We used individual ‘T’ accounts to demonstrate the concept of double entry principles in our earlier article. Nothing stops a company from having as many individual accounts for items as they deem fit. The only caveat is that it should be kept minimally complex so that internal controls and reconciliation derived from analyzing the accounts would be done economically.
These individual accounts are called ledgers. In today’s tutorial on what is a general ledger in accounting, we are going to explore everything about general ledger from basics to advanced concepts of a ledger. To do this, let us firstly start with the official definition of a ledger and then dive in.
Definition of a ledger
Oxford dictionary of accounting defines a ledger as ‘a collection of accounts of similar type’. Another source defined ledger as ‘a book which contains, in a classified and summarized form, a permanent record of all transactions’
For the purpose of our discussion today, I would define ledger as a self-contained document where the double entry of all business transaction is permanently made – double entry principle cannot be practiced without a ledger. Note that this is different from a journal entry -.the double entry feeds the ledger.
Ledgers in the olden days used to be a book that is divided into segments for different accounts. But nowadays, ledgers can be a file on a computer.
Typical page in a ledger is divided into two halves by a vertical line and a horizontal line at the top. The left-hand side of an account is called the debit side – denoted by Dr while the right-hand side is called the credit – denoted by Cr.
A descriptive name is put at the top of the account. Examples are; Depreciation A/C, Motor Vehicle A/C, Purchases A/C, etc. Note that the word ‘ACCOUNT’ is abbreviated as ‘A/C’.
What is a general ledger? |Simplified explanation
Simply put, a general ledger is the complete collection of a company’s different account.
Think of a general ledger as a book that contains all the different transactions that an organization engages in. You may hear some people refer to a general ledger as the principal book – this is correct because depending on the class of account, some individual ledgers never get closed at year end – i.e balance sheet items (more on that shortly).
In the world of business technology, especially the area of blockchain, you will come across terms like distributed ledger, but in core accounting where our focus is, we can have a ledger in loose form, in bound book or in the computer memory as a file.
Accounts in the context of ledger have two broad categories. The first being the statement of financial position (balance sheet) items and the second being the statement of profit and loss account (P&L) items.
Pictorial summary of a ledger from Frank Wood and Alan Sangster, Business Accounting
Division of a ledger (Types of ledger)
The ledger can be divided into the following
- Personal ledger: the personal ledger keeps record of trading activities. Examples of personal ledger are; (i) Sales ledger, (ii) purchases ledger
- General ledger: this is where the rest of the components of the double entry accounts are entered. These are sometimes referred to as real and nominal accounts examples include; (i) expense accounts, (ii) income accounts, (iii) NCA (fixed assets) accounts, etc
- Private ledger: for a small business, it is not uncommon for owners to have frequent involvement with the business. Therefore, activities that relates directly to the proprietor’s involvement are recorded in the private ledger. Examples of private ledger are; (i) drawings, (ii) capital introduced, etc
How to prepare a ledger with Pictorial sample of a ledger
There is a comprehensive article on double entry accounting referenced at the beginning of this article. Please do refer to it for detailed example. Below is a specimen of a traditional ledger.
Sample of a Traditional Ledger
Uses and Importance of ledger
The advancement has greatly influenced the uses and purpose of having a ledger in accounting. Our discussion in this section of this article on what is general ledger in accounting, we will mirror the uses and importance of ledger to reflect the current impact of business technology on our daily business transactions.
- Audit trail: a ledger both in the traditional sense and on a distributed ledger like a blockchain leaves an audit trail. The only difference is that the audit trail of the traditional ledger can easily be tampered with unlike the blockchain ledger that is tamper proof. Auditors while tracing a transaction reviews the contents of a select ledger to validate postings. I would be very surprise as an auditor if I see an item on the trial balance without a ledger – this immediately turns on my fraud detective and prevention radar.
- Insight: some financial analyses are performed at the ledger levels before preparing the financial statements. These kinds of analysis are usually prepared for the use of management – is within the purview of the functions of management accountants.
- Basis of accounts preparation: without a ledger, no trial would be prepared (except when fraud is cooking – I have actually come across a situation where some items on the trial balance had no ledger).
- Storage: the ledger is sometimes referred to as the ‘principal’ book. This is for the simple reason that the ledger is the permanent storage of accounting information even after the final accounts has been prepared.
- Control tool: managers may need to quickly get the total of a particular line of transaction for decision making purpose and can easily get this information from the ledger balance.
- Organizing information: no one would make sense of any financial information that an accountant would produce if the information is not carefully organized. A ledger helps an accountant organize transactions of identical characteristics into groups for easy referencing, tracing and analysis.
This article on what is a general ledger in accounting was written to provide solution to problem identified at work place where a new graduate of accounting was struggling with the basics of double entry and ledger.
According to the individual, the topic was passively treated in school because their lecturer was of the opinion that with computerized accounting, the student does not need to really understand what is under the hood.
I do not have any comment on that for now until I do my research to find out if the issue is as a result of a change in accounting curriculum or if this was an isolated case of lecturers just being lazy – or the recent graduate acting funny.