What is a Ledger in Accounting?

The ledger is a vital component for accurate bookkeeping as it keeps track of all your financial activity. Without one, it’s impossible to know where your business stands financially. Plus, you’ll fail an audit.

How do these documents work and how will your bookkeeper manage a ledger on a daily basis? In this article, we’ll go into detail about what ledgers are and how they work.

What is a Ledger?

A ledger is a physical or digital record that contains bookkeeping entries. It includes the account’s opening balance, all debits and credits made during the accounting period, and its closing balance.

Accounts receivable, payable, sales, and payroll are just a few of the balance sheet and income statement accounts that businesses can keep track of in ledgers. 

Creating a ledger is crucial because it serves as the central record of all your financial transactions. You can better manage your spending because it provides real-time reporting of revenues and outlays. You can also use the general ledger to create financial statements, spot suspicious transactions, and compile a trial balance.


What Types of Accounting Ledgers Are There?

There are three main categories of accounting ledgers to be aware of: 

  • General Ledger
  • Sales Ledger
  • Purchase Ledger

Accounts Receivable are shown in the sales ledger, and Accounts Payable are shown in the purchase ledger. However, both are included in the general ledger, which makes it the most crucial book for accounting purposes. 

It also acts as a control for accountants to record transactions in various ledgers. For instance, a transaction involving money received by a company would be recorded in the general ledger’s sales ledger control account as well. These should match exactly in order to maintain balance.

What is a Ledger Account?

Ledger accounts are essentially sub-categories within the general ledger.

Each transaction affecting a specific account in the general ledger is recorded in the corresponding ledger account. To make it simpler for business owners and accountants to research the purpose of a transaction, each transaction is given a date, transaction number, and description within a particular ledger account. 

Common ledger accounts come in the form of:

  • Asset Accounts: Cash, pre-paid expenses, accounts receivable, furniture, and fixtures .
  • Liability accounts: Notes payable, lines of credit, accrued expenses, and accounts payable.
  • Equity accounts: Paid-in capital, retained earnings, common stock, and shareholder distributions. 
  • Revenue accounts and sales and service fees.
  • Accounts for expenses like rent, utilities, salaries, and supplies, as well as accounts for advertising costs. 
  • Other earnings and costs, including interest, dividends from investments, and gains or losses from asset sales.

What Does Your Bookkeeper Do With Ledger Accounts?

Your bookkeeper enters debits and credits to ledger accounts throughout the year to record all transactions. 

The transactions result from routine business operations like billing clients or buying inventory. They may also be the outcome of journal entries, such as those that note depreciation.

As each transaction is made, the bookkeeper will update the ledger accordingly. This means the ledger is typically accessed and updated throughout each working day.

How Will Your Bookkeeper Set Up the Ledger?

To set up ledger accounts, your bookkeeper will start with the five ledger account types:

  • Assets;
  • Liabilities;
  • Equity;
  • Revenue;
  • Expenses.

The date, transaction, or journal entry number, and description for each account type are separated into columns on the far left of the page. Your bookkeeper will also create columns for the running balance, debits, and credits on the right side. 

Your bookkeeper will then keep a running log of all business transactions in the relevant account section.

How is an Accounting Ledger Different from a Journal?

Understanding how accounting ledgers differ from journals will help you understand their purpose in greater detail. 

The book of original entry, also known as an accounting journal, is where financial transactions are initially noted. The accounting ledger then summarizes the information in a T format with debits on one side and credits on the other. 

The information is transferred from the ledger to create a trial balance and then moves to the balance sheet and income statement. Journal transactions are recorded chronologically, whereas ledger transactions are organized by account type. This is another distinction to be aware of. The double-entry method of bookkeeping requires that ledger accounts be balanced.

Are Ledgers Completed Manually?

Thanks to modern accounting software, much of the ledger can be automated. As transactions, debits, and credits are registered in the system, the ledger can automatically update itself. 

However, that doesn’t make the role of the bookkeeper redundant. They are still responsible for ensuring the software runs efficiently and that everything is recorded accurately. Additionally, some entries, such as cash transactions, will still need to entered manually as there won’t be a digital record of them until the bookkeeper adds them to the system.

Ultimately, bookkeeping software is there to make everyone’s lives easier and reduce the likelihood of errors, but your bookkeeper is still an essential member of staff.

How to Find a Bookkeeper for Your Business

The daily management of a ledger can be complicated and time-consuming, particularly if you’re not financially minded. However, a qualified bookkeeper can take care of the ledger plus your other daily financial tasks with ease.

The problem for most small businesses is that they do not have a requirement for a full-time bookkeeper, so they often neglect to hire one. The danger here is that the ledger quickly falls out of date and becomes impossible to manage. 

But there is a solution.

Hiring a virtual bookkeeper is an economical solution for small businesses. It means you get the bookkeeping expertise you need without paying for services and time you don’t need.

For example, EvolveCFO bookkeepers are hired on a “needs” basis, meaning you only pay for the level of service you require. As you scale your business, you can increase the level of service.

If you need help creating and maintaining your ledger and other bookkeeping activities, get in touch with EvolveCFO to see how we can make your life easier.