Also known as the book of secondary entry, ledger books are maintained by businesses to record their everyday transactions with well-organized accounts. This ledger holds the details of all the accounts maintained by the businesses like opening balance, debits, and credits, and lastly, the ending balance for a specific accounting period.
The ledger book provides a detailed view of the business transactions performed during the accounting period. It serves as a handy resource for future reference when you are drawing financial statements or filing taxes. The ledger book is considered the master document that contains every financial transaction of your business.
Why Should Businesses Maintain Ledger Books?
Maintaining ledger books is important for businesses of all sizes, as they help track the trade details with specific creditor or debtor and provides up-to-date information on liabilities and assets incurred in every financial year. The significance of maintaining a ledger book is discussed below.
- Ledger books help maintain a permanent record of various transactions every month. So, you will be able to get all information related to different accounts immediately.
- With ledger books, it is easy to check the financial details of any recent or old transactions when the need arises.
- Determining the total amount receivable or payable is simpler when trying to settle an account with your business partner or agent.
- Calculation of profit or loss for a particular transaction and profit or loss for an account is easier, as the ledger book has complete details of every account with whom you do business.
- As the ledger has updated information about every transaction, there are no risks of fraud or money laundering.
- The accounts of your business activities are readily available and the financial situation of your business can be understood at a glance, as the ledger entries are based on a dual-entry accounting system.
- Tackling challenging financial situations, or making business decisions is easier, as the ledger book systematically records the details of every account to give you a clear picture of your affordability.
- Filing taxes or applying for a business loan requires you to provide ledger books as a piece of evidence for the business accounts you have dealt with.
- As every financial detail of the accounts is recorded with great accuracy, there will be no misunderstandings in business dealings.
What Are the 3 Types of Ledger Books?
Businesses usually maintain three types of ledger books � the sales ledger, the purchase ledger, and the general ledger.
1. Sales Ledger Book
Also known as the debtor ledger, the sales ledger book records the accounting details related to the sales of products or services made to clients on credit. In short, the details of all credit sales transactions are shown in this ledger as the amount owed by your customers.
2. Purchase Ledger Book
Popularly referred to as the creditor ledger, the purchase ledger book stores the accounting records of every purchase made by your business, which is credit transactions. It contains the details of all credit transactions with the details of the sellers and goods bought as the amount due for payment.
3. General Ledger Book
A general ledger is the prominent type of bookkeeping maintained by most businesses, both big and small. It refers to an extensive record of the accounts your business owns like assets, expenses, liabilities, revenues, and equity. General Ledger is further divided into: General Ledger is further divided into:
- Private Ledger Book: This ledger contains details like capital, daily wages of laborers, and staff salary details. Everyone cannot access these ledger books.
- Nominal Ledger Book: This ledger book offers information related to the appreciation and depreciation value of assets, insurance, income, and expenses of your business.�
How Is a Ledger Book Record Prepared?
The ledger book is prepared by following the double-entry method of bookkeeping while recording the details of financial transactions. The business transactions are entered in two different columns featuring the right side with credits and the debits on the left. The debit shows the rise in the assets and the credit portrays the liabilities incurred by the business.
These two columns of credit and debit are further balanced to reveal how the transactions have panned out. The ledger is maintained for individual accounts like loans, sales, accounts receivable, and cash. So, it is easy to get an idea about every accounting entry, as it portrays how every transaction influences the various aspects of your business like expenditures, sales, and cash inflow.
What Are the 5 Categories of Ledger Accounts?
The information stored in the ledger falls into various categories where the transactions are assigned into credit or debit categories for corresponding accounts. They are:
1. Equity Ledger Accounts
Equity refers to your business’s net worth based on the assets and liabilities you own. This ledger account exhibits the actual value of your business and informs you of the financial condition based on the value of the assets you own and if all the liabilities are duly paid. Stocks are a perfect example of the equity account in a ledger book.
2. Asset Ledger Accounts
The ledger books will have comprehensive details about the asset accounts like intangible assets and physical assets. Asset accounts in the ledger include short-term assets like inventory, accounts receivable, and cash accounts. Plus, it also includes fixed or long-term assets, such as equipment.
3. Expense Ledger Accounts
The expenses spent by your business every day will be recorded as an expense account in the ledger book. The expenses can be staff salaries, utility expenses like energy or power bills that are essential for the smooth functioning of the business.
4. Liability Ledger Accounts
This ledger comprises the dues you owe your suppliers and customers. Unpaid rent, bills, taxes, and loans are some examples of liability accounts.
5. Revenue Ledger Accounts
This ledger account is based on the income your business generates per transaction. It is entered in the profit and loss statement or the statement of income. The income you get from investment or the income derived by selling services or products falls under this category.
FAQs on Ledger Book
Here are some frequently asked questions on Ledger Book:
Is there any rule for posting in a ledger book?
While posting a transaction entry in your ledger book, it is imperative to make it in chronological order, which means date-wise transactions. Every entry should have a dual aspect � a debit and a corresponding credit.
Are ledger books still used by businesses?
Yes, ledger books continue to play a prominent role in accounting even with the advent of accounting software.
Which ledger book type need not be balanced?
Nominal ledger books are generally not balanced, as they can be transferred to profit and loss or trading accounts as administrative costs, manufacturing expenditures, and purchases.
Which ledger type is called the permanent account?
The general ledger book is called a permanent or real account, as it is not closed by the end of every accounting year. The ending balance is carried forward to the next year and is considered the opening balance.
Is closing the ledger book important?
Yes, the purpose of closing the ledger account after a specific accounting period is to reset it to zero once the credit is paid and income is received to evaluate the financial health of your business.
The ledger book is a significant material in the process of accounting, as it offers a crisp view of the present financial condition of your business. It acts as the bridge in business accounting and serves as the base for creating financial statements and balance sheets. Maintaining the ledger books regularly will keep you updated on the growth rate and financial health of your business.
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