What Is a Ledger in Accounting?
Whether you own a cake shop or run a landscaping business, as a small business owner, it's important to have some basic accounting knowledge. A ledger is one accounting tool worth knowing about. It consists of a comprehensive record of bookkeeping entries and organizes your business's transaction data into different accounts like assets, liabilities, revenues, expenses, and owners' equity — also known as the chart of accounts.
This information can be used to prepare financial documentation, like balance sheets, income statements, and cash flow statements. Such paperwork is used to measure the overall financial health of a business. You can use these financial statements to inform operational decisions, such as whether you can afford to hire employees or expand your commercial rental space.
Skynova's accounting software can help you organize the day-to-day financial details of your business, allowing for the creation of accurate ledgers. In this guide, we explain how to create and use ledgers for your small business accounting.
How Does a General Ledger in Accounting Work?
An accounting ledger is used with the double-entry bookkeeping method to record financial transactions. For this reason, you may also see a ledger referred to as a second book of entry. Every transaction is recorded in two ledger accounts, with both a debit and a credit transaction noted.
This information is posted in two columns, with debits on the left-hand side and credits on the right-hand side. The total of the debit and credit entries should balance out. The ledger's information is further broken down into specific accounts, such as sales, accounts receivable, and cash accounts.
The various financial records that rely on double-entry bookkeeping are colloquially referred to as the "T-account." The informal term gets its inspiration from the typical double-column appearance of the ledger account, which has credits on one side and debits on the other, separated by a capital letter "T." This provides a comprehensive, organized, and clear overview of the business's financial transactions.
What Are the Different Types of Ledger Accounts?
There are several types of primary general ledger accounts. We cover the basics below.
An asset account covers accounts receivable, cash, prepaid expenses, and fixed assets. Asset accounts are also referred to as real accounts or permanent accounts because they don't close at the conclusion of the accounting year. Each asset's account balance is carried forward to serve as the starting balance for the next accounting period. Such assets add to the value of your business.
A liability account covers customer deposits and prepayments, business financial obligations, debt, and some types of deferred income taxes related to past transactions. The types of liability accounts may include accounts payable, deferred income taxes, and accrued liabilities (amounts owed but not yet recorded in accounts payable). These are all types of credit balances, meaning they detract from the value of your business.
Stockholders' Equity Accounts
A stockholders' equity account covers accounts related to monetary ownership of your business. This will generally end up being equivalent to the difference of the recorded liabilities and assets. If the company has more assets than liabilities, the stockholders' equity is positive. If the company has more liabilities than assets, the stockholders' equity is negative. Different types of stockholder accounts include common stock, additional paid-in capital, preferred stock, and retained earnings.
Revenue refers to any assets earned by a company in the course of its business activities. This could include cash or receivables, for example. The revenue account displays a credit balance. Revenue accounts rarely have debits since income is almost never taken away from the company. A credit in the revenue T-account will result in an increased revenue account balance.
An expense account covers various costs your business may incur in its day-to-day operations. This could include office supplies, software, and professional services. Expenses are recorded in line with such categories. These are temporary accounts that should get closed out at the conclusion of each accounting cycle.
Revenue and Loss Accounts
A revenue and loss account covers things like investment, interest, and disposal of an asset. Asset disposal may occur if you sell an asset because it's no longer useful or needed. For example, if you invested in three new computers for your team but then downsized and now only have one employee, you might sell the remaining two computers (which are technically assets).
How Do You Read an Accounting Ledger?
Before you create an accounting ledger of your own, it can be helpful to know how to read one. As mentioned, the defining characteristic of the ledger is the "T," with credits in the right-side column and debits in the left side. To read a ledger, first look at the categories it features. This may include some or all of the categories named above, like assets, liabilities, and equity. Each category may have its own sheet. These sheets are then combined in the general ledger.
Read the top of the ledger page from left to right to identify the categories. Read the ledger from top to bottom to review the entries for each month, checking the entered incomes and expenses. You can see how the account balance changes as you track it down the page with each plus or minus. If you want to know your current balance, this will be at the very bottom of the page. You can also review monthly credit and debit balances intermittently.
Some ledgers use codes to sort information more quickly for viewing. A separate chart of such codes may be provided alongside the ledger. See the example below.
In the brief example below, the ledger is updated to Feb. 15, 2021.
101 = Rent
102 = Office Supplies
200 = Accounts Receivable
How Do You Write a Ledger?
Now that you know how to read a ledger, you're probably wondering how to create one for your own business. As described above, the key characteristic of the account ledger is its basic "T" shape: double-entry business transactions span two columns, with credit entries in the right-hand column and debit entries in the left-hand column. The ledger will further break up financial information into categories, like sales, accounts receivable, and cash.
Skynova's accounting software can help you keep track of expenses and invoices, making it easier to create accurate ledgers. When it comes to best practices in keeping ledgers, follow the below tips.
Make a Ledger for Every Account
Your ledger should be divided into different types of accounts, as described in the section "What Are the Different Types of Ledger Accounts?" Create a ledger for each type of account (with its own page). For items that don't fit into any category, create a separate general ledger account.
Add Columns for the Date, Type of Account, and Name/Explanation
Add columns in your ledger for key data, including the date, the type of account, and a name/explanation. At this point, you may want to establish codes to sort the information more easily and concisely. This will cut down on the need for actual text in the ledger itself.
Add Columns for the Debit, Credit, and Balance
For the next step, add columns for debit and credit amounts, as well as a running balance. This allows you to assign a dollar amount to each type of account as it's booked. The balance gives you an up-to-date read on your current financial situation.
Enter Journal Entry Information
Now, you can input the actual information for each journal. Related credits and debits should be placed side by side. This makes it easier to calculate the balance you owe or have earned.
Continue to Record Transactions
Record any transactions as they occur. Ideally, you will review your ledger daily to ensure it's updated. This will save you time and hassle, as you won't have to go back later to sort through invoices, expense notes, or other transactional documents to update the ledger retroactively.
Combine the Accounts to Make a Full Ledger
Finally, you can combine the various accounts to create a single ledger. The front page will list the various accounts.
Let Skynova Help You Manage Your Small Business Accounting
Maintaining an accurate record of your business's financial transactions will ensure a streamlined accounting system, making it easier to create accurate ledgers and financial statements. If you aren't comfortable creating financial statements yourself, you can simply record the relevant information and hire a professional accountant for the analytical part.
Skynova's software products can help you stay on top of your business finances, ensuring no important details slip through the cracks. Business owners can also benefit from Skynova's business templates to streamline processes like invoicing. Take advantage of these products to simplify your small business accounting.
Notice to the Reader
The content within this article is meant to serve as general information about keeping ledgers and not intended as concrete guidelines. The examples described above may not apply to your specific situation. Always consult a licensed accountant or tax professional for individual bookkeeping, accounting, or tax advice.