Ledger, General Ledger Accounting Terms Defined Explained.
Ledger, General Ledger, and Nominal Ledger Explained
Definitions, Meaning, and Example Transactions
©&. Updated
Should anyone ask for the transaction history or the current posted balance in any accounting system account, the ledger provides the answers.
What&is&a&ledger?
In&bookkeeping and accounting, a ledger is a book (or record) for collecting chronological transaction data from a journal, and organizing entries by account.
The ledger provides information on the transaction history and current balance in each account, throughout the .
At the end of the period, ledgers become the authoritative source of data for building a firm's financial accounting reports, including the income statement and balance sheet.
This article further defines and illustrates the meaning of ledger, in the context of related terms including
& &&&General ledger&&(Nominal ledger)
&&&&&Sub ledger
&&&&&Controlling account&&&(Master account)
&&&&&Posting
&&&&&T-account.
How are ledgers used in the accounting cycle?
The accounting cycle begins when business transactions are entered into the . Transactions include all events that impact any of the company's accounts,
such as "Cash on Hand," or "accounts receivable,"&or "bank loans payable." Journal entries accumulate in chronological order—the
order in which they occur. The second step in the accounting cycle is transferring (posting) journal entries into a ledger or ledgers, where
they are organized first by account, and then chronologically within accounts (see Exhibit 1, below).
Historically, journals and
ledgers were always bound notebooks in which a bookkeeper hand wrote entries&shortly after a sale was closed, an expense was incurred,
revenues were received, or any other event occurred that impacted the company's accounts.
Today, of course,&journals and
ledgers are usually implemented in software as part of an accounting software system, where transaction data are&entered manually
through onscreen forms or automatically (e.g., by a point of sale
system). Most accounting systems provide user guidance and
error-checking, to&help ensure that the appropriate accounts are
impacted, and that debit or credit entries are registered correctly.
Software, moreover, automates the second stage of the accounting cycle,
posting journal entries to a ledger.
The accounting cycle
Exhibit 1 below shows the major steps in the accounting cycle, as practiced where&accounting is&based on a &(the
approach to accounting used by the overwhelming majority of companies
and organizations, worldwide). The journal is shown as the initial data
entry&step for transaction records, and the ledger is shown as the
second step. Journal entries are&passed (posted) to
the&ledger, and&ultimately build into the organization's
financial accounting reports at the end of the accounting cycle.&
Exhibit 1.&The accounting cycle. Transactions are&entered&into the journal as the first step in the accounting cycle. The journal is&organized chronologically, that is, entries are added one after another in the order they occur.&Journal entries are transferred to a ledger (posted to a ledger) as the second step, where transactions are organized by account.
Whereas the journal organizes entries chronologically, the ledger organizes entries by &(see the Example section below).&The ledger summaries of account transactions are checked for accuracy by computing&a ,
which should show that across all accounts, total debits equals total
credits. If the two totals do not agree, adjusting entries are made and
ledger entries are corrected, after which&the transaction
data&are&brought into the period's financial accounting
What is the difference between a general ledger and a sub ledger? What are accounts, controlling accounts, master accounts, debits and credits?
The basic building block in a double entry accounting system&is the ,&which
can be defined as a place for recording&changes in&value
(additions and subtractions) for one specific purpose. When transactions
are entered into the journal,&those making&entries are
responsible for knowing which accounts to impact and whether the impacts
should register as as debits or credits&(for more on debits and credits, and&the double entry approach, see the encyclopedia entry ).&& &&&& General ledger accounts
The complete list of accounts that can be used for the organization's journal and ledger entries is called its .
Every account on this list is represented in the general ledger. The
general ledger (or nominal ledger)&is therefore viewed
as&the&"top&level" ledger.& Each
account has a balance, or account value, which can rise and fall as
transactions occur.&Account summaries in the ledger show at a
glance transaction activity for a period of time as well as the current
account balance (or, at least, the balance after journal entries were
last posted). Anyone asking questions&such as&"What is the
current cash account balance?" or, "Are&sales revenues&running
ahead of&expenses?" should find up-to-date answers in the ledger
account summaries.
Ledger T-accounts
In the ledger, each&account is&normally displayed in a form called&a T-account, as
shown in Exhibit 2. Like all members of&the chart of accounts,
this account is identified with&both a number (101) and a name (Cash on Hand)
2.&A ledger&T-account for one account, Cash on Hand, for several days transactions. Cash on Hand is an assetaccount, and this means that&debits&increase its balance, and credits&decrease its balance. This account, therefore,&is said to carry a debit (DR) balance.&&
Figures under &Debits& and &Credits& were transferred here from the journal. Because Cash on Hand is an "Asset" account, it carries a so-called Debit balance, meaning that debit entries increase the balance and credit entries decrease the balance. The
T-shaped crossing lines helps implement the double entry system convention, always placing debits on the left and credits on the right, when debits and credits appear together. &&&& Sub ledgers and controlling accounts (master accounts) Large
organizations may implement an accounting system with hundreds of
different accounts. In such cases, it may be helpful to use not just one
ledger (the general ledger), but use&along with it&a set of sub ledgers (subsidiary ledgers).
