In this article, we will learn in-depth about the ledger, including its definition, features, necessity or importance, classification, preparation rules, and much more.
What is Ledger?
The book in which transactions are recorded in classified permanent form is called the Ledger. Ledger is the permanent storehouse of all the financial transactions.
There are a lot of transactions happening around us every day. After this transaction is identified, it is first recorded in a chronological form in the primary account books (Journal Book). This transaction is later transferred to Ledger by its classification.
Ledger is the principal book of accounts among merchants, in which the entries in all other books are entred.Prof. Chambers
Business uses various kinds of Ledger but every business has a general ledger. A general ledger contains all the assets, liability, owners’ equity, revenue, and expense accounts. The value of each of the accounts is given by the Ledger.
For Example, the bank account shows the amount of bank balance available in the bank, and accounts payable shows the amount owed to vendors.
The financial statement is prepared based on Ledger Balance. Ledger is also called the king of all books.
7 Important Features of Ledger
The 7 important features of the Ledger are as follows:
- Each account in Ledger will have separate headings.
- Account transactions are recorded in a specific table.
- Transactions are recorded on the account by date.
- Each ledger has a column of two amounts. The amount of the transaction in both columns is written by debit and credit.
- There is a column to write the ref number on both sides of the account.
- The balance of the account is calculated at the end of the period.
- After completion of the calculation, the Debit and Credit Column is closed by drawing two parallel lines below the sum of both sides.
Necessity and the Importance of Ledger
Ledger is one of the most important accounting books. It is a permanent repository for all types of transactions. The importance of the ledger is enormous.
The importance and necessity of a ledger are as follows:
- The transactions are recorded in the ledger on a permanent basis. As a result, any accounting-related information is readily available from the Ledger.
- With the help of the Ledger, the mathematical accuracy of calculations can be easily verified.
- With the help of the Ledger, the total amount owed to the individual and the organization can easily be known.
- It is easy to calculate the income, expenditure, and profit & loss of a business organization.
- Ledger plays an important role in the prevention of fraud and falsehood.
- With the help of Ledger, it is possible to maintain a complete account of the organization according to the Double-Entry Accounting System.
- The financial statement shall be prepared with information from Ledger.
- It helps to make any decision of the business organization since all information about Ledger is available in a systematic way.
You can also read: Short Questions and Answers-Ledger
Why is Ledger called the king of all Books of Accounts
Ledger is the king of all books. Once the transaction has been identified, it is first recorded in the Journal Book, and then the transaction is transferred to Ledger by classification.
After that the financial statement of that business is prepared, it relies on the balance of the ledger to determine an organization’s profit or loss. Ledger is the center of all information about a business organization.
The following are the reasons why Ledger is called the King of all books:
- Through the Ledger, all business transactions are permanently recorded in the books of the account.
- The information stored in the Ledger provides an accurate idea of the actual financial condition of the business, such as income, expenditure, liability, and capital.
- Ledger helps to prepare an organization’s final account.
- The mathematical accuracy of the accounts can be verified through the Ledger.
- Any problems arising from the accounts can be avoided through the Ledger.
- Misunderstanding of any matter can be resolved easily with the information stored in the Ledger.
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Classification of Ledger
The ledger can be divided into two parts:
1. Personal Ledger: The personal Ledger can be divided into two parts
- Accounts Receivable Ledger
- Accounts Payable Ledger
2. Impersonal Ledger: Impersonal Ledger can be divided into two parts
- Assets and Liabilities Related Ledger.
- Nominal Ledger.
Rules for Preparing Ledger
- First, the Ledger account must be given a unique title.
- According to the T format, the left side of the Ledger is called the debit, and the right side is called the Credit.
- There are four columns on the left side and four columns on the right.
- The total number of columns will be 6 according to the modern format.
- The balance of accounts for the previous period will be treated as the opening balance of the current period in the Ledger.
- Depending on the nature of the debit-credit of the transaction, the amount should be entered on the debit side and on the credit side, and the balance in the balance column should be added or subtracted.
- The balance is to be calculated as soon as the transaction is written in a modern table.
- The journal page number should be entered in the journal page column of the Ledger.
- When the account is prepared in the “T” format, the account is closed by drawing the closing line below the total sum of the debit and credit columns at the end of a certain period.
Format of Ledger
1. “T” Format
OWE’s Ledger Account
2. Modern Format
OWE’s Ledger Account
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