Ledger
A ledger is a principal book or computer file for recording and totaling economic transactions in terms of debits and credits. It's considered the backbone of any accounting system. Ledgers provide a complete record of financial transactions over the life of a company or entity.
Traditionally, a ledger was a bound book with numbered pages. Modern ledgers are typically maintained electronically, often as part of an accounting software package.
Key Characteristics of a Ledger:
- Comprehensive Record: A ledger contains all the accounts used to record transactions, organized in a structured manner.
- Double-Entry Bookkeeping: Entries in a ledger follow the principles of double-entry bookkeeping, meaning every transaction affects at least two accounts. One account is debited (increased on the debit side or decreased on the credit side) and another is credited (increased on the credit side or decreased on the debit side). This ensures the accounting equation (Assets = Liabilities + Equity) remains balanced.
- T-Accounts: While not always physically present, the "T-account" concept is fundamental to understanding ledgers. A T-account represents a single account, with the account name at the top, debits on the left side, and credits on the right side.
- Balance Determination: Ledgers facilitate the calculation of account balances (the difference between total debits and total credits) at any given time.
- Foundation for Financial Statements: The information in a ledger is used to prepare key financial statements such as the balance sheet, income statement, and statement of cash flows.
Types of Ledgers:
- General Ledger: This is the main ledger, containing all the company's asset, liability, equity, revenue, and expense accounts.
- Subsidiary Ledger: This ledger provides detailed information about a specific general ledger account. For example, an accounts receivable subsidiary ledger would contain individual records for each customer. An accounts payable subsidiary ledger would contain individual records for each vendor.