what are the main objectives (purpose) of preparing Ledger?

 Are you curious to know, the objectives or purpose of preparing ledgers in accounting? Then Let's dive into it. Here, we will discuss, the main objectives or the purpose of preparing Ledgers

What are Ledgers in Accounting?

A Ledger is a bound book containing all the different accounts such as cash account, sales & purchase account, etc. It is also called the book of secondary entry because all the business transactions are recorded in Ledger after they have been recorded in Journal primarily. It is also called the Principal book of accounts. It is also called the book of final entry.

 Ledger posting: Ledger posting is the process of transferring transactions entered in the journal to the respective accounts and they are balanced, accordingly. The ledger contains all the different types of accounts like cash, bank, debtors, plant&machinery, creditors, long term liabilities, expenses and incomes. Each account has a T shape format where the left side is debit and the right side is credit. It also has either a debit balance or a credit balance. Generally, ledger posting is done weekly or monthly as per the requirement of the business entity.

Ledger Balances: Each ledger account has a balance at the end of the account. The totals are calculated and balances are obtained. It may have either a debit balance or a credit balance. All assets, expenses and losses have a debit balance. All income, liabilities, capital, and provision accounts have a credit balance.

 

What are the main objectives of Ledger?

The main objectives or purpose of preparing ledgers are as follows

1. To record the Business Transactions in books of accounts in a systematic manner.

The main objective of the ledger is record keeping of business transactions. Once the transactions are recorded in the journal, they are transferred to different ledger accounts. In this way, the books of accounts are maintained to ensure that all the business transactions are recorded in a systematic manner.

2. Ledger consists of  different types of accounts

It consists of different types of accounts such as cash a/c, bank a/c, debtors a/c, and creditors a/c. These accounts are totalled and balanced to find the balance of each account. The account has T shape where the right side is represented as Debit - Dr and left side is represented as Credit - Cr. The balances of assets, liabilities and capital are carried forward to next financial year. But the balance of an income and expense account is transferred to Profit and loss a/c, and not carried forward to next year.

3. Classification of accounts as Assets, Liabilities, Income, Expenses & Capital

Here, different accounts are mainly classified under Assets, Liabilities, Capital, Expense and Income. This is to make the classification easy and to record them easily in financial statements. For example, the balance of all assets, liabilities, and capital is taken to the Balance Sheet. Whereas the balance of expenses and incomes is to be taken into the Profit and loss account.

4. Helps to know the ledger account balances 

As we know, it helps us to know the different ledger account balances. This helps us to analyse the different accounts and make useful decisions. For example, Debtors' balance helps us to know the balance amount due from debtors, this helps to take steps to collect the amount due from debtors. Similarly, Cash balance helps us to know the amount available in liquid cash.

5. Assists in the preparation of Trial Balance

It also assists in the preparation of trial balance, once the accounts are balanced. The next step after posting and balancing is preparing a trial balance. The trial balance contains all the account balances. Trial balance is prepared to ensure the arithmetical accuracy of books of accounts. The total amount of debit balance must be equal to the total amount of credit balance in a Trial balance

6. Basis for preparation of Financial Statements

It also helps in the preparation of financial statements. As we know, the financial statements include the trading & profit and loss account, balance sheet with notes to accounts, and cash flow statement. The balance sheet depicts the financial position. The cash flow statement gives the picture of the cash position. The profit and loss statement helps to ascertain the financial performance i.e, profit earned or loss incurred during the period.

7. Provides reliable financial information to users of financial information

It provides reliable and useful information to the users of financial statements. The users would include debtors, creditors, competitors, government, credit rating agencies, investors, and shareholders. They are interested to know the financial information of the business enterprise. For example, Government is interested to know the sales account balance to levy tax on sales.

8. To reduce frauds, errors and omission of financial transactions

It helps to record all the business transactions without the omission of any transaction. This also helps to minimize the errors, frauds, and thefts in the business organisation. This helps to maintain the books of accounts without any errors or omissions.

9. Adhere to the double-entry system of bookkeeping

This is to comply with the double-entry system of bookkeeping to make record-keeping complete, reliable, and useful. Under the double-entry system of bookkeeping, both the aspects such as debit and credit are recorded. This system is reliable, scientific and authentic. The books of accounts are prepared by complying with the double-entry system.

10. To ascertain the effect of all business transactions 

One of the objectives of maintaining ledgers is to ascertain the effect of all transactions in the books of accounts. For example, assets recorded will give a debit balance and the asset balance is shown on the asset side of the balance sheet. Similarly, liabilities and capital is shown on the liability side of the balance sheet.

Conclusion:

The main objectives of the ledger would include recording the business transactions, ascertaining the effect of all transactions in the books of accounts and to know the ledger balances as a basis for the preparation of trial balance and financial statements.