Ledger
The ledger is the second stage of the accounting cycle. A transaction is first journalized in chronological order after it occurs. The recorded transactions are then summarized under separate headings according to their nature. The literal meaning of “ledger” is “shelf.”
According to accounting rules, as soon as a business transaction takes place, it is recorded in the journal or primary ledger. Journals keep all transactions together, making it difficult to isolate individual accounts. Therefore, transactions are arranged in short form under specific headings, and the required information is obtained by ascertaining the balance.
Characteristics of a Ledger
Fixed Structure: Each of the various accounting sectors is recorded in the same structure or chart format, ensuring uniformity in calculations.
Headings: The ledger has separate headings for each account sector. For example, transactions related to cash receipts and disbursements fall under the “Cash Account,” while expenditure-related accounts are categorized under headings such as “Salary Account” or “Utility Account.” There is a separate ledger for each account, making the title a key feature of the ledger.
Date Sequence: Dates are recorded in the ledger in chronological order.
Recording of Amounts: The ledger has two columns for amounts. On the debit side is the debit column, and on the credit side is the credit column. The transaction amount is recorded according to its debit or credit nature.
Type of Transaction: A ledger transaction can be either a debit or a credit. The balance of both debit and credit transactions should be equal. Different types of balances have different meanings. For example, a debit balance in the income-expenditure account indicates a loss, while a credit balance indicates a profit.
Balancing: At the end of a specified period, a balance must be drawn for each branch of the ledger account. The ledger is declared closed for the specified period once the account is drawn up.
Why Ledger in Accounting?
The necessity of ledgers in modern accounting practices is immense. Without ledger, accounting is impossible to achieve the primary objectives. Transactions of a business enterprise are recorded in the journal, the primary book of accounts, in chronological order. However, it is not possible to understand the overall outcome of these transactions from the journal alone. That is, it is not possible to get an idea about the income, expenses, liabilities, receivables, assets, capital, etc., of a business at specific intervals. On the other hand, by transferring various accounts to the ledger in a concise and classified manner, financial results and other information can be easily known. Therefore, the necessity of ledgers in accounting is undeniable. Practical necessity of using ledgers:
1. Complete accounting: It is possible to maintain full accounting of a company using the dual-entry method through the ledger.
2. Result Determination: Ledger is indispensable for preparing the income statement of any business.
3. True state of accounts: Ledger is essential to know the true state of each account.
4. Determining the receivables and payables status: The amount of receivables and payables of a business entity can be determined from the recorded individual accounts in the ledger.
5. Verification of accuracy: Accuracy of the accounts can be verified by preparing a trial balance with the account balance recorded in the ledger.
6. Financial Information: Accurate and reliable accounting information can only be obtained from the ledger.
Division of Ledger
1. Personal Ledger: The ledger where accounts are recorded in the name of individuals or entities is called a personal ledger. In this ledger, transactions related to personal accounts, such as individuals or organizations, are recorded. For instance, accounts receivable, accounts payable, loan received and loan given ledgers track individual customer and vendor transactions, respectively. The personal ledger is further divided into:- a) Debtor ledger and b) Creditor ledger.
a) Debtors Ledger: The ledger in which credit sales are recorded is called debtors’ ledger or sales ledger.
b) Creditors Ledger: The ledger in which purchase due are recorded is called creditors’ ledger or purchase ledger.
2. General Ledger: All types of property and nominal accounts are stored in general ledger. Personal accounts do not appear in the general ledger. This ledger can be further divided into two parts: a) Private ledger b) Nominal ledger
a) Nominal Ledger: Assets, liabilities and capital of a business are recorded in Private Ledger. Example:- Machineries, Building etc.
b) Nominal Ledger: All types of income-expenditure and profit-loss accounts of the business are written in Nominal Ledger. Example:- salary account, rent account etc.
Ledger Posting
Transactions are first recorded in the journal. Later the account is transferred from the journal to the ledger. The recording of transactions in the ledger by transfer from the journal is called ledger posting or ledger entry.