Subledger

What is Subledger in Accounting?

Subledger is a subset of various general ledgers used for accounting and may contain all accounts receivable, accounts payable, prepaid expenses, or fixed assets related to financial transactions. In a big organization, it is very difficult to maintain all transactions in the common ledger; therefore, subledger is the best possible option to record entire transactions.

Subledger

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List of 7 Types of Subledger in Accounting

Below are the types of subledger in accounting:

Types of Subledger in Accounting

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  1. Account Receivable Ledger – It records all the credit sales transactions and payments received from a customer against credit sales.
  2. Accounts Payable Ledger Accounts Payable LedgerThe Accounts Payable Ledger, also known as the creditor's ledger, is a subsidiary ledger that lists the details of the company's different suppliers or vendors, as well as their account balances, highlighting the outstanding amount payable by the company.read more It records all the credit purchases and payments to creditors.
  3. Fixed Assets Ledger – It records all transaction data for individual fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more like land, building, furniture & fixtures, or any other fixed assets and depreciation charged on fixed assets.
  4. Inventory Ledger – Inventory ledger may contain transactions about the receipt of raw material, stock movement, conversion into finished stock, scrap, or complete inventory.
  5. Purchase Ledger Purchase ledgerPurchase LedgerPurchase ledger is the ledger in which all the accounting transactions related to the purchase of goods or services are recorded. The purchase ledger reflect the balances of purchase creditors and suppliers including amount due to them.read more records all types of purchases, whether it has been paid or to be paid.
  6. Sales Ledger – Sales ledgerSales LedgerA sales ledger is a ledger entry that records any sale in the book of records, even if the payment is received or not yet received. It records the sales and the cash when received and the amount owed to the business.read more records all types of sales, whether cash sales or credit salesCredit SalesCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more.
  7. Cash Ledger – In this ledger company has to record all types of cash transactions, whether it is cash sales, cash purchase, or expenses paid in cash.

Examples of Subledger

Below are examples of Subledger in accounting.

Examples of Subledger

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#1 – Trade Receivable Ledger

Below is the trade receivableTrade ReceivableTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet.read more ledger of Apple Inc., where the company has an opening balance of $10,000.

The company sold goods of $10,000 on June 15, 2019 and of $5,000 on October 22, 2018, and received $7,000 from its debtors on January 15, 2018.

One of its customer returned material of $1,000 on 20th June ’19 and one of its customer failed to make a payment due to which company had to write offWrite OffWrite off is the reduction in the value of the assets that were present in the books of accounts of the company on a particular period of time and are recorded as the accounting expense against the payment not received or the losses on the assets.read more $500.

After recording all these transactions, the company has a closing balance of $12,000 as of December 31, 2018, which they will receive from its debtorsDebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. read more in the coming year.

Sub-Ledger Example 1

#2 – Sales Ledger

Below is the sales ledger of Apple Inc for the year 2018. In the ledger, the company records its cash sales and credit sales. For example, on January 10, 2018 company has made cash sales of $5,000, and credit sales of $10,000 on June 15, 2018. One of its customers (John) has returned goods of $1,000 to Apple inc on June 20, 2018, and Apple Inc has given cash discountCash DiscountCash discounts are direct incentives and discounts provided by any company to their customers in exchange for paying their bills on time or before the due date. This is a common practice, and the discount may differ from one company to the next depending on the terms and conditions.read more of $2,000 to its customer. After recording all these accounting transactions, the company has net salesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company's gross sales.read more of $12,000, which it has transferred into profit & loss a/c.

Sub-Ledger Example 2

#3 – Fixed Assets Ledger

Below is the fixed assets ledger of Apple Inc. for the year 2018. The company purchased land and machinery for $20,000 and $10,000, respectively, on January 1, 2017. Since machinery has a useful life of 10 years, the company has charged a depreciation of $1,000 for 2017. Therefore, after recording all the transactions, the company has a closing balance of fixed assets of $29,000, which the company will show in the balance sheet under fixed assets. Similarly, Apple Inc. has also charged depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more of $1,000 for the next year, i.e., 2018. Therefore, the closing balance of fixed assets will be $28,000 at the end of 2018.

Sub-Ledger Example 3

Advantages of Subledger:

  1. Due to various ledgers maintained for different transactions, subledger provides up-to-date information on specific accounts.
  2. It shows the company’s level of control regarding financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more.
  3. It helps to find any error or a wrong entry done in the system because of the maintained multiple ledgers.
  4. It provides limited access to company employees and restricts information sharing. For examples, an accounts receivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more manager has access to the only receivable ledger, and not any other ledger.
  5. This accounting systemAccounting SystemAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the firm.read more divides work and responsibility between employees. For example, one employee can post an entry in accounts receivable while others can post in accounts payable.

Disadvantages of Subledger

Below are the disadvantages of subledger:

  1. A subledger accounting system is not suitable for medium and small enterprises; it is suitable only for large business organizations with many transactions.
  2. This accounting system is costly because it requires specific software for maintaining many subledgers and requires a large workforce to record transactions.
  3. This accounting system is complex because of multiple ledgers and the large workforce.
  4. Lack of coordination between employees of the company is another disadvantage..
  5. Sometimes, it fails to provide complete information in one place because transactions are maintained in different ledgers.
  6. It requires knowledge and a skilled workforce because one incorrect transaction may also create problems in another ledger.

Conclusion

Subledger is a subdivision of a general ledger where the company can record its transactions in different – different subledger on the basis of their nature of transactions. It is very useful for a big organization where no. of transactions are very high because it provides control to the management and provides specific and real-time information, but at the same time it is very expensive because of its structure and manpower requirement due to this it is not feasible for small and medium organizations.

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