January 29, 2022

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Ten Importance of Ledger Books you should know

Ten Importance of Ledger Books you should know
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The primary importance of ledger books in an entity is to keep records of business transactions or events permanently. But that’s not all! In this article, let’s list and explain the significance of ledger books. To know the definition, explanations, and format of this principal book, read here.

1. It keeps records permanently

This book helps keep business transactions or events permanently. This implies that the owner of the business can have access to what’s happening in the business anytime. It can access records of the entity that are more than seven years old as practiced by most entities.

2. It aids traceability

You can easily trace events that have occurred in the past. Thanks to the ledger book. When an error occurs, this can be traced if there are proper accounting records in the principal book. Fraud can also be discovered through this means. More so, auditors can carry out audit trails (that’s checking from source documents to accounts to financial statements if they are correct). Its power of traceability makes the ledger book useful.

3. Used to prepare a trial balance

Ledger book aids the preparation of trial balance. The truth is a trial balance tests the accuracy of accounts in the main books. If the trial balance does not have equal amounts on the debit and credit sides, then it can be said that the accounts in the principal book are not accurate. Traces will be done to find what causes the difference.

4. Used to prepare financial reports

Several financial reports It can be prepared either from the principal books or from the trial balance. Mostly, the trial balance is used to prepare financial statements like profit or loss statements. But from the ledger, other unconventional reports can be prepared and presented to management. For example, a business owner may want to know how fuel expenses affect profit for a certain period. It can simply get all fuel expenses figures from the ledger and compare them with profit.

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5. It is used to generate account payables and receivables schedule

The principal books can be utilized in generating account receivables and payables schedules. Most computer-based accounting software will generate these reports with one click. However, with manual bookkeeping, it must be prepared by an employee or outsourced. The problem with manual accounting is that it is prone to human errors.

6. Complying with the laws of a country

In every country, the government has made it mandatory for every registered business to keep proper accounting records. Therefore, keeping ledger books means complying with this law. It also means reducing legal risk to the enterprise.

7. Aids application of Double Entry

Another significance of this book is that it used to apply double-entry principles. Without it, it won’t be easy to practically use the “double-entry” in a business. It is two accounts in the principal book that will be debited and credited. For example, when the business acquires an office vehicle on credit from VD Ventures. The accounts to be opened in the books are office vehicles and VD Ventures accounts. Then double-entry principles will be applied to these two accounts.

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8. Generate reports for customers use

Customers can request reports concerning their dealings with the entity. From the ledger, this report can be generated. This is mostly performed by banks. Customers may request these reports to carry out reconciliation with the account of their business. Or to know what they owe the bank and the amount in their bank account.

9. Accounts are well classified and summarized

Through the ledger books, accounts are classified and summarized. Accounts are classified into sales ledger, purchases ledger, and general ledger. In the example in point 7, the two accounts are classified as general ledgers. While the individual debtors and creditors are classified under the sales ledger and purchases ledger respectively. 

10. Required by Auditors

To audit a business, the principal book is important. From the records, the auditor can examine if all source documents are entered in the books of account (subsidiary and principal books). Then, traced to trial balance, other reports, and financial statements.

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Conclusion

From the foregoing, the principal books are important to every business, whether registered or not. Non-governmental organizations have these books. It is clear that this book keeps records permanently and helps mitigate legal risk.

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