Before you learn about double-entry bookkeeping it is important to get to grips with accounting ledgers, they role in bookkeeping and how they fit into the accounting process.
What are Ledgers in Accounting?
Every financial transaction in a business is recorded in the books of prime entry. For example, all the purchase invoices are logged in the purchase day book. Periodically totals summarising the activity from each of these books need to be logged, grouped and categorised so that financial statements can be produced. This summary is logged by entering them into the accounting ledgers.
In accounting, the ledgers (historically) were individual books and there was one ‘book’ for each type of:
Example of an Accounting Ledger
Here is an example of a ledger for a manual accounting system. It is for the stationery ledger, which summarises all the financial transactions in relation to stationery purchases. In addition to the date and detail, there is a reference which indicates where the figure has come from. In the example below this is ‘PL’ which stands for purchase ledger.
Why Are Ledger Accounts Important?
Ledger accounts speed up the production of financial information for management purposes and allow other teams in accounting to quickly find the information they need from one department to complete their work. Here are some examples:
- The credit control department will require details of payments received from the cash control department so they can keep accurate records about which customers owe the business money;
- Members of the team responsible for cash planning will need information from the credit control and purchase ledger control departments so they can draw up a picture of the money that is coming in and suppliers that need to be paid;
- The sales department may request up to date information on which customers have a history of not paying their bills to help them decide which customers should be targeted for new sales.
Computerise Accounting Systems
Nowadays accounting systems automate the entry of financial transactions, meaning accounting ledgers are automatically updated on when source records are entered as part bookkeeping.
Once the accounting ledgers have been updated, the next step is to update the General Ledger.