Subsidiary LedgerWhy you should prepare one!

To properly document the operations of your business, you need to maintain certain accounting records.

There are essential accounting records, such as the general journal and general ledger, and then there are the optional but equally helpful ones such as the special journals, and subsidiary ledgers.

Maintaining a general journal may be enough to record a business’s transactions but there are some details that these accounting records can’t capture.

This can make keeping track of certain account transactions hard and time-consuming and this becomes even more apparent as the business grows and has more transactions.

The general ledger typically only includes minimal details.

For example, it does not maintain a balance for individual customer or supplier accounts.

This won’t be an issue if the business only has a handful of customers or suppliers, but if the business has many customers or suppliers, then it will be hard to keep track of each account.

For example, if a business has hundreds or thousands of customers that are on credit terms,  it can be hard or even impossible to keep track of each customer’s account with just the general journal and general ledger.

Since all transactions are recorded in these accounting records without discrimination, it’s possible for an individual account to be buried in the thousands of transactions.

For these reasons, it is essential for medium to large businesses to maintain additional accounting records – such as the subsidiary ledger.

In this article, we will be learning what a subsidiary ledger is, and why you should consider maintaining one for your organization.

What is a Subsidiary Ledger?

A subsidiary ledger typically contains the details of each general ledger control account.

For example, the accounts receivable control account in the general ledger only shows us the summary of the transactions for a certain period.

If you want to know the details such as individual customer balances and transactions, then the accounts receivable ledger is what you should look for.

Businesses do not always have to prepare and maintain subsidiary ledgers.

A general ledger might already be enough as a record for your business’s accounts.

In fact, most accounts in the general ledger are not control accounts.

Instead, any transaction that involves these accounts is recorded under their respective accounts rather than just a summary.

This is only possible if the account has a small volume of transactions.

For example, the rent expense is an account that typically only has one transaction per month.

As such, you might find a record of each transaction in the general ledger.

For accounts that have a large volume of transactions, it’s not like it’s impossible to record all of them in the general ledger.

However, by doing so, the general ledger will become cluttered and might even lose its purpose: to summarize an account’s transactions.

As such, if an account has numerous transactions, then it is better to maintain a subsidiary ledger for it.

While it is true that you can set up a subsidiary ledger for any general ledger account, it is usually only done for accounts that have high transaction volumes.

This is because maintaining a subsidiary ledger entails additional costs. This makes it not worth it for accounts that have low transaction volumes.

Common examples of subsidiary ledgers that businesses typically maintain are the following:

• Account Receivable Ledger
• Accounts Payable Ledger
• Purchases Ledger
• Inventory Ledger
• Fixed Assets Ledger

Are Subsidiary Ledgers required?

Required is such a strong word.

Technically, no business is required to prepare and maintain subsidiary ledgers.

But, for certain accounts that have high transaction volumes, it is strongly recommended that a subsidiary ledger be prepared for each of them.

This is so that the general ledger avoids being cluttered and retains its purpose of summarizing an account’s transactions.

Small businesses with low transaction volumes typically don’t need subsidiary ledgers.

As the volume of transactions is low, the general ledger won’t get cluttered even if individual transactions are recorded under each account.

Besides, maintaining a subsidiary means an additional cost, which makes it not worth it if it’s not absolutely needed.

Medium to large businesses however probably have lots of customers and suppliers.

They typically also have high transaction volumes.

As such, while it isn’t required, these businesses maintain subsidiary ledgers for certain accounts.

Doing so makes for an efficient accounting of the business’s accounts and transactions.

So in summary, no, it is not required to prepare subsidiary ledgers.

That said, it is still recommended for businesses that high transaction volumes to not overcrowd the general ledger.

Benefits of maintaining Subsidiary Ledgers

Maintaining a subsidiary ledger comes with costs.

But even so, some businesses still prepare and maintain subsidiary ledgers which goes to show that the benefits that it provides can outweigh its costs.

Here are some of the benefits a subsidiary ledger can provide:

Prevents the cluttering of the general ledger

This is probably the most obvious benefit of maintaining subsidiary ledgers.

By having a subsidiary ledger for each account that has a high transaction volume, you don’t have to record them in the general ledger.

The general ledger instead becomes a summary of the subsidiary ledger. The subsidiary ledger then provides the details of the account’s transactions and balances.

Regularly updated balances

Since subsidiary ledgers cover the individual accounts of customers or suppliers/vendors, they are regularly updated to reflect the current balances of each account.

This makes it possible to know the current balance of each account on a daily basis as opposed to a general ledger that’s only updated at the end of the period.

Enhances efficiency

Since subsidiary ledgers group similar individual accounts (e.g. customer accounts, vendor accounts) into one book, it makes it easier and efficient to review data.

By having similar accounts grouped in one place rather than having them spread out all over the place, you would know which accounting record to look for without having to go through all of your books.

For example, the accounts payable ledger contains all vendor/debtor accounts and the transactions related to them.

So if you want information about a particular vendor account and its related transactions, you no longer have to go through the general journal or general ledger. You only need to check the accounts payable ledger.

Easier safekeeping

This more so applies to manual/physical books of accounts. Since accounts and transactions are segregated, a subsidiary ledger is usually small in size.

