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A ledger account is part of a company’s accounting system designed to hold specific types of financial information relating to business transactions. In double entry accounting, there are specific classes of ledger accounts that comprise the overall accounting system. In some cases, a company may not use each class of accounts as they may not have transactions that fall into these categories. The common ledger account types include revenue, cost of goods sold, and expense in addition to asset, liability, and equity. These accounts fall on a company’s financial statements, primarily the income statement and balance sheet.
A revenue ledger account contains information on all items sold by a company. The most common accounts here may be sales revenue, purchase discounts, and returns. The net between the former and latter two accounts presents a company’s net sales.
Cost of goods sold is the cost of inventory items sold to customers. All companies who sell inventory have to record a cost for these items, which falls in this ledger account. Deducting the total costs of goods sold from net sales results in a company’s gross profit for a specific time period.
The final ledger account group for the income statement is the expense category. Here, accountants record all items that a company needs in order to run the company. Companies must match expenses to revenues earned, meaning payroll, utilities, and other expenses are all necessary in the account group.
The balance sheet accounts begin with the asset category. Assets include all items a company owns and uses for its standard business operations. They can be both physical and intangible and are typically the most valuable items a company requires to earn revenue in the business environment.
A liability ledger account includes data that indicates a company owes a supplier or vendor money for goods. Another way to look at liabilities is the claims made by outside groups against a company’s assets. Companies must pay off liabilities in order to avoid problems with outside groups and legal action from nonpayment for goods or services.
Equity accounts represent the owner or shareholders' claims against the company’s assets. This account is basically the difference between assets and liabilities as listed on the balance sheet. Net profits and losses also go into this figure, increasing or decreasing it according to the information on the company’s income statement.
All of the above ledger account groups have representation in a company’s general ledger. Multiple accounts hold detailed information based on the type of general transaction. Accountants balance and track the information in each account for accuracy and relevance in the company’s operations.