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What is a ledger balance

what is a ledger balance

Garrick Saito. former Corp. Controller, large public company

Most often, if you say the word ledger to an accountant, they will immediately think of something called a General Ledger (or G/L for short), also called 'the books'.

Ultimately, all of the financial transactions of a company are contained in the general ledger, which serves as the basis for producing their financial statements.

Typically, there are three main financial statements;

  • income statement (which measures profitability for a given period of time
  • balance sheet (which is a statement of the company's assets, liabilities and equity)
  • statement of cash flows (which shows how cash is flowing in and out of a company during the period being reported)

The general ledger is made up a chart of accounts. which segregates accounts into groups in a logical manner. Typically, there are six groups of accounts as follows:

  • assets
  • liabilities
  • stockholders' equity
  • revenue
  • cost of sales
  • operating expenses

When entries are made into the general ledger, they contain certain basic information such as:

  • transaction date
  • account name
  • account number
  • amount
  • a designation if the entry is a debit or credit
  • a literal description of the transaction

When you look the aggregate balances for all of the accounts in the general ledger, the sum total of all the debits in the general ledger should always equal the sum total all of the credits. A printout of these balances is called a 'trial balance'.

There are certain types of activities that are common to many all types of businesses, some of which are always present in all businesses. Accounts payable, would be one example of the latter. Every company must pay for operating expenses.

These activities are generally accounted for in 'subsidiary ledgers', which are designed to segregate

numerous like transactions.

Examples of these subsidiary ledgers include (but are not limited to):

  • accounts payable
  • accounts receivable
  • fixed assets
  • cash management
  • inventory management
  • payroll
  • journal entries

Subsidiary ledgers are, in a way, like the general ledger and typically contain massive amounts of detail specific to the type of transaction being processed. For example, an accounts payable subsidiary ledger would represent all of the invoices received and processed.

Details recorded in accounts payable would likely include things like:

  • vendor name
  • vendor number
  • invoice number
  • invoice date
  • purchase order number
  • invoice amount
  • payment terms
  • discounts available
  • and so forth

The other subsidiary ledgers (e.g. payroll, inventory, etc.) would record similar details appropriate for the type of transaction being processed.

Periodically, the details of the subsidiary ledgers are interfaced or transferred to the general ledger. This could be performed once a month, once a week or once a day. Different software systems do it differently and some higher end software packages will allow the company to choose the frequency of the interface.

Conceptually, the subsidiary ledgers should always be synchronous with the general ledger at each month end. Generally speaking, the interface to the general ledger is a summary entry and contain no details (otherwise the general ledger would be 100 miles thick, if printed out on paper). If details are needed about a particular G/L entry, then the subsidiary ledger records are queried.

Below is crude drawing (sorry, I have no artistic skills) of how information flows, based on what I've described above.

I could probably write several hundred more pages on the subject, but frankly my fingers are getting tired and I don't have the time or inclination. I think the above is a fair overview of what is meant by 'ledger'.

Category: Forex

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