What is a Ledger?

A general ledger is a bit like a filing cabinet filled with folders full of receipts and bills...

The general ledger (the filing cabinet) holds the information from lots of accounts (the file folders) inside and organizes that information. Labels on each drawer tell what accounts are located where- like the chart of accounts. Having all financial information in one place lets a company quickly find information about spending and earnings by account and date.

While the general ledger is a master record, there are other types of ledgers used in accounting to detail specific accounts or expand recordkeeping in complex organizations. A company’s ledgers aren’t publicly available. So, you only see select data from the ledgers when financial statements and reports, such as the income statement and balance sheet, are published.

Think of the ledgers as the raw ingredients in a grocery store and the statements and reports as the organized recipes to put together the meal. Most ledgers contain a set of similar information, although the exact layout and forms depend on the company and the accounting software used. The core information sets entered for transactions in ledgers include date of transaction, description of the transaction, what account the transaction belongs to, and amount of transaction. Because it is double-entry bookkeeping, each entry affects two accounts (credit and debit), to keep the books in balance. Some examples of ledgers are;

• Nominal ledger
• Private ledger
• Sales ledger
• Purchase ledger
• Subledger
• Subsidiary ledger (sub-ledger)

A nominal ledger is another name for the general ledger as it includes the record of nominal accounts -- those that are closed at the end of each year and then start the new fiscal year with a zero balance. Expenses, income, salary, and commissions are types of nominal accounts where the balance at the end of the year is transferred into a permanent account, so the nominal account starts the new year with a zero balance.

Asset, liability, and owner equity accounts (such as inventory, accounts payable, and retained earnings) are examples of permanent accounts that are not transferred and reset each year.

It works by compiling the information from all other ledgers. Data in each of the subledgers is assigned an account code (a control account) and entered in the nominal ledger under that assignment. It collects all account information from other ledgers so that financial statements and trial balances can be run.

The ledger organizes accounts by type:

• Assets
• Liabilities
• Equity accounts
• Revenue
• Expenses

A private ledger is a ledger containing confidential accounts for part of a company. An example might be spending by company officers. It allows a company to protect account information for specific accounts, such as spending by corporate officers or something considered a trade secret. There is no fixed set of accounts to be included in a private ledger. Each company determines what is confidential enough to need to be included in a private ledger. Sometimes it is information deemed embarrassing, and sometimes it is simply information that the company wants to keep out of the hands of competitors for a set amount of time.

Possible information to include in a private ledger:

• Spending on inventory that is part of a trade secret recipe
• Confidential settlements paid by the company on behalf of officers
• Acquisitions that are not to be announced until later

Sales ledgers are used to record purchases from a company’s customers. In accounting software, the sales ledger is often called accounts receivable or customer accounts.

The sales ledger works by tracking customer purchases and amounts owed by customers in detail - Who bought what and how much they owe the company. It allows a company, or the accounting software, to keep all invoices, balances owed, and invoices paid together for reconciliation and report generation. It feeds that data to the general ledger (nominal ledger) under its control account.

Purchase ledgers record the monies owed and paid to a company’s suppliers. In accounting software, it often calls this ledger accounts payable or supplier accounts. It’s a bit like the flip side of the coin to the sales ledger. Where the sales ledger tracks sales, the purchase ledger tracks what the company is buying.

A subledger details a specific account more entirely than a general ledger and a summary is then added from it into the general ledger. Subledgers are not always required, and sometimes a journal is used rather than a subledger. Plus, accounting software oftentimes omits subledgers because it has more organizational capacity.

A subsidiary ledger can also be called a sub-ledger. This ledger fills the same function as a subledger. But it focuses on one or more accounts at a company subsidiary when a company has a large and complex organization of accounts and holdings.

A subsidiary ledger (sub-ledger) works as a secondary set of books when a company has a subsidiary (another company owned by the first). The idea is to simplify the primary general ledger for the parent company by having a separate set of books for the owned (subsidiary) company. Think of it as a book within a book, sort of like an anthology of stories. Because the subsidiary ledger contains financial information for a company subsidiary, it may have multiple subledgers of its own (sales ledger, purchase ledger, private ledger, etc.) that feed into the subsidiary ledger under control accounts assigned for each subledger. Then, the subsidiary ledger data is entered into the general ledger under its control account.

A ledger is a record of transactions by account and often holds summarized numbers. A journal is an initial recording of financial transactions that contains a detailed listing of information that will be later copied into either a subledger or the general ledger in simplified form. Paper form journal entries are in date order only and not organized by accounts ⁠— Accounting software allows more freedom in sorting and organizing of entries. Each journal entry holds both credit and debit notations. When used in manual accounting, they are most often used in parts of the company with high transaction volumes.

A chart of accounts is a tool used to organize a ledger. Ledger entries are organized under accounts. The chart of accounts for a company is the list of the accounts used and a code for each account (especially in accounting software). The chart also includes a listing of each account (sales, inventory, salary, utilities, etc.) and a number to represent it so that it functions similar to a table of contents in a novel. The ledger contains the information and the chart of accounts outlines the topics. The chart of accounts may look different in accounting software or be incorporated as part of other reports.

Once information is recorded in a journal or subledger, it must then be transferred to the general ledger. The exact process to prepare a ledger will vary depending on your accounting software package or the journal template you use. Almost all systems will at least have fields for date, item description, subledger or journal reference, credit, debit, and balance. In manual accounting, a general journal usually has separate pages for each account and is listed in order of assets, liabilities, and equity.

Each journal entry is split between two accounts (the credit and the debit) when entered into the ledger. For example, if a company has equipment that it depreciates at $15,000 each year, there will be two entries in the general ledger. Under the depreciation expense account, there will be an entry on December 31st for $15,000 as a debit. Under the accumulated depreciation account a matching entry will be made on December 31st for $15,000 except as a credit. Both entries would have a matching description of ‘annual depreciation’.

In accounting software, the general ledger entry made be entered more like a journal entry and the software then applies it in general ledger form based on account codes entered. The structure of the general ledger in accounting software may look very different than a paper ledger.

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