The traditional ledger remains the basis for classifying and summarising business transactions. The use of computer software and Artificial Intelligence cannot change how ledgers are formulated. To understand why, let me put you through all the facts about these ledgers.
What is a ledger
It is a book of accounts that is used to organise and summarise business transactions. In the definition of accounting, it is stated that transactions need to be organised and summarised. This will help to present financial statements.
The ledger is the main book used for this purpose. It is classified as sales, purchase, and general ledgers. Accounts discussed earlier, are on ledgers. The double-entry principle is applied to post transactions in accounts, but it is the ledger book that helps classify them accordingly.
The other book of accounts that have literally gone into extinction are subsidiary books. Journal entries are the only survival of it. In accounting software, journals are used to post transactions to ledger accounts.
Types of ledgers
Sales or receivable ledger
Receivable ledgers show the number of individuals who owe a business. It is also known as debtors' books. The credit officer of the company knows the number of debtors, the amount owed, and the due dates from it.
In many cases, the receivable ledger is aggregated into a receivable ageing schedule. From here, the credit officer can liaise with the debtors to recover the debts.
Purchases or payables ledger
The purchase ledger shows the number of individuals to whom the company owes. From here, all creditors can be known individually and holistically. It can be referred to as the creditors' book.
The company's responsible staff can use it to defend the amount of debt they owe a creditor. For example, a creditor may claim that the company owes it 5 million Naira. In the payables ledger, a sum of N4.2 million is the debt. Therefore, a reconciliation can be done to determine the actual amount owed.
General ledger
A general or nominal ledger keeps records of other transactions that cannot be in the sales and purchases ledger. This includes sales and purchases accounts. Electricity and retained earnings accounts. The list continues.
Importance of the traditional ledger
Traditional Ledgers remain the bedrock of accounting. Failure of this knowledge by accountants may have adverse effects on the company. You might have heard of high revenue and receivables of more than one billion on accounting software. But the actual money debtors owe is not up to 3 million. That's the result of a lack of knowledge of the ledger.
The totals on the sales and purchases ledger are used as total receivables and payables in the statement of financial position.
The company's representative can know the debt owed by trade receivables and payables. And liaise on how it can be settled. When combined with other metrics, management can make informed decisions on its working capital and other business areas.
In addition, the general ledgers contain other items that are required in the statement of profit or loss and the statement of financial position.
In conclusion, ledgers classify and summarise an entity's transactions. It helps management maintain accurate records and prepare financial statements. When used with other metrics, it can provide useful information to users.