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A ledger (also called a general ledger, accounting ledger, or financial ledger) is a record-keeping system for a company’s financial transaction data. A ledger is a central source of truth, between all financial data sources and destinations. Ledgers can exist as physical books, if a company’s accounting is done by-hand, or, more commonly, exist as digital records.
A ledger provides a record of each debit and credit transaction across the lifespan of a company. Each transaction within the ledger is also known as a “journal entry.”
Businesses use ledgers to get a detailed view of their financial transactions for different periods of time, be that weeks, months, quarters, or years. The information contained in a general ledger is also what is used to create income statements, balance sheets, or other financial documents. Another key use of a ledger is to keep track of important balances that can inform business decisions such as how much to pay out to vendors or employees.
What are the key components of a Ledger?
Double-Entry Accounting
With a ledger, businesses must use double-entry accounting (or double-entry bookkeeping). Double-entry accounting records each transaction twice, as corresponding debits and credits. Double-entry transactions, also known as “journal entries,” are posted in two columns: debits on the left and credits on the right. The total of all of the different debit and credit entries must balance out. This method tracks not just cash on hand, but also the value of all of a company’s assets.
As an example, let’s say you run Bagel.co, a company that allows users to buy, sell, and trade bagels. Bagel.co moves funds between accounts that they operate on behalf of their customers. Customers 1-3 buy and sell bagels to each other, and cash out the balances of their accounts on your platform to external banks. Below is an example double-entry ledger of their transactions.
The key to double-entry accounting can be remembered as Assets = Liabilities + Equities. Using a ledger and tallying both sides of it helps with accuracy, because credits and debits should cancel each other out.
Chart of Accounts
The credit and debit transactions in a ledger are segregated into different accounts for different business uses. Simply put an account is a 'bucket' of value–or the balances a company needs to track. For instance, a business probably wants to know how much it has made in revenue, or how much it has spent on wages, or how much it owes to suppliers. Each of these balances would have their own accounts.
A chart of accounts (COA) is an index of all those different accounts within a company’s ledger. It is essentially a tool that provides a breakdown of all the company’s financial transactions by category and dictates how the transactions should be entered in the ledger.
A COA typically includes a name, a short description, and an identification code for each different account. A company’s transactions are then recorded throughout the year by debiting and crediting against these accounts.
Let’s look at a sample COA for a bagel shop:
What is the difference between a General Ledger and a Sub-Ledger?
The general ledger is the master chart of accounts where all business transactions are recorded. A sub-ledger, or subsidiary ledger, is a set of intermediary accounts linked to the general ledger that contain transaction information. There can be multiple sub-ledgers of a general ledger.
For larger companies, it may not be convenient to enter every single transaction in the general ledger because of the high volume of transactions. In that case, individual transactions are recorded in sub-ledgers and the totals are then transferred to an account within the general ledger.
Where a ledger shows a summary of the double-entry accounting at any given point in time, the sub-ledger records the details of the transactions shown in the general ledger. Additionally, a sub-ledger must balance in order to reflect the correct information regarding those transactions from the general ledger.
To learn more about Ledgers, check out these additional resources:
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A chart of accounts (COA) is an index of all the different accounts within a company’s ledger.
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A ledger (also called a general ledger, accounting ledger, or financial ledger) is a record-keeping system for a company’s financial transaction data.
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