What is Ledger & How to create One
We’ve just processed all our transactions into journals. The next step in the accounting process is entering these journal entries into ledgers.
Think of a ledger as a summary of transactions that relate to a certain account. For example, our bank ledger will summarise all the transactions that involved our bank account; our loan ledger will summarise all the transactions that involved our loan account and so on.
Ledgers are important because they summarise all our transactions into a single balance. For example, instead of knowing that we spent $100 on car expenses in July, $300 in August, $600 in September, $500 in November and so on, our ledger will simply tell us we spent $1,500 in total. By using ledgers, we are able to summarise hundreds or even thousands of transactions into a single balance! Obviously that makes things a lot easier to manage.
A ledger consists of 4 things:
1. An opening balance
2. A debit side
3. A credit side
4. A closing balance
Let’s have a look at an example.
|
BANK LEDGER |
DEBIT |
CREDIT |
|
Opening balance |
$0 |
|
|
|
|
|
This is an empty BANK ledger. Notice how the opening balance is on the debit side, because BANK is an asset, which is a debit account.
Likewise, for a credit account like Owners Equity, the opening balance will be on the credit side.
Every journal entry which includes the bank account will be recorded in this ledger. Let’s take a look at a journal entry from the previous lessons. Here’s the first one.
Transaction 1: You decide to start a business. To start the business off, you deposit $10,000 of your savings into the business bank account.
|
Dr |
Bank |
$10,000 |
|
Cr |
Owners’ Equity |
$10,000 |
So the two accounts in this transaction are Bank and Owners Equity. That means we’ll be making entries to our Bank and Owners Equity ledgers. Let’s do the Bank ledger first.
The journal entry says we need to make a debit movement to the bank account of $10,000. Let’s enter it in our ledger below. It’s as simple as entering $10,000 in the debit column.
BANK LEDGER
|
Details |
DEBIT |
CREDIT |
|
Opening balance |
$0 |
|
|
Owners Equity |
$10,000 |
|
That’s it!
In the Details column, we will write “Owners’ Equity”. This allows us to see where the $10,000 came from.
Easy! Now let’s do the Owners’ Equity ledger.
OWNERS EQUITY LEDGER
|
Details |
DEBIT |
CREDIT |
|
Opening balance |
|
$0 |
|
Bank |
|
$10,000 |
Because Owners Equity is a credit account, we put the opening balance on the credit side.
The journal entry shows a credit of $10,000 to Owners Equity. To record this in the ledger, it is as simple as putting $10,000 in the credit column. In the Details column, we’ll write “Bank”, as this allows us to see what the other side of the transaction was.
Done! We’ve just done our first two entries into our ledgers.
Now let’s look at the rest of the journals from our lesson 7, and see if we can enter them correctly into our ledgers.
Transaction 2: You take out a business loan of $10,000.
|
Dr |
Bank |
$10,000 |
|
Cr |
Loan |
$10,000 |
Because our journal consists of entries to the Bank and Loan accounts, we’ll need the Bank and Loan ledgers.
BANK LEDGER
|
Details |
DEBIT |
CREDIT |
|
Opening balance |
$0 |
|
|
Owners Equity |
$10,000 |
|
|
Loan |
$10,000 |
|
The journal shows a debit to bank of $10,000, so we simply put $10,000 in the debit column of our bank ledger. Notice how the previous entry, the $10,000 to Owners Equity from our earlier transaction, is in the ledger also. This is because the idea of a ledger is to collect ALL transactions related to an account in one place. By the end of the exercise, there will be over 10 transactions in this ledger alone.
Now let’s look at the other side of the transaction – the Loan account.
LOAN LEDGER
|
Details |
DEBIT |
CREDIT |
|
Opening balance |
|
$0 |
|
Bank |
|
$10,000 |
Because the journal entry shows a credit to Loan of $10,000, we simply enter $10,000 in the credit column of the Loan ledger. We’ll put the corresponding side of the journal in the details column. In this case, it’s Bank!
Transaction 3:
You purchase your iPhone for $500.
|
|
iphone |
$500 |
|
Cr |
Bank |
$500 |
BANK LEDGER
|
Details |
DEBIT |
CREDIT |
|
Opening balance |
$0 |
|
|
Owners Equity |
$10,000 |
|
|
Loan |
$10,000 |
|
Iphone Ledger
|
Details |
DEBIT |
CREDIT |
|
Opening balance |
|
$0 |
Now that we’ve entered all our journals into our ledgers, let’s take a look at what to do next. Here’s the first one.
LOAN LEDGER
|
Details |
DEBIT |
CREDIT |
|
Opening balance |
|
$0 |
|
Bank |
|
$10,000 |
|
Bank |
$1,000 |
|
|
TOTAL |
$1,000 |
$10,000 |
|
|
|
|
|
Minus debits |
|
-$1,000 |
|
BALANCE |
|
$9,000 |
Ok troops, listen carefully! This gets a little tricky.
In this ledger we have entries on both the debit and credit sides.
First, we total up both sides. Take a look at the row that reads “TOTAL”. We have a total of $1,000 on the debit side and $10,000 on the credit side.
Now we simply SUBTRACT THE SMALLER SIDE FROM THE LARGER SIDE to find our balance. In this case we subtract the $1,000 from the $10,000. This is illustrated in the row that reads “MINUS DEBITS”.
This leaves us with a balance on the credit side of $9,000. That’s it! High five amigo - you’ve completed your first ledger.
Now let’s go ahead and complete the rest of them.
This first one is easy. Because there’s only movements on the credit side, there’s no need to fiddle around with it. Simply total up the CREDIT column and there’s your balance!
JOHNS CAR SHOP LEDGER
- 3000
|
Details
|
Debit |
Credit
|
|
|
|
|
|
|
CAR LEDGER
- 3000
|
Details
|
Debit
|
Credit |
|
|
|
|
|
|
BANK LEDGER
|
Details |
DEBIT |
CREDIT |
|
Opening balance |
$0 |
|
|
Owner’s Equity |
$10,000 |
|
|
Loan |
$10,000 |
|
|
iPhone |
|
$500 |
|
Oven |
|
$2,000 |
|
Owner’s Equity |
$5,000 |
|
|
Loan |
|
$1,000 |
|
Computer |
|
$1,500 |
|
Cake mix |
|
$3,000 |
|
Interest |
|
$1,000 |
|
Sales |
$5,000 |
|
|
Telephone |
|
$300 |
|
Sales |
$2,000 |
|
|
Repairs |
|
$50 |
|
Drawings |
|
$1,000 |
|
|
|
|
|
TOTAL |
$32,000 |
$10,350 |
|
Minus credits |
-$10,350 |
|
|
|
|
|
|
BALANCE |
$21,650 |
|
Magnifico! We’ve just completed all our ledgers. So what does this mean?
This means we finally have a balance of all our accounts. After entering all our sales in the sales ledger, we know the total amount of our sales. After entering all our bank transactions in our bank ledger, we know the final balance in our bank. And after entering all our expense payments in our expense ledgers, we know the total amounts of each expense!
Now that we have all our balances, we’re ready to start putting together some reports! My gosh, you’re starting to look like an accountant already.
Ok, you ready? Let’s go.