Money is the primary component of a business. The prime goal of all business entities is to earn profit. Small business entities have a low turnover or are run by 1 or 2 persons. Need not keep a record of transactions as the transactions are limited.
Yet, as the business grows. The entity has to record daily transactions to identify the actual sales. The amount has to be spent while running the business. Books of Accounting are always required to be in a format prescribed by the tax authorities. These show the transactions which took place beyond the permitted limit.
Thus, every business entity must keep a record of financial transactions or ledger. The account books are maintained to show the truth of a firm’s financial health.
Every financial transaction during business can be classified as follows debit or credit done for a particular account head. We all know the number of transactions carried out by a single account regularly. The records of each such transaction are kept in a journal. Yet, the regular account transactions are way more different.
Then what’s written in the ledger?
The ledger or a log is a book of accounts that have been kept, In the physical form or electronic form to capture transactions recorded. As for debit or credit in a journal. Transactions of a large business entity are not recorded randomly.
But they are differentiated precisely. Thus, the records from the journal are filled into a ledger in the same classification. It is the second book under the accounting description.
The information recorded is used to prepare the financial statements as well as required to see the health of the business. The information in the logs is also required to be submitted to the tax authorities. And to the other statutory bodies like the Registrar of Companies. The major components of this log are assets or liabilities, income, and expenditure, loans, equity, investments, etc.
This contains the list of various general account heads used in normal transactions of the business entity. The types of general log accounts differ from business to business. The log of a bank is different from that of a manufacturing company.
Some of the primary accounts are listed below. (Note that the details may defer from business to business)
- Owner or promoters’ equity:
This account represents the capital investment made by the owners or promoters of the business. It reflects the initial funds contributed and any subsequent investments made.
- Assets of various types like fixed assets (buildings, plant, machinery, etc.) and movable assets like cars, trucks, etc.
Assets encompass various categories, including fixed assets such as buildings, plants, and machinery, as well as movable assets like cars and trucks. These accounts record the value of the company’s resources and investments.
- Various kinds of Liability (loans, bills payable, etc.)
This category covers different types of obligations, such as loans and bills payable. It helps track the amounts owed to creditors or financial institutions, indicating the company’s financial responsibilities.
- Revenue earned account for keeping details of earned revenue during business transactions.
The revenue earned account is essential for documenting the details of income generated during business transactions. It provides an overview of the company’s sales, services rendered or other revenue-generating activities.
- Expenditure account to keep details of subhead-wise expenditure.
The expenditure account captures the details of expenses incurred, often categorized under various subheads. This allows for a breakdown of expenses, such as salaries, utilities, marketing costs, and more, enabling better expense management.
- Interest paid on loans and interest earned.
This account is dedicated to recording interest payments on loans taken by the business and interest earned on investments or deposits. It helps track interest-related financial transactions and provides clarity on interest expenses and income.
There are various types of book logs in a typical business entity. The classification is based on the type of transaction entered into it.
Some of them being used in the Journal are the following:-
1. Sales ledger
A sales ledger contains transactions related to sales. It includes a description of the item, the date of the transaction, the amount involved, sold on cash or credit, and the amount involved in the sale.
Generally, the data is kept month-wise in most of the business entities. Yet, the data can be kept on a yearly or quarterly basis. The number of transactions is low but the amount involved in the transaction is high.
These logs typically maintain data only about one business entity and data of subsidiaries, if any is kept separately. A sub-ledger on sales on credit is also maintained to keep a separate record of such sales. Raise demand from the firms to which the sales were made in credit.
Maintaining sales logs can significantly enhance the sales process.
By keeping detailed records of sales transactions, businesses can gain valuable insights into their sales performance. Sales logs provide a comprehensive overview of customer interactions, allowing for more personalized and targeted sales approaches. With accurate data on sales volumes, revenue, and customer preferences, businesses can identify trends, forecast demand, and make informed decisions to optimize their sales strategies.
Sales ledgers also enable effective tracking of customer payments and outstanding balances, facilitating timely follow-ups and reducing the risk of revenue loss. Ultimately, the maintenance of the bills empowers businesses to streamline their sales processes, improve customer relationships, and drive overall sales growth.
2. Purchase ledger
All businesses need goods as raw materials for manufacturing, processing, or distribution in smaller quantities such as the sales ledger. This log also contains details of the item purchased, date quantity, cost, etc.
It is also pertinent to mention that a sub-ledger of all the purchases is also maintained to keep a separate record of transactions where the sale is made on credit. This is very useful to find the due dates and amounts so that interest payments on delayed payments can be avoided.
A purchase logbook plays a crucial role in effective financial management.
It acts as a central repository for recording and tracking purchases made by a business. By maintaining a comprehensive purchase ledger, organizations can monitor their procurement activities, track supplier transactions, and manage payment obligations.
