In accounting terms, what is a ledger?

A ledger is fundamentally defined as a collection of accounts used to summarize all transactions affecting an entity. It acts as a central repository where all financial transactions are recorded and organized by account type, such as assets, liabilities, equity, revenues, and expenses. Each account within the ledger reflects all the transactions related to that specific item, allowing for a comprehensive view of the company's financial position and performance.

This systematic organization enables easier tracking of business performance and plays an essential role in preparing financial statements. By consolidating all the financial activities within these accounts, a ledger becomes a crucial tool for accountants to analyze and derive meaningful insights about the company's financial health.

The other options do not capture the core definition of a ledger. For instance, a report summarizing cash inflows and outflows is more appropriately described as a cash flow statement, which is one specific type of financial report rather than a ledger. A legal document regarding business formation pertains to the legal aspects of a business and is unrelated to financial record-keeping. Lastly, a record of company policies and procedures pertains to governance and operations rather than financial transactions. Therefore, choosing the answer that reflects the correct definition of a ledger aligns accurately with accounting principles.