A ledger account is a book in which a company permanently stores the data of all financial statements and transactions in a classified and summarised manner. It includes financial transactions for all liabilities, assets, debts, equity, etc., as a whole. This is done by recording and processing the financial data of an entity taken from journal entries. With the help of a ledger account, trial balance and balance sheet preparation are possible.
This blog lays out all the details about a ledger account – its features, types, format, example, how to prepare a ledger and benefits. Read on!
The primary features of a ledger account are:
There are four types of ledger accounts:
Purchase ledger or creditor’s ledger specifically records high-value transactions related to sellers from whom goods have been purchased on credit. The sum allotted here is termed as accounts payable, sundry creditors or trade creditors.
The purpose of this is to provide insight into suppliers the business owes money to and the amount it owes. However, for accounts that purchase volumes, entries can be made in the general book of account.
A sales ledger or debtor’s ledger specifically keeps a record of all credit sales transactions made by customers. The sum allotted here is termed as accounts receivable, sundry debtors and trade debtors.
The purpose of this account is to provide clarity on the customers owing money to the business and the amount they owe. In addition, these accounts are arranged in alphabetical order and maintained using accounting ERPs.
A general ledger is a centralised collection of all ledger accounts made during a certain period. It is generally a compilation of all journal entries posted to the books of account, and this is also its main purpose.
Furthermore, it records all types of transactions, such as assets, liabilities, revenues, expenses, capital, equity, etc., found in an organisation.
Private Ledger maintains the personal records of a proprietor. These accounts are not intended for observing general accounting transactions like current accounts, capital accounts, loan accounts, drawing accounts, etc.
The format of a ledger account is as follows:
In the books of ABC
The following example explains the working of a Ledger Account:
Post the following transactions into the Ledger and also balance the accounts:
|1 April||Ramesh started a business with cash||100000|
|2 April||Paid into bank||70000|
|3 April||Bought goods for cash||5000|
|4 April||Drew cash from the bank for office purposes||1000|
|13 April||Sold goods to Krishna on credit||1500|
|20 April||Bought goods from Shyam on credit||2250|
|24 April||Received from Krishna||1500|
|28 April||Paid cash to ShyamDiscount allowed by him||2150100|
|30 April||Cash sales for the month||8000|
|30 April||Paid rent||500|
|30 April||Paid salary to Ram||3000|
In the books of Ramesh
|1 April||To Capital A/c||100000||2 April||By Bank A/c||70000|
|4 April||To Bank A/c||1000||3 April||By Purchases A/c||5000|
|24 April||To Krishna A/c||1500||28 April||By Shyam A/c||2150|
|30 April||To Sales A/c||8000||30 April||By Rent A/c||500|
|30 April||By Salaries A/c||3000|
|30 April||By Balance c/d||29850|
|1 May||To Balance b/d||29850|
|30 April||To Balance c/d||100000||1 April||By Cash A/c||100000|
|2 April||To Cash A/c||70000||4 April||By Cash A/c||1000|
|30 April||By Balance c/d||69000|
|1 May||To Balance b/d||69000|
|3 April||To Cash A/c||5000||30 April||By Balance c/d||7250|
|20 April||To Shyam A/c||2250|
|1 May||To Balance b/d||7250|
|30 April||To Balance c/d||9500||13 April||By Krishna A/c||1500|
|30 April||By Cash A/c||8000|
|1 May||By Balance b/d||9500|
Other than these, there will be accounts of Krishna, Shyam, Discounts received, Rent, and Salaries, which will follow the same format shown above. If you face difficulty in making these ledger accounts, feel free to make a journal entry first.
The steps to prepare a general ledger are as follows:
Step 1: A separate individual account is opened for every account.
Step 2: Create a section on the left to make debit entries and on the right for credit entries.
Step 3: Post the entries in chronological order. While posting, make sure to write ‘To’ in case of debit transactions and ‘By’ in case of credit transactions.
Step 4: Lastly, balance the accounts and carry forward the difference, which is later brought down to the next month.
The primary advantages of a general ledger account are:
The rules which must be strictly followed before writing journal entries in a ledger account to maintain an accurate record book are:
In assets, the debit side increases, whereas the credit side decreases.
In the case of liabilities, the debit side decreases and the credit side increases.
The rule of liability applies to capital as well.
The credit side of the expense account decreases with an increase on the debit side.
The debit side of the income or gain account decreases with an increase on the credit side.
Ledger serves as a central financial document for an organisation as it is a compilation of all the debit and credit transactions. It is important to prepare a ledger account as it helps in keeping track of income and expenditure in a systematised manner. In addition, it helps in spotting unusual transactions and rectifying them before posting to the trial balance.
Ans: A nominal ledger is a type of general ledger which contains transactional details of all the nominal accounts of an organisation. Some of these accounts are Purchase, Sales, Salary, Rent, Depreciation and many more.
Ans: A ledger is a book of accounts containing a permanent record of all transactions in a classified and summarised form. It is also the most important book since the Trial Balance is drawn from it. Hence, it is known as the Principal Book of account.
Ans: The main difference is that ledger is a permanent book of records, whereas a journal is not. However, journal entries have detailed narration which the ledger accounts lack.
Ans: A cash book is both a journal and a ledger. Cash transactions are first entered into the cash book, which acts like a journal. Additionally, at the end of the accounting period, it provides the closing cash balance by replicating the features of a ledger.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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