Learn something new every day More Info... by email
Ledger systems in accounting define how a company records its financial transactions into accounting books. There are very few ledger systems that a company can choose from and use effectively. The first part of the system is double entry accounting, the very base for all journals and ledgers. Offshoots from this system include cash basis and accrual accounting, systems from which a company will choose that define how it records transactions. Owners, managers, and upper-level accounting staff are typically the influential decision makers for this process.
Double entry accounting is a self-balancing accounting process that helps a company manage its books. Under these ledger systems, two entries are required to balance the accounting equation: assets equal liabilities plus owner’s equity. Each entry must balance the equation so the company’s accounting books will always balance and maintain a semblance of order. This is not to say that a company’s accounting ledger will never be out of balance; the system will help support proper activity. It is possible for a company to use a different system, though it is extremely rare.
Another aspect of ledger systems is the process by which a company records its transactions. The two main systems here are cash basis and accrual accounting. Under the cash basis system, a company records transactions whenever cash changes hands during an event. For example, a company purchases inventory for cash, and an accountant records this event into the ledger as cash was involved. At month end, the transactions in a company’s general ledger should mirror that of its bank statement, creating a balance for all activity that results in accurate financial reporting.
Accrual accounting is the most popular of the two ledger systems beneath the double entry accounting umbrella. In short, accrual accounting is the opposite of cash basis accounting; transactions go into the accounting books as they occur. Any time a company engages in a transaction that affects the company’s accounting system, it must go into the accounting books. No cash needs to change hands in order for these transaction to have representation in the company’s books. Accrual accounting is more accurate, leads to better reporting, and creates reports that reflect a company's true activity.
Other ledger systems may exist in the business environment. For example, companies can create a hybrid method that combines attributes of both systems. It must, however, meet national accounting standards for keeping information in an accurate and relevant manner.