Using the ledger-to-ledger transaction accounting method keeps track of your business activities. Each transaction is analyzed and recorded in the appropriate ledger. With the exception of the general ledger, each ledger consists of similar individual accounts. For example, all of the individual vendors you do business with are included in your purchases ledger. To complete a ledger-to-ledger transaction, you review the types of ledgers available, select the appropriate ledgers and enter the transaction using a double-entry accounting system.
Types of Ledgers
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The three basic types of ledgers used to record your business transactions are the sales ledger, purchases ledger and general ledger. The sales ledger keeps track of your cash sales, credit sales, sales discounts and returned merchandise. The purchases ledger records your cash and credit vendor purchases, vendor discounts and merchandise you return. Other frequently used ledgers are the accounts receivable ledgers, accounts payable ledgers and cash receipts ledgers. The general ledger records all the accounting transactions not recorded in your other ledgers.
Double-Entry Accounting
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Each transaction is recorded in your ledgers using the double-entry accounting system. Each transaction must have at least one debit and one credit entry. Using separate ledgers means that each transaction can be recorded in two or more different places. If you use a manual accounting system, the numbers can be transposed during the recording process. You can check your work by adding up the amounts in the debit column and the credit column. Both columns will have the same total if the transaction was entered correctly.
Selecting the Ledger
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The source document tells you which ledgers are used to record the transaction. A cash sale is recorded in the cash ledger and in the sales ledger. If you sell merchandise with a cash down payment, you record the transaction in the sales ledger, the accounts receivable ledger and the cash ledger. A vendor purchase uses the purchases ledger and the cash ledger. If you purchase using trade credit, you use the accounts payable ledger instead of the cash ledger.
Recording the Transaction
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To create a ledger-to-ledger transaction, select the ledgers you need based on the source document. For example, say you sell $5,000 of merchandise on credit to customer ABC. Using the sales invoice, you record the $5,000 as a credit in the sales ledger. You record a $5,000 debit to customer ABC's account in the accounts receivable ledger. You record the payment as a $5,000 debit in the cash ledger and a $5,000 credit to customer ABC’s account in the accounts payable ledger. By transferring the sale and payment information from one ledger to another, the transaction is made part of your accounting records.
