What is a ledger account?
Sometimes we often forget the basics of accounting. It’s so easy nowadays to forget what’s behind the transactions and journal entries we make in accounting software. So, today I’ll got back to basics and describe a ledger account. Ledger accounts can be used in financial and management accounting to accumulate things like costs, revenues, the value of assets etc.
It’s probably easiest to describe what a traditional manually written ledger account looks like. The term T account (see left) is often used to describe a ledger account as this is what an account looks like in a handwritten ledger (a ledger is just a type of notebook). The left side of the account is called the Debit side, the right hand the Credit side. The details of every business transaction can be recorded in a ledger account. There are rules (called rules of double entry accounting) which tell us what to do. What we do depends on the type of transaction. If we wish to record an increase in an asset or expense , then we record the details (date, amount, some narrative) on the debit side of the account. If we wish to record in increase in an income, liability or capital account, then we record the details on the credit side. For example, if I make a sale for cash of €1,000, I would record this on the debit side of the bank account and the credit side of the sales account. There are always at least two ledger entries for every transaction – this is the double entry system of accounting, which you can read more on in this post. If I were to enter this cash sale in some accounting software, while I might not see a ledger account, the principles are there in the background. For example, some software might show debit entries as a plus, credits as minus. No matter what the software, be it simple like Quickbooks or complex like SAP, the same process as a manual ledger account occurs.