Ledger accounts are the accounting units that present the summarized balances of transactions under each category. A general ledger is the collection of these ledger accounts. A business can have five types of ledger accounts: assets, liabilities, equity, revenue, and expense.
Let us discuss the definition and types of ledger accounts with the help of an example.
A ledger account is the record of transactions related to a particular segment of the business. Each ledger account presents the trial balance at any given time.
Individual ledger accounts are then presented in the general ledger which is also called the book of accounts for business. Each account records all relevant transactions.
A ledger account would reflect the accumulated balance of all transactions carried out in a specific accounting period. In other words, it presents the summary of each type of transaction or a particular category for the business.
A ledger account can be presented in different ways. For instance, a typical ledger account follows a T account format.
A typical ledger account will have the following components:
- A Journal Entry or the transaction number of an entry under each ledger account. It can be a simple serial number that can be reset after each accounting period.
- A general description or detail of the transaction.
- Debit and Credit columns of the account. Each transaction has an offsetting entry for a debit and a credit.
- Account Balance – Each account begins with an opening balance. Each transaction adds/reduces the balance and at the end of the accounting period, it shows the ending balance.
The debit and credit balances for each account must balance at any given time. These figures are then carried forward to the trial balances that are used to create financial statement accounts.
Types of Ledger Accounts
A business can list ledger accounts for several categories. Each type of business transaction can be categorized as a new type.
Broadly, a business can have the following types of ledger accounts:
- Assets: asset accounts can be further classified into several categories such as fixed assets, current assets, tangibles, and intangibles. Asset accounts include cash, inventory, property, equipment, goodwill, trademark, and so on.
- Liabilities: liability accounts can be accounts payable, bank loans, mortgages, payroll, and taxes, to name a few.
- Equity: equity accounts can be categorized into common stocks, preferred stocks, additional paid-in capital (or share premium), and retained earnings of a business.
- Revenue: These accounts include any revenue stream of a business including sales, commission, interest income, and royalties.
- Expenses: Examples of expense accounts include rent, utilities, marketing, admin, and selling expenses.
The types of ledger accounts can differ by the nature and size of a business. For instance, small businesses do not use stock accounts. Instead, they summarize it under the owner’s equity heading.
Another way of categorizing ledger accounts is to record them as a balance sheet or income statement accounts.
Balance Sheet Accounts
There are three types of balance sheet ledger account categories. Each account can then be categorized under one of these.
- Asset Accounts – cash, inventory, accounts receivable, etc.
- Liability Accounts – Bank Loans, payables, taxes, etc.
- Equity Accounts – Common stocks, additional paid-in capital, retained earnings.
Income Statement Accounts
Similarly, income statement accounts can be categorized into two categories.
- Revenue Accounts – sales, interest income, commission, royalty, etc.
- Expense Accounts – rent, utilities, admin, selling, marketing, and so on.
A business can use sub-ledger accounts when using consolidated statements for its subsidiaries. Each subsidiary can have a separate sub-ledger account for each category that can be consolidated into the business’s financial statements.
Another common use of sub-ledger accounts is to divide large ledger accounts into several sub-accounts. This way, a business can easily manage large accounts by categorizing them into relevant sub-categories.
For example, a business can use sub-ledger accounts for its various suppliers in the accounts payable category. That can help a business manage supplier relationships.
The double-entry bookkeeping accounting practice means there are at least two entries for every transaction for a business. The total of all debits and credits must match at any time.
Ledger accounts follow the same principle too. A business will record a debit and a subsequent credit entry for every transaction.
However, each transaction can be divided into one or more debit or credit entries. The sum of debits should equal the sum of all credits, though.
The double-entry accounting rule applies to all ledger accounts, including assets, liabilities, revenue, and expenses.
One transaction can affect both the balance sheet and income statement ledger accounts. For example, if a business records a business sale on credit, it will affect the accounts receivable (balance sheet ledger account) and revenue ( income statement account) as well.
A general ledger is the foundation of the accounting and bookkeeping of any business. It records each financial transaction of a business, whether in cash or credit.
A general ledger can be described as the collection of ledger accounts. Each account maintains details of every transaction to its respective categories. Then, each account presents trial balances used to summarize each account balance.
The general ledger then becomes the fundamental record source to create the financial statements of a business.
Each business needs to reconcile its accounting records. Financial statements only present the summary of each account type. Thus, for reconciliation purposes, analysts must revert to the general ledger.
Suppose a company ABC runs a small clothing store. It has the following transactions during an accounting period:
Cash Capital investment = $200,000
Inventory Purchases = $80,000
Staff Salaries = $15,000
Sales during the period = $50,000
The journal entries for these transactions can be listed below:
The ledger accounts can be listed in the following manner.
Capital Account # 1:
|01-01-2021||Cash investment||$ 200,000|
|31-01-2021||Balance B/F||$ 200,000|
|Total||$ 200,000||$ 200,000|
Cash Account # 2:
|01-01-2021||Capital Investment||$ 200,000|
|05-01-2021||Inventory purchases||$ 80,000|
|30-01-2021||Salaries Paid||$ 15,000|
|30-01-2021||Sales revenue||$ 50,000|
|31-01-2021||Balance B/F||$ 155,000|
|Total||$ 250,000||$ 250,000|
Inventory Account # 3:
|05-01-2021||Inventory Purchased||$ 80,000|
|31-01-2021||Balance B/F||$ 30,000|
|Total||$ 80,000||$ 80,000|
Salaries Account # 4:
|30-01-2021||Salaries Paid||$ 15,000|
|Balance F/F||$ 15,000|
|Total||$ 15,000||$ 15,000|
Similarly, a business can create a number of ledger accounts. Large businesses can create sub-ledger accounts as well.
A ledger account is a unit of accounting record for summarized transactions for one category. Ledger accounts then combined make up the general ledger of the business. These accounts and the general ledger form the basis of financial statements for any business.
Ledger accounts present comprehensive accounting records of the business. These accounts are also used for accounting reconciliation purposes.