Notes

Discover the chart of accounts and ledger accounting definitions. Learn about the different ledgers and account types, as well as the chart of accounts numbering system.
Ledger & Chart of Accounts
Before you can completely understand the process of accounting, you have to understand the key concepts of the accounting industry. Two of those concepts are the ledger and the chart of accounts. The ledger, which is also known as the book of final entry, is the book or computer printout that contains the accounts. The chart of accounts is a listing of all accounts that are related to a company. Each and every transaction in the business world results in a change to the balance of at least two accounts. It's important to note here that accounts usually have their own specific account number.

Types of Ledgers
There are two kinds of ledgers: a general ledger contains information on all the accounts, while a subsidiary ledger contains information that is specific to a certain general ledger account. If you're using a manual accounting system, you'll be using an actual book to record information in the ledger. If you're using a computerized accounting system, your ledger information will be in the form of computer printouts and will be contained within the computer program itself. Regardless of the type of ledger that you're using, the purpose of the ledger is to record specific information about transactions that affect the balance of the ledger account.

Types of Accounts
The chart of accounts is broken down into asset, liability, owner's equity, revenue and expense accounts. Asset accounts are accounts that show what a company owns. Liability accounts are accounts that show what a company owes. Owner's equity accounts are accounts that show how much money company owners and investors have invested in the company. A revenue account is an account that is set up to record the inflow of money earned from company operations, while expense accounts are accounts that are set up to record the outflow of cash related to company operations.

How Do They Relate?
So, how do the ledger and the chart of accounts relate? The answer to that is pretty simple. The chart of accounts is one of the first things created when a business opens. Some say that it's the blueprint of the business since the chart of accounts contains all the accounts that will appear on the balance sheet and income statement. Once the chart of accounts is created, then and only then can the ledgers be created.

Lesson Summary
The ledger and chart of accounts are both very important for a business. The ledger is the book that contains all the accounts. There are two types of ledgers: the general ledger, which contains information on all the company accounts, while the subsidiary ledgers contain information about specific individual accounts. The chart of accounts is a listing of all accounts that a company has. There are five categories of accounts that make up the chart of accounts. They are asset, liability, owner's equity, revenue and expense accounts.

Asset accounts are accounts that show what a company owns. Liability accounts are accounts that show what a company owes. Owner's equity accounts are accounts that show how much money company owners and stockholders have invested in the company. Revenue accounts are accounts that show the cash inflows of a company due to operations, while expense accounts are accounts that show the cash outflows of a company due to operations. Once the chart of accounts has been established, then a company is ready to begin the process of accounting.