Money is the primary component of a business. The prime goal of all business entities is to earn profit. The small business entities having low turnover or run by 1 or 2 persons. Need not keep a record of transactions as the transactions are limited.
Yet, as the business grows. The entity has to record daily transactions to identify the actual sales . The amount has to be spent while running the business. Books of Accounts are always required to be in a format prescribed by the tax authorities. These show the transactions which took place beyond the permitted limit.
Thus, every business entity must keep a record of financial transactions. The account books are maintained to show the truth of a firm’s financial health.
Every financial transaction during business can be classified are as follows for debit or credit done for a particular account head. We all know the number of transactions carried out by a single account regularly. The records of each such transaction are kept in a journal. Yet, the regular account transactions are way more different. Than what’s written in the ledger.
The ledger is a book of accounts that has been kept, In the physical form or electronic form to capture transactions recorded . As for debit or credit in a journal. Transactions of a large business entity are not recorded randomly.
But they are differentiated precisely. Thus, the records from the journal are filled into a ledger in the same classification. Ledger is the second book under the accounting description.
The information recorded in the ledger is used to prepare the financial statements as well as required to see the health of the business. The information in the ledgers is also required to submitted to the tax authorities. And to the other statutory bodies like Registrar of Companies. The major components of a ledger are assets or liabilities, income, and expenditure, loans, equity, investments, etc.
The Ledger in Accounting contains the list of various general account heads used in normal transactions of the business entity. The types of general ledger accounts differ from business to business. The ledger of a bank is different from that of a manufacturing company.
Some of the primary ledger accounts are listed below. Note that the details may defer from business to business.
- Owner or promoters’ equity.
- Assets of various types like fixed assets (buildings, plant, machinery, etc.) and movable assets like cars, trucks, etc.
- Various kinds of Liability (loans, bills payable, etc.)
- Revenue earned account for keeping details of earned revenue during business transactions.
- Expenditure account to keep details of subhead wise expenditure.
- Interest paid on loans and interest earned.
There are various types of ledgers in a typical business entity. The classification is based on the type of transaction entered into the ledger.
Some of the ledgers being used in the Journal are following:-
1. Sales ledger
A sales ledger contains transactions related to sales. It includes description of the item, date of transaction, the amount involved, sold on cash or credit, the amount involved in the sale.
Generally, the data is kept month-wise in most of the business entities. Yet, the data can be kept on a yearly or quarterly basis. The number of transactions is low but the amount involved in the transaction is high.
Ledgers typically maintain data only about one business entity and data of subsidiaries, if any is kept separately. A sub-ledger on sales on credit is also maintained to keep a separate record of such sales. Raise demand from the firms to which the sales were made in credit.
2. Purchase ledger
All businesses need goods as raw material for manufacturing, processing or distribution in smaller quantities such as the sales ledger. This ledger also contains details of the item purchased, date quantity, cost, etc.
Ledger are maintained monthly, quarterly or half-yearly depending on the frequency of such purchases. It is also pertinent to mention that a sub-ledger of all the purchases is also maintained to keep a separate record of transactions where the sale is made on credit. This is very useful to find the due dates and amounts so that interest payments on delayed payments can be avoided.
3. Cash ledger
It contains all the transactions which are done in cash for a particular period. The cash transactions have to be matched with bank transactions to find out the proper use of money.
The term used for matching the entries with the bank account is bank reconciliation. Generally, the reconciliation is done at the end of the month. Any unreconciled entries are referred back to the accounts department to find and match the transactions.
4. General ledger
The transactions which do not fall under any of the specified categories are recorded in the general ledger. An amount of care must be taken to see that it has fewer entries. Otherwise, it will be difficult to reconcile the accounting entries.
Comparison between a journal and a ledger:
As indicated in the first paragraph, the entries into the ledger are sourced from the journal. The journal is the primary book of accounting. Which has primary details of all transactions happening in the business entity.
The transactions are then recorded in the various ledgers. The ledger is thus called a secondary or principal book of account. Here, it is also important to note that all transactions of an entity find a place in the ledger.
Use of ledger:
This section will be answering the need for a Ledger in Accounting. The information recorded in a ledger generates a trial balance account. This account is paramount in the accounting information of a business entity. A trial balance is a sheet showing balances of ledgers categorized as debit or credit.
In a trial balance, debit is on the left side and credit on the right. The trial balance is generally prepared at end of the calendar month or financial year. If there is no mistake in the entries in the trial balance, the debit and credit will always be equal. The trial balance shows the financials of an entity as on a particular date.
Correct maintenance of Ledger in Accounting is premium to keep a watch on the health of the business. The double entry system also rules out arithmetic errors. The involvement of many persons in final calculation increases the number of mistakes. The times are now changing fast. Digitalization has taken over.
Ledger is one of the crucial accounting books that act as the source of information about the functioning of the business entity. If you are struggling to streamline the accounting needs of your business.
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