What Is Ledger Account And How It Is Prepared
A ledger in accounting is a book containing accounts whereupon the classified and summarized information from the journals is posted as debits and credits. The ledger contains the financial data which is needed to prepare financial statements. It includes accounts for assets, liabilities, owners' equity, revenues and expenses.
The ledger account may be in written form if a company's accounting is done manually by an accountant or in electronic form when the business uses accounting software packages. You can check out some easy-to-use accounting software for small business.
What Is A Ledger Account?
A ledger account has a listing of all general accounts in the accounting system’s chart of accounts. The purpose of ledger account is to organize the financial information which is needed to prepare financial statements of a business. Examples of items in ledger account are:
- Cash
- Accounts receivable
- Inventory
- Fixed assets
- Accounts payable
- Accrued expenses
- Debt
- Stockholders' equity
- Revenue
- Cost of goods sold
- Salaries and wages
- Office expenses
- Depreciation
- Income tax expense
Characteristics Of Ledger Accounts
The following are characteristics of ledger account;
- There are two sides of a ledger account, one is debit which is seen on left side of the account while the other is credit which is the right side of the account.
- The debit entries of all financial transactions are recorded on the debit side while the credit entries of all financial transactions are recorded on the credit side of the account.
- The difference between the debit and the credit side represents the balance. A debit balance represents the excess of debit side over credit side while the credit balance shows the excess of credit side are over debit side.
- At the end of the period, both sides are balanced and the excess balance is written over the closing balance at the end of the period.
- At the end of the accounting period, the closing balance is forwarded to the following year as a beginning balance for the new year.
Types Of Ledger Accounts
There are three types of ledger on the basis of purpose, they are: general ledger, sales or debtors ledger, and purchases or creditors ledger. There is an unpopular one called private ledger, which i will explain as you read on. The types of ledgers are explained below
1. General Ledger Account
The general ledger gathers data from journals. Every month, all journals are summed up and posted to the general ledger. The purpose of the general ledger is to organize and summarize the individual transactions in all the journals.
2. Sales Ledger
The sales ledger, also known as debtors ledger gathers information from the sales journal of a business. The purpose of the debtors ledger is to provide clarity on the customers who owe the business and how much they owe.
3. Purchases Ledger
The purchases ledger is also called creditors ledger. The information for this purchases ledger is gotten from the purchases journal. The purpose of preparing creditors ledger is to provide insight on which suppliers the business owes money to, and how much.
4. Private Ledger
Private Ledger is prepared to maintain the personal records of the proprietor, and are not intended for general observation such as capital account, current account, drawing account, personal loan account, etc.
The General ledger account is divided into five categories. They are assets, liabilities, income, expense and capital.
1. Assets
Asset accounts include fixed assets items such as land and building, plant and machinery, motor van, etc. Current assets items such as cash in hand and cash at bank. Other assets such as prepaid expenses, accounts receivable, etc
2. Liabilities
Liability accounts include notes payable, lines of credit, accounts payable and debt, income received in advance, etc.
3. Stockholders’ Equity
- Common Stocks
- Retained Earnings
4. Revenue accounts
- Sales
- Services Fees
- Disposal of an asset
- Interest
- Investment
Expense accounts
- Wages and Salaries Account
- Depreciation Accounts
- Electricity Account
- Stationery Account
Format of Ledger Account
The ledger account format looks like this:
If you take a close look at the ledger above, you would notice that each side of ledger account (debit and credit sides) is divided into four columns. The purpose of these columns is explained below:
- Date column: The year, month and day of the transaction is recorded in this column in the same manner it is recorded in the general journal.
- Description: Also known as particular, in this column the title of the corresponding account, i.e., the order that the account was written in the journal entry.
- Posting Reference: This is also called folio number. The general journal page number is recorded in this column.
- Amount: The amount of the account is recorded in this column. This is the amount of money involved in the transaction.
How to Write and Prepare Ledger Account
A general ledger is used by businesses that use the double-entry bookkeeping method. This means that each entry has a debit and a credit side and financial transaction affects at least two general ledger accounts.
Double-entry transactions are posted in debit and credit columns, with debit entries on the left and credit entries on the right. The double-entry system states that the total of all debit and credit entries must balance, this means that they must be equal. Below is a detailed explanation of how to prepare ledger account:
- Prepare a ledger for each account. For instance, all cash transactions of your company will be recorded in a cash account ledger. Create a general ledger account for unusual expenses.
