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What is a purchase ledger? The purchase ledger and the purchase ledger control account are important elements in bookkeeping. Here’s what small businesses should know.
The purchase ledger is part of a small business’s bookkeeping system, involving invoices, purchase orders, and expenses.
It’s an accounting database that helps you keep track of your outgoings and how much you owe your suppliers.
It records purchases specifically made with suppliers and shows which ones have been paid and which are still outstanding.
A purchase ledger can be a simple spreadsheet. Each item is represented as a row in the spreadsheet. The columns on the left side of your spreadsheet will be:
Then for the purchase ledger itself (e.g. the values that affect its balance), these columns go on the right:
It’s important to use reference numbers (like purchase order numbers, or another system that you create for numbering the bills you receive). This allows you to easily track and identify particular transactions when needed.
If you have lots of suppliers, you may choose to use a separate purchase ledger for each one.
A purchase ledger control account is an entry in a general ledger which keeps the general ledger free of details, but has the right balance needed for preparing financial statements.
The general ledger is the main accounting record for a business, which has accounts for assets, liabilities, equity, revenues, and expenses.
The purchase ledger control account doesn’t include details like supplier, transaction date, and purchase order number. Instead transactions only show as an ending balance, which is the amount a business owes to all of its suppliers.
This means that the balances for all suppliers in a purchase ledger should add up to the overall balance in the purchase ledger control account.
When making purchases on credit, you list this number as a liability in your business’s balance sheet.
Control accounts and the general ledger are part of double-entry bookkeeping. In this system, each transaction is recorded twice – as a debit and a credit. The goal is that these should balance.
A business will often make purchases on credit. Under double-entry bookkeeping, the overall assets figure in the general ledger will increase (this is a debit). The liabilities figure will also increase (this is a credit, usually going under accounts payable).
Essentially, the accounts have to balance using this equation:
Assets = Liabilities + Equity
If the accounts don't balance, then you need to have a look through the individual transactions to find out where the error is. This is where sub-ledgers, like the purchase ledger, give the necessary detail.
A proper accounting system is necessary for keeping track of the financial health of your business. You need accurate records to produce reports like cash flow statements, balance sheets, and income statements, which can then help you assess (and prove) business performance.
Please use this article as a guide only and speak to a professional accountant for the specifics on your business.
Do you use a purchase ledger for your small business? Let us know in the comments below.
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Sam has more than 10 years of experience in writing for financial services. He specialises in illuminating complicated topics, from IR35 to ISAs, and identifying emerging trends that audiences want to know about. Sam spent five years at Simply Business, where he was Senior Copywriter.
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