A sub ledger is organized and updated in the same way as the general
ledger, except that the sub ledger may include only a few accounts from
the chart of accounts.
Sub ledgers&are used&when
it is desirable&to put initial data management into the hands of
people or organizations who are directly engaged in transaction
activity.& A "Sales Account" sub ledger, for instance, might be
created holding only sales-related accounts, such as "Product sales
revenues," "Accounts Receivable," "Shipping expenses," "Cash receipts
from sales," and so on. This sub ledger, moreover, may list information
that will not appear in the general ledger, but which is useful to sales
managers, identifying transactions by individual sales people for
instance, or by&individual customers, or by specific product
lines,&or specific regions, and so on. When sub
ledgers of this kind are used, sub ledger entries are associated with
specific accounts in the general ledger. One general ledger account,
e.g., "Product Sales Revenues" can represent the "roll up," or aggregate
of several&different "Regional product sales
revenues"&entries from different regional sub ledgers. In such
cases, the general ledger account is called the controlling account, or master account for the contributing sub ledger accounts. Account categories and debits and credits
of impact (debit or credit) that a transaction makes on each ledger
account&depends on which of five chart of account categories the
accounts belong to.
First, there are the so-called "balance sheet"&account categories:
1. Asset accounts: Things of value that are owned and used by the business.& &&& Example: Cash on&hand &&& Example: Accounts Receivable
2. Liability accounts: Debts that are owed by the business.
&&& Example: Accounts Payable
&&& Example:&Salaries Payable
3. Equity accounts: The owner's claim to business assets.
&&& Example:&Owner Capital
&&& Example: Retained Earnings
Secondly, there are the so-called "income statement" account categories:
4. Revenue accounts:& The amounts earned from the sale of goods and services, or&investment income, or extraordinary&income. &&& Example:&Product Sales Revenues
&&& Example: Interest Earned Revenues
5. Expense accounts: Costs incurred in the course of business.
&&& Example: Direct Labor Costs
&&& Example: Advertising Expenses In
practice, even a small&organization may&list a hundred or
more such accounts&as the basis for&its accounting system, and
very large and complex organizations&may use&many
more.&Nevertheless, for bookkeeping and accounting purposes, all
named accounts fall into one of the five categories above.
Adding and subtracting with debits and credits
financial transaction brings as a journal entry, then becomes a ledger
entry,&with at least two equal and offsetting account changes.
The&change in one account is called a &(DR) and the change in another account&called a credit &(CR).&Whether a debit or a credit increases or decreases the account balance depends on the kind of account involved, as shown below in Exhibit 3:
& & Debit (DR) Entry ...
& Credit (CR) Entry ...
&&& Asset acct& Adds to (increases)
account balance Decreases (subtracts from)
account balance
Liability acct& Decreases (subtracts from)
account balance Increases (adds to)
account balance
Equity acct& Subtracts from (decreases)
account balance Adds to (increases)
account balance
Revenue acct& Decreases (subtracts from)
account balance Increases (adds to)
account balance
Expense acct& Increases (adds to)
account balance Decreases (subtracts from)
account balance
Exhibit 3: As debits and credits are entered into the journal and ledger for different &accounts, the impact of the entry either adds to or subtracts from the current value & (balance) of the accounts. Whether a debit or a credit&adds or subtracts value depends & on account category—asset,
liability, equity,&revenue, or expense. It also depends o& whether or not the account is a contra account within a category.
Suppose, for example, that a company acquires assets valued at $100,000. The
journal entry for the acquisition&will show that an&asset
account increases $100,000, perhaps&asset account "factory
manufacturing equipment." Because this is an asset account, its balance
increase is called a debit.&However, the &may
now be temporarily out of balance until there is an offsetting credit
of $100,000 to another account, somewhere in the system. This could be,
for instance:
&A credit of $100,000 to
another asset account, reducing that account value by $100,000. This
could be the asset account "Cash on Hand." If instead of
cash, the asset purchase is financed with a bank loan,&the
offsetting transaction in the journal entry could be&a credit to a
liability account such as "bank loans payable,"&increasing that
account value by $100,000.&
The debit and
the credit from the acquisition&will be shown together in the
journal entry, but when transferred to the ledger, they will each impact
a different account summary (see the journal and ledger entry examples below). When the journal entry is complete, the basic
holds and the balance sheet stays balanced: Assets = Liabilities + Equities And, for the account journal entries that follow from a single transaction: Debits = Credits
Contra accounts
bookkeeper or accountant dealing with&journal and ledger entries faces one complication, however, in that not all accounts work
additively with each other on the primary financial accounting reports—especially on the income statement and balance sheet. There are&cases where one account offsets the impact of another account in the same category. These are the contra accounts that "work against" other accounts in their own categories.&In some
cases, the contra accounts reverse the debit and credit rules in Exhibit&3&above.