This valuable tool allows businesses to have a clear overview of their purchasing history, identify cost-saving opportunities, and negotiate favorable terms with suppliers. Additionally, a well-maintained purchase logbook helps streamline the accounts payable process, ensuring accurate and timely payments.
It also provides valuable data for budgeting, forecasting, and assessing supplier performance. Overall, the diligent upkeep of a purchase logbook enables businesses to optimize their procurement processes, maintain financial control, and enhance overall operational efficiency.
3. Cash ledger
It contains all the transactions which are done in cash for a particular period. The cash transactions have to be matched with bank transactions to find out the proper use of money.
The term used for matching the entries with the bank account is bank reconciliation. Generally, the reconciliation is done at the end of the month. Any unreconciled entries are referred back to the accounts department to find and match the transactions.
This cash log holds significant importance in financial management.
It serves as a vital tool for tracking and managing cash transactions within an organization. This detailed record of cash inflows and outflows enables businesses to maintain accurate financial records, assess liquidity levels, and monitor cash flow patterns. By diligently updating the cash ledger, businesses can gain insights into their financial health, identify potential discrepancies or irregularities, and make informed decisions regarding expenses, investments, and budgeting.
Furthermore, the cash record allows for better cash flow forecasting, enabling businesses to plan for contingencies and optimize their financial strategies.
Overall, this empowers organizations to maintain financial stability, make sound financial decisions, and ensure effective cash management.
4. General ledger
The transactions which do not fall under any of the specified categories are recorded in the general ledger. An amount of care must be taken to see that it has fewer entries. Otherwise, it will be difficult to reconcile the accounting entries.
A general ledger serves as the backbone of financial record-keeping and analysis for an organization. It consolidates all financial transactions, including revenues, expenses, assets, and liabilities, into a single, comprehensive document. By maintaining this and keeping it well-organized and up-to-date, businesses can accurately track and monitor their financial activities, ensuring compliance with accounting standards and regulations.
The general log provides a holistic view of the company’s financial position, allowing for effective financial analysis, budgeting, and decision-making. It enables businesses to identify trends, assess profitability, and identify areas for improvement. Moreover, the general ledger facilitates the preparation of financial statements, tax filings, and audits.
Ultimately, a robust and meticulously maintained general log empowers organizations with the financial insights needed to drive success and financial stability.
Comparison Between A Journal And A Ledger:
As indicated in the first paragraph, the entries in the ledger are sourced from the journal. The journal is the primary book of bookkeeping. Which has primary details of all transactions happening in the business entity.
The transactions are then recorded in the various logs. It’s thus called a secondary or principal book of account. Here, it is also important to note that all transactions of an entity find a place in the log.
Uses Of A Ledger:
This section will be answering the need for a Ledger in Accounting. The information recorded in a log generates a trial balance account. This account is paramount in the bookkeeping information of a business entity. A trial balance is a sheet showing balances of logs categorized as debit or credit.
In a trial balance, debit is on the left side, and credit is on the right. The trial balance is generally prepared at the end of the calendar month or financial year. If there is no mistake in the entries in the trial balance, the debit and credit will always be equal. The trial balance shows the financials of an entity on a particular date.
Correct maintenance of Ledger in Accounting is a premium to keep a watch on the health of the business. The double-entry system also rules out arithmetic errors. The involvement of many persons in the final calculation increases the number of mistakes. The times are now changing fast. Digitalization has taken over.
Ledger is one of the crucial accountancy books that act as the source of information about the functioning of the business entity. If you are struggling to streamline the bookkeeping needs of your business.
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Frequently Asked Questions (FAQs)
Q1. Why is it called a ledger?
A1. The term actually stems from old English words like “liggen” or “leggen,” which mean “to lie or lay.” It’s interesting to note that it was adapted from the Dutch word “legger,” which refers to a book that lies or remains in one place consistently. So, essentially, a ledger is like a book that stays put and keeps track of important information.
Q2. What is a contra entry?
A2. A contra entry refers to a specific type of accounting entry. It occurs when both the debit and credit entries impact the same parent account, resulting in a net zero effect on the account. In simpler terms, it means that the total debits and credits cancel each other out. Contra entries typically involve transactions between cash and bank accounts, where the amounts recorded in both accounts offset each other.
Q3. Do I need to keep an accounting log?
Maintaining an accounting ledger can be beneficial for effective financial record-keeping. While it may not be a requirement for everyone, having a log can help you stay organized and keep track of your financial transactions.
By using this, you can record and monitor your income, expenses, and other financial activities in a structured manner. This allows you to have a clear overview of your financial situation and facilitates better decision-making.
So, while it’s not mandatory, keeping a book log can provide you with valuable insights and assist you in managing your finances effectively.