# Financial Ledger System Low-Level Design: Double-Entry Accounting, Account Hierarchy, and Reporting Source: https://www.techinterview.org/post/3233469735/lld-ledger-system/ Updated: 2026-06-30 · techinterview.org ## Double-Entry Bookkeeping Every financial transaction in the system uses double-entry bookkeeping: each transaction debits one or more accounts and credits one or more accounts, with total debits always equaling total credits. This invariant — the accounting equation — ensures the ledger is always balanced: ``` Assets = Liabilities + Equity ``` No single-sided entries are permitted. Every journal entry is validated before persistence: `SUM(debit_amounts) = SUM(credit_amounts)` must hold exactly. If this check fails, the entry is rejected. ## Chart of Accounts The chart of accounts is a hierarchical taxonomy of all accounts in the organization: ``` accounts { account_id UUID PK org_id UUID FK parent_account_id UUID FK nullable name VARCHAR(255) code VARCHAR(20) -- e.g. "1010" type ENUM(ASSET, LIABILITY, EQUITY, REVENUE, EXPENSE) normal_balance ENUM(DEBIT, CREDIT) is_leaf BOOLEAN active BOOLEAN DEFAULT true } ``` Example hierarchy: Assets (1000) → Current Assets (1010) → Cash (1011); Liabilities (2000) → Accounts Payable (2010). Normal balance is DEBIT for assets and expenses; CREDIT for liabilities, equity, and revenue. This determines how increases and decreases are recorded. ## Journal Entry Schema A journal entry records one complete transaction across two or more accounts: ``` journal_entries { journal_id UUID PK org_id UUID FK description VARCHAR(500) date DATE reference VARCHAR(100) -- invoice number, receipt, etc. created_by UUID FK users created_at TIMESTAMP } journal_lines { line_id UUID PK journal_id UUID FK account_id UUID FK debit_amount DECIMAL(18,4) DEFAULT 0 credit_amount DECIMAL(18,4) DEFAULT 0 description VARCHAR(255) } ``` A journal entry with two lines (one debit, one credit) is the simplest case. Complex transactions can span many lines, as long as the total debit equals total credit. ## Journal Entry Immutability Once posted, journal entries are never modified or deleted. This is a core accounting principle — altering historical records destroys the audit trail and violates accounting standards. Corrections use a two-step process: - **Reversing entry:** create a new journal entry that exactly inverts the original (debits and credits swapped) to cancel its effect - **Correcting entry:** create a new journal entry with the correct amounts The original entry, the reversing entry, and the correcting entry all remain in the ledger, linked by a `reversal_of` reference field. ## Account Balance Calculation The current balance of an account is derived by summing all journal lines for that account: ``` -- For DEBIT-normal accounts (Assets, Expenses): balance = SUM(debit_amount) - SUM(credit_amount) -- For CREDIT-normal accounts (Liabilities, Equity, Revenue): balance = SUM(credit_amount) - SUM(debit_amount) ``` For performance, a materialized `account_balances` table stores running totals, updated transactionally on each journal entry insert. Point-in-time balances are computed by summing lines up to a given date. ## Period Closing At the end of each accounting period (month, quarter, year): - Calculate net income: SUM(revenue account balances) - SUM(expense account balances) - Post a closing journal entry: debit all revenue accounts to zero, credit all expense accounts to zero, with the net income flowing to Retained Earnings (equity account) - Mark the period as CLOSED in the `accounting_periods` table - Reject any new journal entries dated within a closed period After closing, revenue and expense account balances reset to zero for the new period, while asset, liability, and equity balances carry forward. ## Balance Sheet The balance sheet is a point-in-time report showing financial position. It aggregates account balances as of a specific date: - **Assets section:** sum of all ASSET account balances grouped by sub-category - **Liabilities section:** sum of all LIABILITY account balances - **Equity section:** sum of all EQUITY account balances including retained earnings - **Validation:** Total Assets must equal Total Liabilities + Total Equity ## Profit and Loss Report The P&L (income statement) covers a date range and shows: - **Revenue:** sum of all REVENUE account activity for the period - **Expenses:** sum of all EXPENSE account activity, broken down by category - **Net Income:** Revenue - Expenses Both reports support drill-down: clicking a line item shows the individual journal entries that compose it. ## Multi-Currency Support All amounts are stored in the organization's functional currency. Foreign currency transactions are recorded with the exchange rate at transaction date: ``` journal_lines + { foreign_currency CHAR(3), foreign_amount DECIMAL(18,4), exchange_rate DECIMAL(12,6) } ``` At period end, a revaluation run recalculates the functional currency value of foreign-denominated balances at the current exchange rate. The difference is posted as an unrealized FX gain or loss to a dedicated equity account. ## Audit Trail Every journal entry is immutable and carries the creator's user_id and creation timestamp. No UPDATE or DELETE is permitted on journal_entries or journal_lines — enforced at the database level via trigger or application-level constraint. The full history of every transaction is always recoverable, making the ledger suitable for external audit and regulatory compliance. See also: [Stripe Interview Guide 2026: Process, Bug Bash Round, and Payment Systems](https://www.techinterview.org/post/3233460268/stripe-interview-guide-2026-process-bug-bash-round-and-payment-systems/) See also: [Coinbase Interview Guide](https://www.techinterview.org/post/3233459920/coinbase-interview/) See also: [Scale AI Interview Guide 2026: Data Infrastructure, RLHF Pipelines, and ML Engineering](https://www.techinterview.org/post/3233460275/scale-ai-interview-guide-2026-data-infrastructure-rlhf-pipelines-and-ml-engineering/)