The Cornerstone of Bookkeeping
If double-entry accounting is the basis of a true accounting system, then the ledgers are the building blocks. In business application of the accounting system, you are only a strong as your weakest link. What this means is your financial health, the monthly snapshot of your worth, is only as accurate as your most inaccurate records. If even one small piece of recorded information is in error, the entire picture is wrong.
Double-entry accounting assures us a way to balance and reconcile our entries. The ledgers that we keep assure us of being able to account for every aspect of the business operation. There are ledgers for every area: Assets, liabilities, and equity.
Ledgers are not labeled with asset, liability, or equity but they are segregated according to their type. Ledgers are generally individualized based upon the account for which they are kept. The cash account has a cash ledger for recording transactions into and out of the account. Furniture and fixture records are generally kept in an account labeled “equipment” or “office equipment” and once again, any transactions affecting the monetary value of equipment is recorded in this ledger.
Ledgers are generally labeled with titles such as Cash Account, Accounts receivable, Accounts Payable, Sales, Purchases, Utilities, and Owner’s Equity. The list can be longer and more varied, depending upon the type of business you are keeping records for. Service and professional businesses have quite a different set of ledgers, to say, the ledgers needed to run a manufacturing facility.
All of these individual ledgers are balanced, or closed on at least an annual basis in order to file an income tax return. The individual ledger balances are recorded in what is known as a “general ledger”. The general ledger totals and the individual ledger totals must always agree; if not adjusting entries must be made when the errors are found in order to reconcile the accounts.
Since the inception and growth of the computer, many of the ledger entries are now done via a data entry clerk. Generally, most of the entries are repetitive and require very little actual accounting knowledge. This makes data entry a very simple task. The actual hard copy ledgers are now kept on computer files in software designed especially for the accounting industry. And thanks to the advance state of accounting software, double-entry accounting generally only requires a single data entry input; the software automatically creates the second entry.
All of this record keeping and ledger entry is done in order to obtain 3 reports at month end, or at least year end. The Profit and Loss Report or Income Statement, the Statement of Cash Flows and the Balance Sheet all rely on the accurate record keeping of the ledgers. The financial picture painted by the information contained in these reports is a direct result of the information recorded in the ledgers. This end result is the reason for accuracy in the ledger phase of recorded transactions. The ledger entries are the starting point for the picture we will eventually refer to as the “state of the financial health” of a business.