- Create columns on the far left of the page (debit side) for the transaction date, journal number and particular. Do the same thing for the right hand side (credit side).
- Create amount columns on the debit and credit sides, and balance. Money received are recorded on the debit refers while money paid out are recorded on the credit side. Balance means the difference between the total debit and total credit.
- Input information from the journals into related accounts. Compare the related debits and credits entries.
- Record and implement changes to the transactions as they happen. If you already made a journal entry, post it to the ledger immediately.
- Lastly, combine the different accounts to make a full ledger. The front page includes the chart of accounts, listing each account in the ledger and its number.
The next step in the accounting cycle is the preparation of trial balance. The information in the ledger accounts is summed up into account level totals in the trial balance report. The trial balance totals are matched and used to prepare financial statements.
Example
Record the transactions below in general journal and post them into their ledger accounts.
Jan. 01: Mr. A started business with cash $45,000.
Jan. 04: Purchased merchandise for cash $4,500.
Jan. 10: Sold goods to Mr. John $1,450.
Jan. 31: Cash received from Mr. John $1,400 with a discount allowed of $50.
Solution
Recording in the general journal
Recording in ledger accounts
What is the Difference Between a Journal and a Ledger Account?
The journal and ledger both play a crucial role in the accounting process. Financial transactions are primarily recorded in the journal accounts and subsequently posted to the ledger accounts under respective heads. While many business transactions are recorded in the two accounting books, there are significant differences in the purpose and the roles they play in the accounting cycle. Some of the important differences between a journal and ledger are:
1. Meaning
In the journal, financial transactions are summarized and recorded in accordance with the double entry system. Journal is also called book of original entry or primary book of accounting.
The ledger, however, is the principal book of accounting. It records information from the journal in the “T” format. It is used to prepare the trial balance which serves as the source of the financial statements.
2. Recording Transactions
The technique for recording business transactions in a journal is called journalizing while the technique of transferring the entries from the journal to the ledger is called posting.
The transactions in a journal are recorded in a sequential order making it easy to identify the transactions which are associated with a given business day, week, or another billing period. On the other hand, the arrangement of entries within a ledger involves grouping similar transactions together into the same kind of accounts with the aim of assessing the data for accounting purposes.
3. Format
The format of a journal is straightforward. It includes the date of transaction, particulars, folio number, debit amount and credit amount. There is no particular scope for balancing in a journal.
The format of a journal:
The ledger uses the “T” format where the date of transaction, particulars, and amount is recorded in each side. The left hand side is the debit side while the right hand side is the credit side.
The format of a ledger:
Ledger Posting
Whenever there is a business transaction, it is recorded in the journal in form of the journal entry. Hence, this entry is posted to their respective ledger accounts.This is done using the double entry principle. Therefore, the process of posting journal entries to their separate accounts is known as ledger posting.
Rules For Writing Journal Entries In Ledger Account
To have an accurate record book, there are rules which must be strictly adhered to while writing the journal entries for the following accounts:
- Liabilities: This decreases the debit side and increases the credit side.
- Assets: In assets, the figure increases the debit side while this decreases the credit side.
- Capital: The rules of liabilities applies to capital.
- Income: In income, there is a decrease on the debit side and an increase on the credit side.
- Expenses: The expenses account decreases on the credit side while increases on the debit side.
Importance of Ledger Account
The importance of preparing ledger account for your business are:
1. Ascertaining profit or Loss of a business
A business can't properly calculate the exact profit or Loss for the year without preparing the relevant ledger accounts. Every company needs to prepare an income statement to determine the true and fair position of the financial statements which cannot be ascertained without preparing the relevant ledger accounts.
2. Exact position of an account
Ledger accounts communicate the precise position of the accounts, whether they have an outstanding balance as at the time of closing the account.
3. Time saver
Since we record all the ledger entries in one place, it becomes easier and quicker while preparing other accounts like trading, profit and loss accounts and balance sheet.
4. Imperative
Every business has an obligation to prepare ledger accounts of the parties involved in every transaction for maintaining accuracy of the transactions that happened in the course of the year. Creating individual ledger accounts reduces the likelihood of leaving out any transaction as ledger account will not be balanced if any transaction is left out.
Conclusion: What Is a Ledger Account?
Ledger is a compilation of all the journal transactions for all the assets and liabilities, income and expenses of the financial statement and the balance is transferred to trial balance for keeping further accounts. Hence, we came to a conclusion that preparing ledger is an important aspect of the accounting process.
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