What is a Ledger & Why should you have one?
A ledger, also referred to as a general ledger, is an accounting document system that keeps complete records of all the financial business transactions.
The importance of a ledger lies in the fact that it assists well in tracking and managing the financial operations of a business. It is used for storing and organising the data required for preparing the financial statement of a company.
Ledger also allows users to compile trial balances, which makes the process of analysing tax returns easy since all the income and expenses are displayed in a single place.
A ledger is similar to a book covering all the accounts, including individual, nominal, real, debited, or credited accounts, which are entered primarily in a journal or subsidiary books. The Ledger functions as an effective and result-oriented accounting system. In digitized systems, it involves interconnected digital files but sticks to similar accounting principles as the manual system.
Format of Ledger in Accounting
|General Ledger Sheet||Sheet No: 21|
|Account: Electricity Expense||Account No:640|
|Mar 15||To Accounts Payable||J1||4,000||4,000|
|June 17||To Accounts Payable||J3||3,640||7,640|
|Sept 14||By Accounts Payable||J5||430||7,210|
- Every individual ledger account is divided into two main parts. The left-hand side is called the Debit Side, and the right-hand side is called the Credit Side. The initials ‘Dr.’ and ‘Cr.’ denote ‘debit’ and ‘credit,’ respectively.
- The name of the ledger account is displayed in the top middle section of the account.
- The transaction date gets recorded in the date column section.
- The word ‘To’ present before the account appears on the Debit side of an account in the specific column.
- The word ‘By’ present before the account appears on the Credit side of an account in the specific column.
- The accounts’ names influenced by the transaction are displayed in either of the specific columns on the debit or credit side.
- The specific page number of the journal or subsidiary from which an entry is transferred is entered in the J.F. (Journal Folio) column.
Advantages of Ledger
The various advantages of a ledger are as follows:
1. Easy Trial Balance Creation
A trial balance requires a ledger account balance in order to be easily prepared. Due to this, it is almost impossible to create a trial balance without the help of a ledger.
2. Final Account Presentation
Final Accounts is the last step of the accounting process where various ledgers maintained in the trial balance of the business are presented to check the profitability and financial position of a company.
3. Application of Double Entry System
The double-entry system’s application process can be completed only if the journals are posted to separate ledger accounts.
4. Classified Accounts Management
The details of the classified accounts, i.e., real account, nominal account and personal account, can be displayed after properly recording them in the ledger accounts.
5. Presentation of Statistical Information
Balances of the ledger accounts act as a source of the statistical information used by the management in making decisions. The financial data supplied by the ledger accounts is summarised, analysed and interpreted to get the various accounting information of a company.
6. Minimise the Chances of Accounting Errors and Omissions
Since the transactions are initially recorded in a journal before the ledger, it reduces the chances of accounting errors and omissions.
7. Analyse the Total Income and Expenses of a Business
Different types of income and expenses of a business are recorded in separate ledgers. So, it becomes possible to analyze the amount of income and expenditure under each head over a particular period.
8. For Storing and Collecting Information
Ledger offers a great way for storing various types of transaction information. The transactional information can be organised within a ledger in terms of assets, liabilities, revenue, and expenses. Once each ledger is closed, the trial balance is prepared, which is required to produce income statements, balance sheets and other essential financial reports.
9. For Understanding a Business’s Present Financial Position
The present financial position of an enterprise after creating the final account can easily be recognized with proper maintenance of a ledger account.
Disadvantages of Ledger that one must know
- Ledger is not entirely safe since anyone can easily access the book or file from the system.
- These are sensitive financial documents and call for extra security.
- It is dependent upon the transactions recorded in the journal. If there’s any mistake in transaction records in the journal, the results of the transaction posting inside the ledger will also be unreliable.
- Maintaining a ledger is a time-consuming task.