Ledger
A Ledger is a book that contains records of all transactions related to a particular account within a financial year. It is also known as the principal book of accounts, and the combination of all the individual ledger accounts is known as General Ledger. The Ledger accounts include accounts for different types of fixed and current assets, revenue and expenses, liabilities, gains and losses.
Trial Balance
A Trial Balance is a statement that gives a report of the final debit or credit balances of all ledger accounts in an organisation. A company prepares their Trial Balance at the end of the financial year. It is used to prepare financial statements like the Balance Sheet and the Profit & Loss Account. It helps to ascertain the mathematical accuracy of the financial transactions recorded in the ledger accounts of a business.
Differences between Ledger and Trial Balance
The main differences between Ledger and Trial Balance are as follows:
|
Ledger |
Trial Balance |
|
Definition |
|
|
A Ledger is an account-wise summary of business transactions recorded in the Journal. |
A Trial Balance is a statement prepared at the end of a financial year to depict the debit or credit balances of all ledger accounts. |
|
Hierarchy within Accounting |
|
|
The Ledger is also known as the principal book of accounts. It gets prepared after the financial transactions of a business are recorded in a journal. |
The Trial Balance is prepared only after ascertaining the debit or credit balances within all ledger accounts. |
|
Dependency |
|
|
The Ledger is prepared based on the Journal. |
The Trial Balance is prepared based on the Ledger accounts and subsidiary books. |
|
Information |
|
|
The Ledger accounts provide complete information related to each and every financial transaction taking place within a business. Each accounting entry is posted under the double-entry bookkeeping system to the respective accounts. |
The Trial Balance only provides limited information related to the debit or credit balances of all the ledger accounts of a business. |
|
Purpose |
|
|
The purpose of preparing a Ledger is to gather and classify the information from journal entries into different accounts and ascertain their debit/credit balances. |
The purpose of preparing a Trial Balance is to verify the mathematical accuracy of the financial transactions posted in the ledger accounts of a business. |
|
Timing |
|
|
The Ledger accounts are prepared throughout the accounting period as the transactions are posted there in chronological order. |
The Trial Balance is prepared at the end of an accounting period. |
|
Balancing or Tallying |
|
|
Each Ledger account is closed at the end of an accounting period to ascertain whether it has a debit or credit balance. |
The debit and credit sides of a Trial Balance are totalled at the end of the accounting period. They must tally with each other to ensure the mathematical accuracy of the financial transactions. |
|
Format |
|
|
All Ledger accounts are prepared in the ‘T format’ with the debit transactions posted on the left column and credit transactions on the right. |
The Trial Balance is prepared in a columnar format with separate columns for posting the debit and credit balance of ledger accounts. |
Conclusion
There are many differences between Ledger and Trial Balance but both of them are essential for preparing the financial statements of any business. They are an integral part of the double-entry bookkeeping system, and the accountants need to prepare them without any errors. Otherwise, these books will not reveal the actual financial position of the firm to its stakeholders.
Frequently Asked Questions on Ledger and Trial Balance
What are the different methods of preparing a Trial Balance?
The three different methods of preparing a Trial Balance are as follows:
- Total Method
- Balance Method
- Total cum Balance Method
What are the limitations of a Trial Balance?
The main limitations of a Trial Balance are as follows:
- It may hide errors of omission in case a transaction is not journalised.
- If a journal entry with an incorrect amount gets recorded in both accounts, the Trial Balance will not reflect that error.
- If a journal entry doesn’t get recorded in the Ledger, it will not reflect in the Trial Balance.
- If an accountant enters a journal entry under the wrong accounting head, the Trial Balance will not be able to identify this mistake.
What are the benefits of preparing a Ledger?
The benefits of preparing Ledger accounts are as follows:
- It helps in preparing the Bank Reconciliation Statement.
- It gives you a brief picture of the financial position of a business.
- It allows auditors to get information about the business transactions in an organisation.
What are some examples of Ledger Accounts prepared in a business?
Some examples of Ledger Accounts prepared in a business are as follows:
- Capital A/c
- Revenue A/c
- Wages and Salaries A/c
- Depreciation A/c
- Bank A/c
What are the five different categories under Ledger Accounts?
The five main categories in which Ledger Accounts can be classified are as follows:
- Assets
- Liabilities
- Equity
- Revenue
- Expenses
What is the definition of an Unadjusted Trial Balance?
The Unadjusted Trial Balance lists all the ledger account balances at the end of the financial year before making the year-end adjusting journal entries.
Comments