A ledger, also referred to as a general ledger, is a list of financial transactions. This financial report summarizes transactions for a specific period of time. Depending on the type of ledger, it can also show you a cumulative total of transactions. The general ledger shows you all of your active business accounts. However, each account within the general ledger can have its own ledger. The total of all ledgers in your accounting system should equal zero.
Ledgers are important for transparency in your financial reporting. For example, if an account balance seems high, you can go back to the ledger and figure out if transactions are properly recorded and what items are influencing your balance. Additionally, ending ledger balances flow through to your financial statements, including the profit and loss statement and the balance sheet. Ensuring accuracy in your ledgers helps you create error-free financial reports.
Ledgers will be broken down into two main categories: debits and credits. Debits increase asset balances and reduce liability balances, while credits decrease asset balances and increase liability balances. Revenue is also recorded as a credit, while expenses are considered debits. Below is an example of how debits and credits are applied to different account balances. We’ll expand on each section next.
| Account | Debit | Credit | Net Change |
| Checking Account | $50,000 | $10,000 | $40,000 |
| Accounts Payable | $20,000 | $30,000 | ($10,000) |
| Revenue | $5,000 | $60,000 | ($55,000) |
| Expenses | $25,000 | $2,000 | $23,000 |
There are five main types of ledgers within your general ledger: assets, liabilities, equity, revenue, and expenses. Let’s explore the details of these ledgers in more detail.
Assets are items your business owns, such as accounts receivable, cash, inventory, and fixed assets. As a result, assets are normally debit balances. For example, if you receive a customer deposit, your ledger will show a debit transaction. The opposite effect is also true. If you pay out wages, your cash balance will decrease with a credit entry.
Liabilities retain the opposite principles of asset ledgers. Debits to liability accounts decrease balances. For example, if you took out a loan for $50,000 and made a $10,000 payment, your ledger will show a $10,000 debit. Credits to your ledger increase your loan balance. In our above example, taking out the $50,000 loan would be shown as a credit transaction.
Equity ledgers have a mix of debits and credit balances. As a recap, equity contains distributions, contributions, and past earnings. Distributions are normally debit balances, while contributions are credit balances. However, depending on your past earnings, retained earnings can be a debit or a credit balance.
Revenue transactions are recorded through credit entries. For example, if a customer submits a payment, your revenue ledger would show a credit balance. The offsetting debit will be found in your cash account. Keep in mind, your revenue ledger can show debit balances for returned items.
Expenses are the opposite of revenue, being recorded as debit balances. Let’s say you pay an insurance premium. The transaction would show up as a debit in your insurance ledger. If an expense balance has a credit balance, it could indicate a refund or an incorrect transaction. Now, let’s say you overpaid on your insurance. As a result, your insurance carrier issued you a refund, creating a credit entry in your ledger.
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