Ledgers track cash inflows and outflows, with general ledgers separating asset and liability balances into debits and credits. Sub-ledgers detail transactions affecting account balances, with ending balances transferred to general ledgers. Ledgers are used to create a company’s financial statements.
Simple ledgers are used by businesses to track and document cash inflows and outflows. General ledgers separate asset and liability account balances into debits and credits. Sub-books detail transactions that directly affect an account balance, such as accounts receivable. Ledgers are sometimes called t-accounts, since all transactions that affect debit balances must offset or equal transactions that affect credit balances.
Bookkeepers and bookkeepers document a business‘s expenses and the payments it receives through a series of journal entries. For example, if a business purchases inventory on credit, a debit entry will be made for the amount of the inventory purchase. A corresponding credit entry will be made for the same amount that indicates a balance is due on an invoice or line of credit. These amounts are ultimately used to calculate an account’s ending balance, which can then be transferred to one of the types of ledgers.
The term t-account is used to describe the process of classifying debit and credit transactions. The name is derived from how transactions are represented: a line similar to the letter “t” is drawn on paper, with debit amounts recorded on the right and credit amounts recorded on the left. Each transaction contains both a debit and a credit to a sub-ledger. For example, a payment made on an invoice would result in a debit, or decrease, to the cash account and a credit, or increase, to the accounts payable account.
For groups of transactions that are related to each other, a sub-ledger is created. Subaccounts are a way to help simplify a company’s financial statements. They reflect whether an account balance increased or decreased during an accounting period, which can typically span three months, six months, or a year. For example, in the case of accounts receivable, the balance amount may reflect if a business is having trouble collecting money owed on inventory that has already been sold.
The ending balances of the sub-ledgers are transferred to the general ledgers. These types of simple ledgers are a summary of the sources of all of a company’s debit and credit balances. The general ledger does not give details about account balances. For example, the “sales” account will appear as a single balance and is the total of all sales the company generated for that accounting period.
Ledgers are also known as a “final entry.” Simple ledgers contain the values that will be used to create a company’s balance sheet, income statement, and statement of cash flows. Careful record-keeping in simple ledgers can be especially helpful when it comes time to build a balance sheet, since a company’s assets must equal its liabilities plus its shareholders’ equity.
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