As such, it is easier to store and move them.

Lightens the workload

By maintaining subsidiary ledgers for multiple accounts, it’s possible to assign each subsidiary ledger to different employees.

This way, it lightens the workload of each individual.

For example, a business can assign the duties of maintaining the accounts receivable ledger to one employee, and the maintaining of the accounts payable ledger to another.

You can even assign the maintaining of the accounts receivable ledger to multiple people if there are too many customer accounts.

By being able to divide the workload, it makes it lighter for each person assigned to maintain the books.

It can also lead to fewer errors because the assigned person only has to worry about a certain type of account instead of all the business’s accounts.

Fewer instances of errors and fraud

With the help of subsidiary ledgers, it’s possible to simplify the general ledger.

With the use of control accounts, eliminating instances of errors and fraud is much more attainable.

And since similar accounts and their related transactions are grouped together, it’s easier to detect and identify errors in individual accounts (if there are any).

Limitations of Subsidiary Ledgers

There’s no doubt that subsidiary ledgers are useful for accounting for your business.

However, there’s a reason why it isn’t always recommended that a business prepares and maintains one.

For one, as already repeatedly mentioned, maintaining a subsidiary ledger entails additional costs.

You’ll have to assign at least one employee to take care of the subsidiary ledgers.

If there are multiple subsidiary ledgers, you might have to employ additional people to maintain each of them.

And the salaries/wages of these additional employees can add up quickly.

Another thing to note is that subsidiary ledgers are not journals.

As such, it’s possible that transactions recorded in one are not in chronological order.

This just goes to show that subsidiary ledgers are not the “end all be all”.

They are much better used in conjunction with other accounting records such as the general journal, general ledger, and special journals.

The accuracy and effectiveness of subsidiary ledgers heavily rely on the business’s accounting system and the person/s that maintain them.

That means that the person/s in charge of maintaining the subsidiary ledgers should be well-versed in accounting.

Otherwise, there is a huge risk of having inaccurate subsidiary ledgers.

If subsidiary ledgers are inaccurate, then the general ledger might be inaccurate too which will ultimately affect the accuracy of financial statements.

Things to know when maintaining Subsidiary Ledgers

So you’ve decided to maintain subsidiary ledgers for certain accounts.

Good for you!

But before all that, there are some things you need to keep in mind when it comes to these useful accounting records.

With proper understanding, you’ll be able to interpret your business’s financial health more clearly.

The following are practices that will keep your books, including subsidiary ledgers, balanced and easy to understand:

Ensure that the subsidiary ledgers are balanced each month

A subsidiary ledger won’t always balance itself.

As such, you must always remember to ensure that your subsidiary ledgers are balanced.

In addition, do it monthly. Doing so will ensure that your accounting records are current and accurate.

Not only that, it makes it easier to backtrack if there are any discrepancies as opposed to doing so only every quarter or year.

For example, the accounts receivable ledger balance should be the same as the balance of the accounts receivable control account in the general ledger.

If they are not equal, then either (or maybe even both) are inaccurate.

It could be just a simple error such as a missing debit/credit entry, or a case of entering $5,000 instead of $500.

Either way, it’s much easier to track these mistakes the fewer transactions you have to check.

It goes without saying that a quarter will typically have more transactions than a month.

After reconciling with the general ledger, make sure to complete your closing entries

Always complete your closing entries after reconciling your ledgers.

Not completing your closing entries can inflate the figures on your financial statements.

And while having high figures in your financial statements can make them more attractive at first glance, the tax implications that come with such are not worth it.

For example, if the net income reported in the income statement is higher than what it actually is, then you’ll be paying more income taxes than you’re supposed to.

When it comes to accounting, accuracy is key.

That also means that you’re financial reports, including subsidiary ledgers, should be reporting honest figures.

Only allow authorized personnel to have access to your business’s subsidiary ledgers

Okay, let’s be real here.

It’s okay, even sometimes necessary, to restrict access to your business’s subsidiary ledgers.

Only allow certain personnel to access and edit them.

For example, you only allow access to the accounts payable bookkeeper and the credit department when it comes to the accounts payable ledger.

Or that only bookkeepers are allowed to view and edit, while the other authorized persons are only allowed to view the ledgers.

The vice-president of finance or the chief finance office (CFO), as well as the accountants, should always have access to such books.

This is because they are the ones responsible for providing financial information to external parties (e.g. auditors, creditors, potential investors) as well as internal parties (board of directors, shareholders).

Assign subsidiary ledgers to employees who are well versed in accounting

A subsidiary ledger’s effectiveness will depend on the person that handles it.

That’s why it’s important to assign subsidiary ledger to persons that are well versed in accounting. In the first place, accounting is very technical so it’s not like anyone can do it.

Imagine having someone with zero accounting knowledge handle your financial records. It does not paint a very good picture huh?

To ensure the accuracy of your subsidiary ledgers, the person/s handling them should know what they’re doing.

They don’t have to be CPAs.

Just having minimal accounting knowledge should be enough.

Don’t assign them to persons who don’t have even the tiniest bit of accounting knowledge.