What is Accounting Ledger?
If you are running a business, then you will need to keep an accounting ledger. You can, save yourself a lot of time and effort by using a good accounting software program that will do the necessary work of keeping the accounting ledger updated for you. Of course, no two businesses will keep their accounts in the same way and so the software package that you end up with must be one that is flexible enough to cater to different accounting requirements.
When it comes to maintaining accounting ledger, there are however certain basic requirements that do not change across business entities. These include controlling financial statements and creating and tracking invoices. Other aspects that remain the same across businesses include maintaining control over inventory and keeping proper accounts receivable and accounts payable records.
In regards to maintaining an accounting ledger with the help of software, it is important to select a software program that is flexible because there is going to be a need to tailor the programs to handle unique issues. These include maintaining the profit and loss account and creating a balance sheet as well as performing cash flow analyses. Each of these aspects begins with the general ledger and each of these financial statements is important as they indicate the state of health of the business entity.
By studying profit and loss accounts, balance sheets and cash flow analyses, a company can know at any point in time whether it is performing well or poorly. By using these statements, company’s can identify trends which should be analyzed so that proper action can be taken to keep the profitability and financial health of the company at optimum levels.
As an entrepreneur, you will need to pick out the root cause of various trends which in turn can be discovered by checking the financial statements. The first step is to look at the accounting ledger. This is why it is important to choose a software program that shows maximum flexibility in so far as its ability to handle the general ledger goes. This added flexibility will also help in identifying the points at which different trends originated and this information can then be used to fix up problems wherever and whenever they occur.
For example, if after studying the general ledger, you see that there is a decrease in expenses then you need to start the process of pinpointing where the trend began. Without proper software, this can be a tedious and very difficult task. The right accounting software can help you keep track of multiple numbers of accounting ledgers and in this way make the task of pinpointing trends that much easier.
Proper software must have the ability to display all the different journal entries in the accounting ledger with no more effort than performing a few basic keystrokes or by just clicking the mouse button.
This is a very important aspect to picking the right software but you should take special care to pick only a suitable software because otherwise you will not benefit much from your investment in the program.
Accounting Ledger Overview
Accounting ledger is summary of transactions which hold all your double-entry accounting. At first double entry might sound like twice as much work, but once the accounting ledger is build up with entries, you will learn to rely on the checks and balances that help you keep accurate records.
Double-entry accounting means every transaction affects and is recorded in at least two accounts. The total amount debit must equal the total amount credit. Therefore, the sum of the debits for all entries must equal the sum of the credits. Double-entry accounting helps to prevent errors by assuring that debits and credits for each transaction are equal. (This document is also available as pdf format. Click here: GENERAL LEDGER to view).
Having said that, if you go to the store and buy a hand saw? You are decreasing cash in the bank by $89 and increasing your expenses by same amount. That’s all there is to it, you just affected two accounts.
Debit Tools $89.
Credit Cash $89.
What puts a spin on this debit/credit business, is that most people think of credit as being negative or minus and debit being a positive or plus. But each account type is affected differently depending on the nature of the entry.
Assets are what the business owns and they are always a debit balance and liabilities are what the business owes and they are always a credit balance. Assets are positive and liabilities are negative because they need to be subtracted from each other to come up with the total value of the company.
When a liability account gets credited, you are adding a negative to a negative balance, which makes a bigger negative number. It increases your liability. Take the hand saw example. If, instead of paying cash you charged it on your account, the expense entry will remain the same but because you’re not taking money out of cash the accounts payable is affected with a credit.
Debit Tools $89.
Credit Accounts payable $89.
Let’s look at income and expenses. Income has a credit balance and expenses have a debit balance. Yes, I know we think of income as being positive and should have a debit balance but in the accounting world it’s the opposite. The way to remember this is, when you sell a product and customer pays you cash, you deposit the cash in bank and the bank is debited, therefore the income must be credited.
Expenses have a debit balance. You enter an expense as a positive (debit) number to increase your record of what you’ve purchased. Whenever you purchase an item, ex: office supplies, that goes to your expense account and gets debited. Expenses are positive and income is negative because they need to be subtracted from each other to come up with the total net income.
A little history – debit and credits are remnants of 18th-century English recordkeeping practices in which the terms debtor and creditor were used instead of debit and credit. The abbreviations, Cr. and Dr. use the first letter of there terms where Dr. resulted from debtor and Cr. from Creditor , just as we still do for Saint (St) and doctor (Dr).
The following chart shoes how debits and credits affect the different types of accounts.
|Account type||Debit (Dr)||Credit (Cr)|
Now, let’s start by entering some info into our double-entry ledger. Read the following examples, once you’ve figured out one side of the entry ex: debit side, the other must be the credit entry. (The pdf version of this document is available by clicking on this line here: General Ledger Document)
The T-accounts above are a helpful learning tool. It shows the effects of individual transactions on specific accounts. The T-account is so named because it looks like the letter T.
The left side of the T-account is always called the debit side often abbreviated Dr. The right side is always called the credit side, often abbreviated Cr. The difference between total debits and total credits for an account is the account balance. When the sum of debits exceeds the sum of credits, the account has a debit balance. It has a credit balance when the sum of credits exceeds the sum of debits. When the sum of debits equals the sum of credits, the account has a zero balance.
Please, see below a link to pdf version of this article. You can easily print it out and refer to at your pleasure time.
Thank you for your time,