What Does Ledger Balance Mean ?

What is Ledger Balance?

A ledger balance therefore is the total of all balances in the general ledger book of any organization at any given time. The general ledger involves all the account groups of a business and these may include the asset, liability, equity, income, and expense accounts. Ledger balance consolidates the debit and credit balances of all such accounts to give a general view of the company’s financial status.

Understanding Ledger Balances

Each business transaction records at least two accounts in the general ledger as stated in the accounting equation. By doing so, this double-entry system of accounting brought about balance in the accounting records. For instance, if a company borrows $1,000 from the bank, it will result in $1,000 in the cash account which is an increase, and $1,000 in the loans payable account which is also an increase.

In due course, the bookkeeper will prepare a trial balance where the total of all the debit balances equals the total of the credit balances in the general ledger. When all the equations are added, the total debit balances should sum up with the total credit balances to show that the books of account are balanced with no entries made in the wrong manner.

The sum of all the accounts is known as the ledger balance or the running balance if the accounts are in credit. It involves the balances of assets such as cash and accounts receivable, balances of inventory as well as the liability and equity account balances as of a certain date. Out of all the balances in the financial statement, the ledger balance gives more information about a company’s financial status at a particular period.

In conclusion, general ledger balances play an important role in the financial controls of any business organization.

Monitoring general ledger balances is crucial for several reasons:

1. Evaluate financial health: The ledger gives a general view of all the accounts in order; to help to show excess or deficiency in assets to meet liability plus equity. Management can then make financing and investment decisions based on the return on investment.

2. Detect errors: If the total debit balances do not equal the total credits in the trial balance then it suggests that there were errors in the recording of transactions which had to be spotted and corrected.

3. Track transaction history: Record keeping for months provides insight into particular accounts where there might be problems, and ensures that responsibility is assigned.

4. Assist auditing: General ledger balances and transaction trails are the primary documentation auditors rely on to ensure that the company’s financial statements are not inclined to contain significant improper information.

5. Aid decision-making: The trends can be used to evaluate the progress in achieving the financial targets and to make some management decisions based on the account balances of prior periods. Historical data also helps in budgeting as it provides previous records of expenditures that were made.

Types of Ledger Balances

1. Current ledger balance: In accounting, it refers to the position of the total in a ledger account at a certain date. It plays an intermediary role to enable one to notice problems at the right time.

2. Adjusted ledger balance: The state of an account after closing entries are made, which is the final accounting statement. Offers a conclusive figure after every adjustment such as accruals, deferrals, etc.

3. Opening ledger balance: The balance brought forward in an account from a previous period at the beginning of a new period. Serves as the beginning point.

Related to this topic, it is also important to define whether the ledger balance is the same as the account balance.

Nevertheless, it is important to point out that even though they are often used interchangeably, ledger balance and account balance are two distinct concepts. It means that account balance pertains only to the amount in one particular account and the balance as of the date of the balance sheet without including all the balance amounts in the general ledger. In each account, there will be an ending debit or credit balance but the ledger balance means the balances of all the accounts in the ledger on a certain date.

Conclusion

The balance in the general ledger provides only one summarized picture of the company’s financial position and all its transactions that involve all the accounting entries made in the period. Carefully balancing general ledgers eliminates some of the errors that may occur in the accounting process, supports the management in decision-making processes and also the auditors, and gives important information on the overall financial situation of the company. Even though individual accounts have their particular role, it is the general ledger balance that speaks volumes.