Many business owners and finance leaders are content to take their financial info from the company’s main statements, like the balance sheet and the income statement.
But some want to dive deeper to understand the intricacies of how a company’s finances operate.
If you’re in the latter camp, you’ll want to have a good handle on how the accounting ledger works.
In this article, we’ll discuss what an accounting ledger is, how it works, the different types that exist, and how to create and use an accounting ledger in daily operations.
What is an accounting ledger?
An accounting ledger is the main record of a company’s financial transactions, organized by account. It serves as the foundation for preparing key financial statements like the balance sheet and income statement.
The accounting ledger acts as the second book of entry in the accounting process. It stores and summarizes the information that was originally recorded in the journal.
By organizing every transaction into the correct account, the ledger becomes the source of truth for producing accurate financial statements and evaluating overall financial health.
How the accounting ledger works
The accounting ledger takes detailed entries from the journal, then organizes them into individual accounts with a running balance.
The process here ensures that every debit and credit is recorded, summarized, and ready for accurate financial reporting.
Here’s a quick overview of the four core steps involved in running an accounting ledger:
- Record the transaction in the journal: Each financial event is first documented in the journal, along with the date of the transaction, accounts affected, and debit and credit amounts.
- Post debits and credits to the ledger: The journal entry is then transferred to the ledger, where each amount is posted to the correct account (such as revenue or accounts payable).
- Summarize account activity: Whenever new entries are posted, the ledger updates its running balance for each account. This creates a clear summary of financial activity over time.
- Use ledger balances for financial reporting: Once all accounts are updated and balanced, the ledger then becomes the source of truth for preparing financial statements, such as the cash flow statement or the profit and loss statement.
Components of an accounting ledger
An accounting ledger is made up of individual accounts that track different categories of financial activity. Each account falls under one of these five main account types:
The format of the ledger can vary, depending on the accounting system you use, but each account page (or record) generally includes these core elements:
- Account name and number: Identifies the account and its position in the chart of accounts.
- Date: Notes when the transaction was posted.
- Description: A brief explanation for clarity and better audit traceability.
- Debit and credit columns: Show how each transaction affects the account.
- Running balance: The current total for that specific account.
How to create and maintain an accounting ledger
Building a reliable accounting ledger starts with setting up the right account structure and then keeping it updated through consistent posting and review.
Naturally, the exact steps depend a little on your accounting software platform, but the process generally follows these steps:
- Set up your chart of accounts: First, define all of the accounts your business will track across the five main account categories. This becomes the framework for your accounting ledger.
- Choose your ledger system: Your main options here are to use a physical book, spreadsheet, or accounting software solution. Software is almost always the smartest option here. They can automate posting, balancing, and reporting, reducing risk and saving time.
- Record transactions in the journal: Each time your business makes a transaction, it should be documented with clear debit and credit entries before anything is posted to the ledger.
- Post entries to the ledger: Then, transfer each journal entry to its corresponding account in the ledger to update the running balance.
- Reconcile and review regularly: It's a good practice to compare ledger balances against bank statements and source documents regularly to ensure accuracy. Weekly or monthly reviews are a good habit, depending on the volume of transactions you’re processing.
- Generate financial reports: Finally, use the updated ledger balances to produce your three big financial statements: the income statement, balance sheet, and cash flow statement.
Best practices for maintaining accuracy
Accurate ledger records are essential for reliable financial reporting and control.
Follow these best practices to maintain clean, trustworthy data:
- Avoid delays in posting, which increases the risk of errors or missing information.
- Use supporting documentation, matching ledger entries to invoices, receipts, and bank statements to ensure entries have verifiable sources.
- Perform reconciliations against bank statements and subsidiary ledgers on a regular basis.
- Where possible, assign different people to recording, approving, and reconciling transactions to strengthen internal controls and reduce fraud risk.
- Keep an eye out for unusual activity, duplicate entries, or sudden balance swings that could indicate posting errors.
- Use modern accounting software to automate posting, enforce double-entry rules, and maintain running balances in real time.
Differences between accounting ledgers and journals
Journals and ledgers often get mixed up, but they play very different roles in the accounting process.
The journal is the first place that a financial transaction is recorded. It captures each event in chronological order, including the date, accounts affected, and debit and credit amounts.
The ledger is the second book of entry. It organizes those journal entries into individual accounts and maintains a running balance for each category, such as cash, inventory, or expenses.
The journal and the ledger are used in conjunction. Here’s how.
How transactions flow between journals and ledgers
The accounting process starts in the journal.
A transaction is first recorded in the journal, then posted to the ledger, where the debit and credit amounts are sorted into their respective accounts.
Let’s examine with an example.
Say your business purchases new equipment using cash. The journal entry would debit equipment and credit cash. That journal entry is then posted to the ledger, which increases the equipment account balance and decreases the cash account balance.
Over time, the journal provides a detailed log of activity, while the ledger summarizes that activity into account-level balances used for financial reporting.
Types of accounting ledgers
Businesses use different types of ledgers to manage financial information at varying levels of detail. The three most common are the general ledger, subsidiary ledgers, and special-purpose ledgers.
Here’s a quick overview of the differences.
General ledger (GL)
The general ledger is the main ledger. It contains all primary accounts and provides the complete financial picture of the business, serving as the source for the preparation of financial statements.
The general ledger’s advantage is its breadth. It shows overall financial performance and maintains the official account balances.
Subsidiary ledgers
Subsidiary ledgers break down detailed activity for specific high-volume accounts, such as:
- Accounts receivable
- Accounts payable
- Inventory
Each subsidiary ledger feeds into a control account in the general ledger.
The advantage of subsidiary ledgers is depth. They make it a lot easier to manage, monitor, and audit individual customers, suppliers, or inventory items, while keeping the main ledger clutter-free.
Special-purpose ledgers
Some businesses use special-purpose ledgers like sales or purchase ledgers, which track activity in a particular transaction category.
The advantage of special-purpose ledgers is focus. They allow a company to isolate and analyze specific transaction streams, improving oversight and reporting depth.
The importance of accounting ledgers for small businesses
A well-maintained ledger supports financial visibility, compliance, and smoother reporting. Its value for small businesses can be seen in three key areas:
- Financial health and decision-making: Well-organized account balances help business owners monitor cash flow, measure profitability, and track spending with confidence.
- Regulatory compliance and audits: A clear audit trail helps reduce the risk of errors, disputes, and penalties. It makes audits faster and more straightforward.
- Simplified tax preparation and reporting: When income and expenses are accurately categorized, tax filing becomes easier, deductions are easier to substantiate, and financial reports can be produced with greater ease.
How do you create a ledger in accounting software?
Most modern accounting platforms automate the process, and it looks a little different in each tool, but the basic steps are simple:
- Set up your chart of accounts
- Open your general ledger module
- Connect your bank and payment accounts to sync automatically
- Enter new activity as required or automatically pull in date from bank feeds, invoices, or bills
- Review running balances to ensure debits and credits are posting to the correct accounts
- Perform regular reconciliations to match your ledger to bank statements and confirm accuracy
With most accounting software, once the setup is complete, the system handles posting, balancing, and reporting automatically.
Integrate your accounting ledger with financial operations software
An accounting ledger is essential for organizing transactions, maintaining audit readiness, and producing accurate financial reports. To manage it effectively, businesses should integrate their ledger with financial operations software like BILL.
BILL simplifies the entire process by:
- Automating data entry
- Syncing transactions in real time
- Ensuring your ledger stays complete, compliant, and up to date
