Let us make in-depth study of the meaning, utility, format and classification of ledger.
Meaning of Ledger:
A book containing all accounts of a business enterprise is known as ledger and transferring transactions from the books of original entries to their respective ledger accounts is known as posting. Ledger serves as the main book for an effective and result oriented accounting system. For recording various transactions of a business enterprise, a ledger contains different accounts showing the impact of the business transactions occurred during an accounting period. It is a collection of all accounts, debited or credited in the books of original entry viz. subsidiary books and proper journal.
Ledger in the form of bound register or separate sheets with spiral binding or in any form of binding contains various accounts (preferably each account on a separate page) incorporating all information about a particular item for which that account is maintained.
Utilities of Ledger:
A ledger is so useful for any business enterprise that it can be regarded as its principal book.
In nutshell, the utility of the ledger can be described as under:
1. Quick Information about Particular Items:
The ledger sets the relationship between the business enterprise and a particular item with the help of an account which is maintained specifically for that item only. For example, if a business enterprise wants to know the position of total sales of the enterprise during any accounting year, then sales account will serve the purpose because in the sales account the position of total sales (including credit sales) is given.
Similarly, debtors account and creditors account show the position of total debtors and total creditors of the business enterprise. It is worth mentioning here that getting information from the journal is very difficult.
2. Proper Control over Transactions:
In ledger, separate accounts are maintained for each type of transactions. Various accounts are opened on the basis of classification of transactions. These accounts record the transactions related to a particular field only. Therefore, after proper analysis of the accounts, transactions can be controlled.
3. Helps in Preparing Trial Balance:
The final balances of all ledger accounts are to be shown in the trial balance from which arithmetical accuracy of the accounts can be checked.
4. Helps in Preparing Financial Statements:
The financial statements of any business concern consist of income statement viz. Trading and Profit & Loss Account and positional statement viz. Balance Sheet. Both these statements are prepared from the ledger accounts.
Format of Ledger Account:
Ledger is a book containing various accounts of a business enterprise. At the beginning of ledger, an index is provided showing all accounts contained therein. Each account is allotted a code number for easy identification. The name or title of each account is written at the top middle and usually in bold capital letters.
Ledger account is prepared in ‘T’ shape and usually known as ‘T’ account. Ledger account is basically divided into two parts. Left side is known as ‘debit side’ and right side is known as ‘credit side’. On the left side, all debits are recorded and on the right, all credits are recorded. To record necessary details of each transaction, each side of account is further divided into four columns.
The following is the format of ledger account:
The following information shall be contained in the various columns on both sides of the ledger:
In this column, the date of a transaction is recorded. However, opening and closing balances (if any), are recorded at the beginning and closing of the accounting year respectively.
(iii) Journal Folio (J.F.):
In this column, the page number of the book of original entry (i.e., journal or any subsidiary book) from which this account has been taken is to be written.
It has already been clarified that only those transactions are recorded in the books of accounts which can be measured in terms of money. So, in the ‘Amount’ column, the amount in terms of money shall be recorded.
Classification of Ledger Accounts:
Ail accounts in the ledger can be grouped into two broad categories viz.,
(i) Permanent Accounts and
(ii) Temporary Accounts.
On the basis of traditional classification, permanent accounts include real accounts and personal accounts. While temporary accounts include losses, expenses, incomes and gains. Similarly, on the basis of modern approach (Equation based approach) permanent accounts include assets, liabilities and capital. Temporary accounts include revenue and expenses.