Accounting ledgers: A beginner’s guide to ledgers for 2023

An accounting ledger, also commonly called a general ledger, is the main record of your business’s financial standing. It functions as the repository of all financial transactions and is used to prepare a number of reports, including balance sheets and income statements. 

Let’s dive into these ledgers to get a better understanding of what they are and why they’re so important to keeping your small business’s accounting in order.

• How an accounting ledger works
• Types of accounting ledgers
• How to create an accounting ledger
• Accounting ledger example
• The difference between journals and accounting ledgers
• Accounting ledger FAQ

How an accounting ledger works

An accounting ledger records transactions and helps generate financial statements for investors, creditors, or even regulators. The information in the ledger can help management with decision-making based on financial data. The general ledger can, for example, help a business find where increased expenses are coming from, and it allows a bookkeeper or accountant to search out and correct errors.

A general ledger uses the double-entry accounting method for generating financial statements. This method records the debits and credits for each transaction, which should always balance out. Each journal entry must have at least one debit and one credit entry. 

• Debits: A debit is all incoming money. 
• Credits: A credit is all outgoing money. 
• Dollar amounts: The dollar amount of total debits and credits must balance. 

For example, if a company makes a sale, its revenue and cash increase by an equal amount. When a company borrows funds, the cash balance increases, and the debt (liability) balance increases by the same amount.

However, the number of debit and credit accounts does not have to be equal, as long as the trial balance is even. For example, you may have 10 payments listed on the credits side to pay for supplies but only two sales (listed in the debits side).

Double-entry bookkeeping keeps the accounting equation (or balance sheet equation) in balance. The balance sheet formula adds liabilities and owner’s equity to determine a business’s assets. The balance sheet formula is:

Liabilities + owner’s equity = assets

If the accounting equation is not in balance, there may be a mistake in your journal entry. Some accounting solutions alert users when a journal entry does not balance total debits and credits.

The difference between journals and accounting ledgers

If you look at the information that’s recorded in an accounting journal and an accounting ledger, a lot of it would look the same. There’s a good reason for that—a lot of that data is the same. But there are some differences between how the two records function so it’s important to understand how they work together. 

Accounting journal format

You can think of your accounting journal as the first record of each transaction. Every transaction should be recorded in chronological order in a journal with as much detail as needed to ensure that it can be properly transferred to a ledger and serve as a resource for anyone who needs more information about an entry. 

Format of a ledger

A ledger is where the most important information necessary to create financial statements is located. A ledger is an aggregation of data from relevant journals. The general ledger is where the data from other ledgers (as well as any journals not accounted for in a ledger to this point) is added. 

One important difference between a journal and a ledger is that the ledger is where double-entry bookkeeping takes place. This is why there are two sides to a ledger, one for debits and one for credits.

Types of ledgers

There are several kinds of ledgers that you may use in the course of bookkeeping for your business. Most accounting software will compile some of these ledgers together while still letting you view them independently. Depending on the size of your business and what your business does, you may not need to use all of them. Here are some common types to be aware of and when to use them, beginning with a general ledger of course.

General ledger

Also known as an accounting ledger, the general ledger serves as the record for a business’s financial data. This ledger is used to record each transaction and uses a trial balance to validate the information. With this ledger, a business can prepare its financial statements.

The information in a general letter is broken up into the following parts (also known as accounts):

• A journal entry: This is where you record the journal entry number along with the entry date.
• A description: Here, you will describe the transaction in less detail than the actual journal entry.
• Debit and credit columns: For every entry, you’ll record a debit or credit.
• A balance: The general ledger will list the account balance whenever a debit or credit is posted to the account. 

The general ledger also contains the chart of accounts, the main list of account numbers, and the names of each of the accounts, including:

• Assets
• Liabilities
• Equity
• Revenue
• Expenses
• Other income and expenses

Purchase ledger

Your purchase ledger is there to help you keep track of purchases. If your business doesn’t make enough purchases to warrant keeping them in its own ledger, you can include them in your general ledger.

Purchase ledgers can contain:

• Date of purchase
• Supplier names
• Invoice or purchase order numbers
• Amount paid
• Tax paid

Sales ledger

A sales ledger is a detailed list in chronological order of all sales made. This ledger can also be used to keep track of items that reduce the number of total sales, like returns and outstanding amounts still owed. 

Sales ledgers can contain:

• Dates
• The name of the customer
• Invoice numbers
• The number of items sold
• Taxes charged on items sold
• Shipping costs

With modern accounting software, you may not have a purchase or sales ledger. Instead, they can be marked as a certain type of entry and called up in a search if you want to look at these entries on their own.

How to format an accounting ledger [accounting ledger example]

Creating an accounting ledger is fairly straightforward. With just a little work, you’ll be able to start keeping an accurate tally of your business’s financial situation. For example, to create and format your accounting ledger, follow these four steps: 

1. Set up ledger accounts: Your ledger accounts are assets, liabilities, equity, revenue, and expenses. 
2. Create columns: Most kinds of bookkeeping software will move everything into a general ledger, but if you need to use spreadsheets or do it by hand, it helps to create your ledgers in the double-entry style. This means you’ll need to create two sides on a ledger – one for credits and one for debits. The credit side will have a date column, a description column, a column for the ledger or folio number, and an amount column. The debit side will have matching columns.
3. Record transactions: As you conduct business, record the transactions in the appropriate ledger. At the end of your reporting period, you’ll consolidate the data from all ledgers into the general ledger.
4. Create trial balance: The trial balance is the record of all credits and debits in your general ledger. If everything has been accounted for and recorded correctly, the balance of the credit and debit columns should be equal. 

By recording each transaction correctly, your trial balance should show equal credits and debits. When your trial balance is equal, your books are balanced.

One more note: Your ledgers should always have the information you need to be able to accurately track where money is coming from and where it is going. Setting it up in this way will keep it clear and allow you and anyone else involved in your business’s bookkeeping, like a live bookkeeper, to use the information.

Streamline your accounting and save time

Now that you understand what an accounting ledger is and how important it is to keep track of the finances of your small business, you’ll be able to organize and track transactions more easily. 

And if you decide to hire an accountant or bookkeeper, those ledgers can get them up to speed much faster than if they were starting with nothing. 

Accounting ledger FAQ

Have more questions about ledgers? We have answers.

How can I set up a general ledger in QuickBooks?

Use the general ledger report in QuickBooks to see a complete list of transactions from all accounts within a date range. You select only the accounts you want the report to show. This report is available in all versions of QuickBooks Online.

Is an accounting ledger used in double-entry bookkeeping?

Yes. Double-entry bookkeeping uses a ledger to track credits and debits with a trial balance to assure that everything is accurately tracked.

What is the difference between a general ledger and a balance sheet?

A general journal records every business transaction in chronological order—it is the first point of entry into the company’s accounts. The general ledger is the second entry point for recording transactions after it enters the accounting system through the general journal. 

What are sub-ledgers?

Sub-ledgers (subsidiary ledgers) within each account provide additional information to support the journal entries in the general ledger. Sub-ledgers are great for accounts that require more details to review the activity.

Is a cash book an accounting ledger or a journal?

A cash book functions as both a journal and a ledger because it contains both credits and debits. Because a cash book is updated and referenced frequently, similar to a journal, mistakes can be found and corrected day-to-day instead of at the end of the month.