What is a Ledger?

Published by Thomas Herold in Accounting, Corporate Finance

'Ledger' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A Ledger is also often called a general ledger. It refers to a firm’s set of (numbered) accounts that it maintains for its corporate accounting records. With such a record, the firm has a full history of all its financial transactions it has entered into throughout the entire existence of the firm. In this master set of company books, the firm keeps all of the necessary information it must have to compile its financial statements. The data will always cover such useful facts and figures as liabilities, assets, cash flow and positions, revenues, expenses, profits, and owners’ equity.

Accountants work with these general ledgers as part of their book keeping system for drawing up the company financial statements. All transactions must be included in the master document. Accountants will first pursue creating a trial balance. This represents a report of all account balances and the corresponding accounts. It is this adjusted trial balance which will be employed to create all relevant corporate financial statements.

These general ledgers are employed continuously by those firms which utilize the method of book keeping known as the double entry system. In such a methodology of accounting, every financial transaction will impact minimally two different ledgers and accounts. It also signifies that every entry will have an equal and opposite credit and debit transaction. Such double entries will be arrayed in two separate columns. Generally the debit postings will be to the left while the credit entries will be posted to the right column. It is imperative that all credit and debit entries balance out all the time.

It helps to look at a concrete example to better understand this challenging concept. When a customer pays a $300 invoice, the cash account will rise. The accountant will book a $300 credit to cash. At the same time, he or she will then log a $300 debit on the other column for the accounts receivable. In this way, both the credits and debits will equal out.

There are four key financial statements which accountants can produce from these general ledgers. The balance sheet is one of them. Under balance sheets there are sub divisions including accounts receivable and cash accounts reports. The formula for any balance sheet proves to be assets minus liabilities equals equity. The one cash account in the example above gains by $300 while the accounts receivable category becomes reduced by the amount of $300. Thanks to this simultaneous increasing and decreasing of the balance sheet equation left side, the equation will stay in perfect balance.

A second critical financial report which is impacted by the general ledgers proves to be the income statement. It also has a formula, which amounts to revenue minus expenses equals net income (also called profit). It is crucial that this formula similarly remains balanced for the financial statements to be correct. A single given transaction might also affect both the income statement and the balance sheet. Consider another example. Firms might bill their clients $750. They would note a $750 debit on to the accounts receivable category. At the same time, they would put up a $750 credit on to the revenue (or cash) categories. Both the credits and debits grow by $750 this way. The two totals remain in balance.

This double entry accounting contrasts with single entry accounting methods. In either methodology of book keeping, the common element will be the accountant or book keeper working with a general ledger of some type.

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The term 'Ledger' is included in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.