Table of Contents
What is a Ledger?
A ledger is a record of bookkeeping entries or transactions. Ledgers are also called the Book of Secondary Entry, a Journal being the Book of Primary Entry.
A ledger shows all the accounts that a business maintains, all debits and credits to that account through time, and finally, the closing balance of the account at the end of the accounting period.
A ledger consists of accounts.
It is easier to understand what an account is if you visualize it as different buckets. A business would have various buckets for each item it owns or interacts with.
Importance of Ledger
A ledger gives business owners and accountants a comprehensive view of transactions a business did in the accounting period.
It is also well organized into accounts. It is only because of these accounts that we know:
- How much cash the business is left with at the end of the period
- How much money the business owes its creditors
- How much money can the business collect from its debtors
- How much cash was spent over the course of the period
If your business is left with insufficient cash at the end of the quarter, take a look at the Cash A/c of your Ledger book, and you can see where exactly all that cash is going.
How a Ledger Works
Ledgers, like all books of accounts, work with the Double Entry principle. This is the underlying principle behind all books of accounts.
Read more: Double Entry System of Accounting
In short, the double entry system states that all transactions have a two-sided effect. Purchase of sugar for cash means that the value of the cash account reduces, while the value of the sugar account increases.
What is a Ledger Format?
The way a ledger looks may differ depending on the software available and the resources at hand, but all ledgers follow the same principles.
| Date | Particulars (Debit) | J.F | Amt (Rs) | Date | Particulars (Credit) | J.F | Amt (Rs) |
Debit/Credit
One side records debit entries, and the other side records credit entries. Debit is value added, and credit is value deducted.
Date
The date column is important because accounting is done chronologically. Accountants date each entry so that the reader knows what goes on in the business day by day.
Particulars
In this column, accountants record the details of the other side of the transaction. Let’s see how Razor Bakery’s accountant would record the purchase of Sugar.
There are two accounts in this transaction: Sugar Account and Cash Account.
This is how the Sugar Ledger would look.
Sugar A/c
| Date | Particulars (debit) | J.F | Amt (Rs) | Date | Particulars (credit) | J.F | Amt (Rs) |
| 25 Nov 22 | To Cash A/c | 1 | 50 | ||||
Let’s take a look at what the Cash Ledger looks like.
Cash A/c
| Date | Particulars (debit) | J.F | Amt (Rs) | Date | Particulars (credit) | J.F | Amt (Rs) |
| 25 Nov 22 | By Sugar A/c | 1 | 50 | ||||
Journal Folio
The information that is in ledgers comes from journal entries. Each line item in every ledger account has a corresponding journal entry. Accountants record the serial number of the corresponding journal entry in this column.
Amount
This is where the accountant records the exact amount of the transaction. Ideally, every ledger account will have multiple entries. How do we know how much is left in an account at the end of the accounting period?
We do this by balancing the ledger accounts. Let’s understand this in more detail in the next column.
Balancing Ledger Accounts
One of the most important things that a ledger does is provide information for other financial statements. The Trial Balance is created from the closing balances of all the accounts in the ledger.
At the end of the quarter, the accountant adds all the debit values and subtracts them from the sum of all the credit values.
Razor Bakery is left with Rs 110 at the end of the quarter! Since this is a positive value, it is a debit value.
Closing debit values are recorded on the credit side of the ledger to balance both sides. This is how a cash account would look like:
Cash A/c
| Date | Particulars (debit) | J.F | Amt (Rs) | Date | Particulars (credit) | J.F | Amt (Rs) |
| 25 Nov 22 | By Sugar A/c | 1 | 50 | ||||
| 27 Nov 22 | To Sales A/c | 3 | 300 | 30 Nov 22 | By Flour A/c | 2 | 40 |
| 3 Dec 22 | By Salary A/c | 4 | 100 | ||||
| 31 Dec 22 | By Balance c/d | 190 | |||||
| 300 | 300 |
When the accountant creates the Cash A/c for the next quarter, in January 2023, he will take this value as the starting balance for the account, as Balance b/d, or “brought down”.
Cash A/c
| Date | Particulars (debit) | J.F | Amt (Rs) | Date | Particulars (credit) | J.F | Amt (Rs) |
| 1 Jan 23 | To Balance b/d | 190 |
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FAQs
What is a ledger?
A ledger is the second step in the process of recording how money moves through a business. Ledgers are also called the Book of Secondary Entry. A ledger shows all the accounts that a business maintains, all debits and credits to that account through time, and finally, the closing balance of the account at the end of the accounting period.
What is ledger good for?
A ledger gives business owners and accountants a comprehensive view of everything a business did in the accounting period. It is not just comprehensive, it is also well organized into accounts. If your business is left with insufficient cash the end of the quarter, all you’d need to do is take a look at the Cash A/c of your Ledger book, and you’d be able to see where exactly all that cash is going!
Are ledgers still used?
Yes! Ledgers remain a very important part of the accounting process. Of course, the actual recording procedure has changed thanks to new accounting software, but the importance of a ledger hasn't changed.
What is debit and credit balance in a ledger?
One of the most important things that a ledger does is provide information for the other financial statements. The Trial Balance is created from the closing balances of all the accounts in the ledger. Closing balances are calculated by adding all the debit values, and subtracting it from the sum of all the credit values.
