Subsidiary Ledger

A subsidiary Ledger is a list of individual accounts that bears a similar nature. It can also be regarded as an expansion of the conventional general ledger that is separately used to record all the transactions related to the accounts payable and accounts receivables in a detailed manner. A summary of all accounts of this nature can be found in the general ledger or the master account of the organization.

The subsidiary ledger accounting has all the details relating to its nature. For example, an accounts receivable subsidiary ledger provides all the insights into the company’s credit sales such as date, invoice number, discounts, allowances, payments, etc. These details provide much-needed data points because only a summation of these numbers is reflected on the general ledger.

1. A subsidiary ledger is a list of individual accounts. It may also be seen as an enlargement of the traditional general ledger, which is used to meticulously record all transactions about accounts payable and receivables separately.
2. Accounting firms use the receivable ledger to record all transactional information about specific clients and buyers. Every transaction and the money received from each customer to whom the business extends credit is recorded in this kind of ledger.
3. Each ledger's preparation and upkeep are the sole domain of one person. Errors are reduced, and the ledger's effectiveness is increased.
4. Subsidiary ledgers do not guarantee the correctness of ledger accounts. Items might be posted to unnecessary accounts, leading to more mistakes in the separate ledgers and ultimately affecting the subsidiary ledger's overall accuracy.

Subsidiary Ledger is a set of individual accounts and is a part of a general account. It can be used by large-scale businesses or entities with enormous data volume. Small or medium-scale businesses or entities with small transactions may not benefit from the subsidiary ledger.

Subledger eliminates the chances of fraud and errors, and it can be segregated into three types- fixed asset sub-ledger, accounts receivable sub-ledger, and accounts payable sub-ledger. Sub-ledgers are complicated, and it is highly expensive to maintain too. It should be prepared by accounting personnel with the proper knowledge of the accounting framework so that the organization can make the best use of the same.

Different ledgers account to the specifics of the generalized data from the general ledger or the master account. Let us understand the subsidiary ledger purpose by understanding the different types as discussed below.

The three common types/components are enlisted below-

• Accounts Payable Subsidiary Ledger - This type of ledger records all the transaction data concerning an organization's suppliers, vendors, and creditors. It tracks every expense an organization owes to its creditors, vendors, and suppliers.
• Accounts Receivable Subsidiary Ledger - Accounts receivable to record every transaction data concerning individual customers and buyers. This type of ledger reflects every transaction and amount received from each buyer to whosoever the company sells its goods and services on credit.
• Fixed Asset Subsidiary Ledger - Fixed asset ledger is used to record every transaction concerning fixed assets. Assets like land, equipment, plant and machinery, property, buildings, etc., fall under the domain of fixed assets, and the same must be accounted for in the fixed asset subsidiary ledger.

Let us understand the subsidiary ledger accounting through the example below.

ABC ltd sells tires and prepares an account receivable subsidiary ledger for the year ending December 2019. The opening balance for Mr. M Williams and T George on December 1 is $ 150,000 and $ 353,000. On December 5, the company sold goods to M Williams on credit for $ 325,000.

The company received M Williams and T George payments on December 10 and December 18 for $ 225,000 and $ 353,000, respectively. Accordingly, prepare the Accounts Receivable Subsidiary Ledger for ABC Ltd for the year ended on December 31, 2019.

Solution

Below is the Accounts Receivable Subsidiary Ledger for ABC Ltd for the year ended on December 31, 2019 -

Let us understand the different aspects of subsidiary ledger purpose through the discussion of the highs and the lows as perceived by companies and accountants through the points below.

Advantages

The different advantages related to the Subsidiary Ledger are as follows:

• Elimination of Frauds and Errors - It uses only a control account, which ultimately eliminates even the slightest possibility of frauds and errors.
• Balances remain Updated- The balances remain updated since all the transactions concerning buyers and creditors are recorded in detail in their respective accounts.
• Minimal Error and Enhanced Efficiency - The responsibility to prepare and maintain every ledger is entrusted only to one person. It helps in minimizing errors and enhances the efficiency of the ledger.
• Easy Movement- The size of the ledger remains small since the same is segregated into numerous parts. It allows the ledger to have an easy movement.

Disadvantages

The disadvantages related to the Subsidiary ledger are as follows:

• Suitable only for Large Scale Organizations- It is ideal for organizations that have large transactions. Large scale businesses or organizations where the volume of transactions are large can only benefit from this ledger. In contrast, the same is not suitable for small and medium-scale organizations or the ones where the volume of transactions is small or fewer in number.
• Expensive- Another problem with this ledger is that these are highly expensive, and it is also why the same remains less preferred by medium and small-scale organizations.
• Highly Complicated- It is highly complicated since there is a need to hire many employees and maintain different books for each account. Keeping different accountants and employees gets a little complicated for organizations.
• Failure to offer Complete Financial Information- As the transactions are not recorded chronologically; therefore, the system fails to provide complete and accurate financial information.
• A Requirement of Accounting Knowledge- The personnel in charge must be well-versed in accountancy; otherwise, there are huge chances of the transactions getting wrongly recorded, ultimately impacting the overall accounting process.

Both general ledger and subsidiary ledger accounting are vital in an organization’s overall financial explanation. However, they are often misunderstood for one another due to the similarities at certain levels. Let us understand their differences through the discussion below.

• Both general ledger and subsidiary ledger are used to record financial transactions.
• It has all the details like credit sales, discounts, etc. to provide support to the general ledger. In this regard, it can be said that there is a vast difference between a general ledger and a subsidiary ledger.
• There can be just ledger accounts in a general ledger, while there can be multiple ledger accounts in a subsidiary ledger.
• The general ledger contains minimal data, while the subsidiary ledger contains extensive data.
• It is just a part of the general ledger while the latter controls the former.

This article has been a guide to what is Subsidiary Ledger. Here we explain its example, compare it with general ledger, and discussed its advantages & disadvantages. You can learn more about accounting from the following articles –

• Wholly Owned Subsidiary
• General Journal vs General Ledger
• Accounts Payable Ledger
• Sales Ledger