What Is a Ledger in Accounting?

While the essential concept of a ledger is simple, it can actually be hard to explain what the ledger is due to the fact that there are so many different methods of accounting. Different businesses can also use the same terms to mean different things.

This is doubly true in accounting. With this in mind, we have made the concept of the ledger as simple as possible for you. In order to truly understand the ledger, we will also need to take a look at:

• The general ledger
• The special ledger
• The journal

What is a Ledger Account?

In double-entry accounting, each transaction will be associated with a particular subsidiary ledger. All of these transactions combine to form the ‘general ledger’, an all-encompassing internal document to manage financial affairs.

The general ledger, sometimes referred to as the ‘principal books of accounts’, is used to generate a number of important financial statements, most notably the trial balance. The trial balance, in turn, is used to create the balance sheet, one of the most pivotal accounting documents.

The term ‘general’ is used to denote the all-encompassing account made up of general ledgers. The primary general ledger accounts include:

• Asset accounts (fixed assets, prepaid expenses, accounts receivable, cash)
• Liability accounts (notes payable, lines of credit, accounts payable, debt)
• Equity accounts
• Expense accounts
• Revenue accounts

There is an account (or sub-ledger account) for each asset, liability, equity, income, and expense class. In other words, the general ledger is made up of a number of sub-ledgers. Many online guides and articles use the terms ‘accounting ledger’, ‘nominal ledger, and ‘general ledger’ interchangeably, which can be confusing for those new to the field of accounting. For the purpose of this guide, we will call it the general ledger.

So, the general ledger is actually a large book of all entries for a business. It contains everything. It is made up of the sub-ledger accounts, namely assets, liabilities, equity, expenses, and revenue. These are the 5 primary sub-ledger accounts that make up the general ledger. Each class has its own ledger account. Of course, there are many categories within these sub-ledgers.

Differentiating Between the General Journal and the General Ledger

In order to gain a deeper understanding of the general ledger, we now need to look into the general journal. When a business makes a transaction, it is first recorded in a journal in raw format. For this reason, the general journal is often termed the ‘book of original entries’.

All transactions are recorded in the order in which they have been created. The typical information will include the date of transaction, serial number, transaction type, and debit/credit classification.

Next, the item is ‘posted’ in a given account to the general ledger – asset, liability, equity, expense, revenue. The general ledger is then used to generate the trial balance (a sheet that makes sure that everything truly balances), which is used to generate the income statement. The sequence of transactions in a given business would generally proceed in the following format:

Keep in mind this is a very simplified analysis and there are innumerable intermediate steps, such as balancing and closing the ledgers. And many companies will use specialized ledgers, as examined below.

Recording General Ledger vs General Journal

The general ledger is based on the double-entry accounting system. This means that if a business bought a truck for $30,000 in cash, two entries would need to be made. On one side, we would need to make a debit of ($30,000) in cash.

On the other hand, we would make a credit of $30,000 under assets. The books have to balance. Whenever you buy something, you get something in return – this is the basis of double-entry accounting.

Writing a ledger is different from writing a journal. Making journal entries is straightforward. It includes date, details, number, debit, credit. Much like the following:

Obviously, you will only be entering either a debit or a credit. Entries in the general journal are quite similar to the ledger, but with two sides. When making entries to a general ledger, the famous ‘T’ format is used:

‘Journalizing’ is known as the process by which transactions are recorded in a journal, while ‘posting’ is the term used when recording transactions in a general ledger. Another difference is that while journal entries are in sequential order of dates, in the general ledgers transactions are grouped together by account.

Writing the General Ledger

The most confusing thing about accounting is all of the terms used, which often mean the exact same thing. Yet the core concepts in the double-entry accounting system are actually quite straightforward, once you are clear on what stands for what. Writing a general ledger is a very simple process:

• Create a ledger for each account (cash, equipment, inventory, etc)
• Make columns on the far left of the page for the date, journal number, and description
• Make columns on the left side for debit, credit, and balance. Balance is the difference between the debit and credit
• Enter the information from the journals into related accounts. Place related debits and credits side by side. Calculate the balance you’ve earned or owe
• Record and make changes to the transactions as they occur. If you’ve made a journal entry, post it to the ledger immediately
• Combine the different accounts to make a full ledger. The front page includes the chart of accounts, listing each account in the ledger and its number

After this, you will want to look into creating a trial balance to ensure that everything balances.

Breaking Down Subsidiary Ledgers, Special Ledgers, & Control Accounts

As a rule of thumb, the larger the business, the more complex the method of accounting. A sole proprietorship with 4 employees and $150,000 in gross sales is a lot different from a corporation with 500+ employees and over $20 Million in sales. They will use different methods of accounting and have many special ledger accounts.

Again, the issue is compounded by the incredibly confusing terminology. For instance, in terms of control account reconciliation, the memorandum balances are often referred to as the ‘receivables ledger’ and the ‘payables ledger.’ It’s so easy to mix these up with the control accounts in the general ledger, despite there being no link whatsoever. At a high-level, subsidiary, special, and control ledgers are easy to comprehend:

• Subsidiary ledgers contain the details to support a general ledger control account. For example, the subsidiary ledger for accounts receivable contains the details for each of the company’s credit sales to customers, each customer’s remittance, the return of merchandise, discounts, etc. With these details in the subsidiary ledger, the accounts receivable account in the general ledger can report summary amounts for the accounts receivable activity. Essentially, the subsidiary ledger will allow you to see the transactions per customer.
• Special ledgers will take entries that are not reported on the general ledger but are reported on the balance sheet. They use alternative general ledger reconciliation accounts. Special ledgers are most often used for transactions related to bills of exchange, down payments, or miscellaneous transactions.
• Control accounts are very closely related to subsidiary ledgers. A control account contains only a summary amount. Examples of a control account would be the accounts receivable. If you wanted to see how much a customer spent on a particular day, you would have to visit the accounts receivable subsidiary ledger, which would have more information.
• ‘Cash’ and ‘Bank’ mean the same thing – cash in the bank. Notes and coins are referred to as ‘Petty Cash’
• The ‘Nominal Ledger’ is also referred to as the ‘Main Ledger’ and the ‘General Ledger. It is not really a separate record, but some businesses will have a separate nominal ledger.
• ‘Revenue’, ‘Turnover’, and ‘Sales’ all mean the same thing.
• On the balance sheet, trade receivables are also referred to as ‘debtors’ and the ‘sales ledger control account’.