose of both these books are different. Ledger is used to creating the trial balance while the journal can’t be used for this purpose. 

In a journal, the business transactions are recorded as per the double-entry system. Entering transactions in a journal is called journalizing while posting refers to the process of transferring the entries to ledger from the journal. 

Entries in the journal will be saved in chronological order so it will be easy to find out the transactions done on a specific day, week, month, year whatever you want to check. 

Ledger has the various entries grouped as per the specific accounts. 

The format of both these record books is also different. Ledger uses a T format having a date and the transaction information, credit, debit, balance while the journal has all the transaction information but doesn’t include the balance. 

The ledger account starts with an opening balance and at the end of the closing year, the balance should be what it should be.

So, here was an overview of the ledger balance and ledger book. Hope you got a complete overview of it. It is very important to maintain a general ledger as it will give you a perfect glimpse of how your expense and earnings are going and what all things you need to take to cut down your expense to make some savings. 

It is a stepping stone to create a financial statement so we have to make one good accounting ledger. If you are not paying attention to a ledger in your company until now then start making a good ledger from today to manage your financial transactions perfectly!

For more finance-related concepts you can have a look at the FinanceShed, and stay tuned for more updates.