Ledger account definition

What is a Ledger Account?

A ledger account contains a record of business transactions. It is a separate record within the general ledger that is assigned to a specific asset, liability, equity item, revenue type, or expense type. Each ledger contains an opening balance, all debit and credit entries during the reporting period, and an ending balance.

The Importance of Ledger Accounts

The set of ledger accounts maintained by a business is an essential part of its accounting records, since it summarizes all business transactions recorded by the accounting staff. As long as the ledger accounts are being updated in a timely manner, management can see the summarized revenue and expense information for a business, which allows them to take corrective action as needed. The ledger accounts are also summarized into financial statements, which are needed by investors, creditors, lenders, and government agencies.

Types of Ledger Accounts

The main types of ledger accounts are as follows:

  • Asset accounts. Track resources owned by the business, such as Cash, Accounts Receivable, Inventory, and Equipment.

  • Liability accounts. Record obligations the business owes, including Accounts Payable, Loans Payable, and Accrued Expenses.

  • Equity accounts. Reflect the owner’s interest in the business, such as Common Stock, Retained Earnings, and Owner’s Capital.

  • Revenue accounts. Represent income earned from business operations, including Sales Revenue, Service Revenue, and Interest Income.

  • Expense accounts. Record costs incurred in earning revenue, such as Rent Expense, Salaries Expense, Utilities Expense, and Depreciation Expense.

  • Contra accounts. Used to reduce the value of related accounts, including Accumulated Depreciation (contra-asset) and Sales Returns (contra-revenue).

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Accounting for Ledger Accounts

Information is stored in a ledger account with beginning and ending balances, which are adjusted during an accounting period with debits and credits. Individual transactions are identified within a ledger account with a transaction number or other notation, so that one can research the reason why a transaction was entered into a ledger account. Transactions may be caused by normal business activity, such as billing customers or recording supplier invoices, or they may involve adjusting entries, which call for the use of journal entries.

Presentation of Ledger Accounts

The information in a ledger account is summarized into the account-level totals shown in the trial balance report, which in turn is used to compile financial statements. A sample trial balance appears in the following exhibit.

Storage of Ledger Accounts

The ledger account may take the form of an electronic record, if an accounting software package is used, or a page in a written ledger, if the accounting records are kept by hand. In the case of electronic records, a major concern is whether files are being backed up to an off-site location, and if so, the frequency of these backups. If a written ledger is used, then the concern is centered on how well it is being protected, such as via storage in a fireproof safe.

Terms Similar to Ledger Account

A ledger account is also known as an account.