For example,
an "accounts receivable" account and an "allowance for&doubtful
accounts" account&are both asset accounts.&Accounts
receivable is said to carry a , meaning that debits to this account&increase the account balance. "Allowance for doubtful accounts," however, is a contra
asset account that ultimately reduces the impact (balance) contributed
by "accounts receivable."&"Allowance&for&doubtful
accounts" carries a ,
meaning that its value is increased by a credit transaction. When these
journal entries make their way into the ledger and then the financial
reports, the balance sheet result is a "net accounts receivable" less
than the "accounts receivable" value. In any case, the
bookkeeper or accountant working with journal entries needs to have a
complete knowledge of the organization's chart of accounts and a solid
command of double entry bookkeeping rules—or else, accounting software
that provides clear guidance and good& error checking. What do example journal and ledger entries look like? Journal
entries and their contribution to ledger entries are illustrated here
for a small subset of one company's&chart of accounts, summarized
below in Exhibit 4:
&Grande&Corporation Chart of Accounts
Account No.Account Name
Account Category
101 Cash on Hand Asset
110 Accounts Receivable Asset
125 Supplies Inventory Asset
139 Merchandise Inventory Asset
200 Accounts Payable Liability
410 Product Sales Revenue Revenue
525 Cost of goods sold Expense
610 Supplies expense Expense
Exhibit 4. Eight accounts from one company's chart of accounts, to illustrate journal and ledger entries in the examples below.
In reality, of course, the full chart of accounts, journal, and ledger will include many accounts not shown here. However, for one week's activity affecting these accounts, the journal and ledger entries might appear as shown below. &&&&&Journal entry examples On1 September, two customers place product orders, on credit. Customer
1&orders&$4,200 in products,&Customer 2 orders&$5,800 in products. The company ships the products later that same day.
Grande Corporation
Journal for Fiscal Year 20YY
01-Sep-20YY
01-Sep-20YY
01-Sep-20YY
110&&Accounts Receivable
410 &&&&&Product Sales Revenue
110&&&Accounts Receivable
410 &&&&&Product Sales Revenue
520&&&Cost of Goods Sold
130 &&&&&Merchandise Inventory
Journal entry for 2 September
On 2 September, the company places a $1,180 order for office supplies:
02-Sep-20YY
125&&&Supplies Inventory
200 &&&&&Accounts Payable
Journal entries for 5 September
September, a written check from&Customer 1 arrives ($4,200) and the
company sends its own check to the office supplies vendor ($1,180) for
supplies ordered on 2 September:
05-Sep-20YY
05-Sep-20YY
101&&&Cash on Hand
110 &&&&&Accounts Receivable
&&&Accounts Payable
&&&&&Cash on Hand
Journal entries for 6 September
Four more events occur on 6 September:
Customer 2 pays for goods ordered on 1 September with a credit card&($5,800).
Products were purchased by Customer 3 with cash for $1,250. The customer takes delivery immediate.
Accountants find that supplies worth $820 have been used up since the last check of the supplies inventory.
Customer 4 places a credit order for products ($1,850). This order has not yet shipped by day's end.
These transactio&
06-Sep-20YY
06-Sep-20YY
06-Sep-20YY
06-Sep-20YY
101&&Cash on Hand
110 &&&&&Accounts Receivable
101&&&Cash on Hand
410 &&&&&Product Sales Revenue
610&&&Supplies Expenses
130 &&&&&Supplies Inventory
&&&Accounts Receivable
&&&&&Product Sales Revenue
A fast scan of the journal entries should make&it clear that one part of the accounting equation holds, at least for these entries: Total debits = Total credits.&The journal page shows clearly that&every journal debit is&paired with an equal, offsetting&credit.&The example also shows, that the journal, like the ledger,&follows the double entry system practice&of listing debit figures to the left of their companion credit figures. The journal page does not show so clearly, however, whether or not the company is gaining or losing money.&That picture&is not fully
visualized until&the accounting period ends and ledger account
balances&come&together on the .
That&picture comes a small step nearer, however, when journal
entries such as those above are posted&in the ledger.&The
ledger summarizes transactions by account, showing each account's debits
and credits. Ledger summaries usually show also&how different
account balances are running (e.g., balances for expense accounts and
balances for sales revenue accounts). &&&& Ledger entry examples The second step in the
journal entries to the entity's general ledger. and
sometimes to&various sub ledgers as well.&The
general ledger, is the "top level" ledger, having a record for every account in the chart of accounts. Historically,
when journals and ledgers were&bound notebooks,&and entries
were hand written, journal&data were posted into
ledgers&only&periodically.&That meant that account
balances were known only&through the most&recent posting.
Software-based accounting systems however,&usually update ledger accounts&frequently or even continuously. Thus, running account balances in the ledger are kept current, as suggested
in&Exhibit 4 below suggests.& Account summaries in the
ledger are usually presented in the form of T-accounts, as shown above
in Exhibit and below in Exhibit&5 for&each of the eight
accounts from Exhibit 3&and the journal entry examples
Exhibit 5. T-accounts in the general ledger after journal entries have been posted.
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