The Subsidiary Ledgers

What are Subsidiary Ledgers?

In the previous articles, we have learned that journals present a chronological listing of a company's daily transactions, which are then posted to General Ledger. The general ledger of a business is the place where all account information is posted and a balance is maintained for each account. Based on the order of the Chart of Accounts, the general ledger contains accounts organized by assets, liabilities, shareholders' equity, revenue, and expenses. For any company that has a large number of transactions, putting all the details in the general ledger is not feasible. Hence it needs to be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger.

Subsidiary ledgers are often used in addition to a general ledger, to focus on particular areas of interest and capture additional and granular details pertaining to that particular area and reduce the need for excessive details in the general ledger. General ledger accounts with a large volume of repetitive transactions or multiple transaction sources often warrant subsidiary ledgers. All the day to day financial information for such accounts is first posted in Subsidiary Leaders and at a periodic interval, subsidiary ledger information is summarized in the corresponding control account of the general ledger. In each subsidiary ledger, subaccount balances are maintained for the various sources contributing transactions to the account, and each source has its own sub-account level balance.

Balances in General Ledger are supported by various sub-ledgers. A subsidiary ledger is a group of similar accounts whose combined balances equal the balance in a specific general ledger account. Subsidiary Ledgers facilitate the recording of complete financial and other information related to the transaction.

What is the Need for Subsidiary Ledgers?

Consider any one account in a general ledger, such as Accounts Payable. Perhaps you want to know how much money you currently owe to each of your suppliers and this information is very critical for you to manage your relationship with that supplier and to ensure that you are paying only for what you purchased and received. If you only have one or two suppliers, it is easily possible to compile this information directly in the general ledger by opening two natural accounts in the name of the suppliers. But what if you have hundreds or even thousands of suppliers? In that case, you may want to create subsidiary ledgers for accounts payable that will capture the complete master and transactional level details for each of your suppliers. This way, you can record the details of transactions involving each supplier in the relevant subsidiary ledger and then subsequently transfer the totals into a control account in the general ledger.

Let’s also understand the concept of Subsidiary Ledger by having a look at the Accounts Receivable Process. We have an “Accounts Receivable” (AR) subsidiary ledger that includes a separate account for each customer who makes credit purchases. The combined balance of every account in this AR subsidiary ledger equals the balance of “Accounts Receivable Account” in the general ledger. “Accounts Receivable Account” is also known as “Customer Receivable Control Account”. Subsidiary ledgers contain supplemental accounts that provide the detail to support the summary balance in a control account. Subsidiary Ledgers also capture details pertaining to financial transactions like “Tax Numbers”, “Contact Person”, “Telephone Number” or “Copy of Invoice”. In IT; subsidiary ledgers are also called Modules in the accounting system.

To give you another example; In the Fixed Assets Subsidiary Ledger, you can find all the details pertaining to fixed assets owned by the company. Apart from the financial details like cost of the assets, other information like date of purchase, date when the asset was put to use in business, name of the supplier, storage and location of the asset etcetera are also captured in subsidiary ledgers.