Simple ledgers are used in businesses to keep track of and document inflows and outflows of cash. General ledgers separate asset and liability account balances into debits and credits. Sub-ledgers detail the transactions that directly affect an account balance, such as accounts receivable. Ledgers are sometimes referred to as t-accounts, since all transactions that affect debit balances must balance out or equal the transactions that affect credit balances.
Bookkeepers and accountants document a company's expenses and the payments it receives through a series of journal entries. For example, if a company purchases inventory on credit, a debit entry will be made in the amount of the inventory purchase. A corresponding credit entry will be made for the same amount that indicates a balance is owed on an invoice or a line of credit. These amounts are eventually used to calculate an account's ending balance, which can then be transferred to one of the types of simple ledgers.
The term t-account is used to describe the process of sorting debit and credit transactions. The name is derived from how the transactions are represented: a line resembling the letter "t" is drawn on paper, with debit amounts recorded on the right and credit amounts recorded on the left. Each transaction contains both a debit and a credit to a sub-ledger. For example, a payment made on an invoice would result in a debit, or decrease, to the cash account and a credit, or increase, to the accounts payable account.
For groups of transactions that are related to each other, a sub-ledger is created. Sub-ledgers are a way to help simplify a company's financial statements. They reflect whether an account's balance increased or decreased during an accounting period, which can typically span three months, six months, or a year. For example, in the case of accounts receivable, the balance amount can reflect whether a company is having issues collecting money owed on inventory that has already been sold.
The ending balances of sub-ledgers get transferred to general ledgers. These types of simple ledgers are a summary of the origins of a company's entire debit and credit balances. The general ledger does not give specifics on the account balances. For example, the "sales" account will be listed as a single balance and is the total of all the sales the company generated for that accounting period.
General ledgers are also known as a "final entry." The simple ledgers contain the values that will be used to create a company's balance sheet, income statement and statement of cash flows. Careful record keeping in simple ledgers can be especially helpful when it comes time to construct a balance sheet, as a company's assets must equal its liabilities plus its stockholders' equity.
