What is a Ledger?

A ledger provides a record of each debit and credit transaction across the lifespan of a company. Each transaction within the ledger is also known as an “entry.”

Businesses use ledgers to get a detailed view of their financial transactions for different periods of time, be that weeks, months, quarters, or years. The information contained in a ledger is also what is used to create income statements, balance sheets, or other financial documents. Another key use of a ledger is to keep track of important balances that can inform business decisions such as how much to pay out to vendors or employees.

What are the key components of a Ledger?

Double-Entry Accounting

Double-entry accounting records each transaction twice, as corresponding debits and credits. Double-entry transactions, also known as “entries,” are posted in two columns: debits and credits. The total of all of the different debit and credit entries must balance out. This method tracks not just cash on hand, but also the value of all of a company’s assets.

As an example, let’s say you run Bagel.co, a company that allows users to buy, sell, and trade bagels. Bagel.co moves funds between accounts that they operate on behalf of their customers. Customers 1-3 buy and sell bagels to each other, and cash out the balances of their accounts on your platform to external banks. Below is an example double-entry ledger of their transactions.

The key to double-entry accounting can be remembered as Assets = Liabilities + Equities. Using a ledger and tallying both sides of it helps with accuracy, because credits and debits should cancel each other out.

Chart of Accounts

The credit and debit transactions in a ledger are segregated into different accounts for different business uses. Simply put an account is a 'bucket' of value–or the balances a company needs to track. For instance, a business probably wants to know how much it has made in revenue, or how much it has spent on wages, or how much it owes to suppliers. Each of these balances would have their own accounts.

A chart of accounts (COA) is an index of all those different accounts within a company’s ledger. It is essentially a tool that provides a breakdown of all the company’s financial transactions by category and dictates how the transactions should be entered in the ledger.

A COA typically includes a name, a short description, and an identification code for each different account. A company’s transactions are then recorded throughout the year by debiting and crediting against these accounts.

Let’s look at a sample COA for a bagel shop:

What is the difference between a Ledger Database and a Sub-Ledger?

The ledger database is the master chart of accounts where all business transactions are recorded. A sub-ledger, or subsidiary ledger, is a set of intermediary accounts linked to the general ledger that contain transaction information. There can be multiple sub-ledgers of a ledger database.

For larger companies, it may not be convenient to enter every single transaction in the ledger database because of the high volume of transactions. In that case, individual transactions are recorded in sub-ledgers and the totals are then transferred to an account within the ledger database.

Where a ledger shows a summary of the double-entry accounting at any given point in time, the sub-ledger records the details of the transactions shown in the ledger database. Additionally, a sub-ledger must balance in order to reflect the correct information regarding those transactions from the ledger database.

To learn more about Ledgers, check out these additional resources:

• What's the Difference Between a Financial Ledger Database and a General Ledger?
• Three Questions to Consider When Setting Up Ledgers
• Why Idempotency Matters in Payments
• What is Double-Entry Accounting?