What is an Accounting Ledger?
An accounting ledger records all financial transactions organised by account. This ledger records every financial move made by the business, providing a comprehensive view of its financial health.
Think of it as the backbone of a company’s financial documentation.
The Role of the Accounting Ledger
Often called the “book of final entry,” the ledger summarises all transactions initially recorded in accounting journals. Additionally, it captures every financial detail, ensuring no one misses anything. Each account within the ledger represents different aspects of the business’s finances, such as:
- Assets: What the business owns
- Liabilities: What the business owes
- Revenue: Money earned from sales or services
- Expenses: Money spent on operations
- Equity: Owner’s interest in the business
The main goal of the accounting ledger is to provide a clear and concise summary of a business’s financial activities. Therefore, by organising transactions by account, the ledger offers a snapshot of the business’s financial position at any given time.
Businesses then use this information to prepare financial statements, tax returns, and other financial reports.
Ledger Organisation
The accounting ledger uses a system known as double-entry accounting. This means every transaction impacts at least two accounts.
For example: When a business purchases inventory, it increases the inventory account and decreases the cash account. Consequently, the business would record this transaction as a debit to inventory and a credit to cash.
Types of Accounting Ledgers
There are various types of ledgers, each serving a specific purpose:
- General Ledger: This is the primary ledger, summarising all financial transactions.
- Subsidiary Ledgers: These track transactions for specific accounts like accounts receivable and accounts payable.
- Control Accounts: These ensure that the total balances in subsidiary ledgers match the general ledger.
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