Subsidiary Ledger Definition
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.
Types of Subsidiary Ledger Account
The three common types/components are enlisted below-
- Accounts Payable Subsidiary Ledger – This type of ledger records all the transaction data concerning individual suppliers, vendors, and creditors of an organization. It tracks every expense an organization owes to its creditors, vendors, and suppliers.
- Accounts Receivable Subsidiary Ledger – Accounts receivable ledger is used by organizations to record every transaction data concerning individual customers and buyers. This type of ledger reflects every transaction and amount that is 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 single 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.
Example of Subsidiary Ledger Account
ABC ltd sells tires and prepares 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 payments from M Williams and T George on December 10 and December 18 for $ 225,000 and $ 353,000, respectively. Prepare the Accounts Receivable Subsidiary Ledger for ABC Ltd for the year ended on December 31, 2019.
Below is Accounts Receivable Subsidiary Ledger for ABC Ltd for the year ended on December 31, 2019 –
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 single ledger is entrusted upon one person only. 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.
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 a large number of 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 to get wrongly recorded, which might ultimately impact the overall accounting process.
Subsidiary Ledgers are purposeful, but the limitations of the same cannot be ignored. Following are the few limitations –
- It may contain undetected errors.
- Subsidiary ledgers do not assure the accuracy of ledger accounts. The items may be posted to irrelevant accounts, which may add to errors in the individual ledgers and ultimately impact the overall accuracy of the subsidiary ledger.
General Ledger vs. Subsidiary Ledger
- 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.
- In a general ledger, there can be just ledger accounts, while in a subsidiary ledger, there can be multiple ledger accounts.
- The general ledger contains minimal data, while subsidiary ledger contains extensive data.
- It is just a part of the general ledger while the latter controls the former.
It is a set of individual accounts and is a part of a general account. It can be used by large scale businesses or entities where the volume of data is enormous. Small or medium-scale businesses or entities that have a small number of 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 that has the proper knowledge in accounting framework so that the organization can make the best use of the same.
This article has been a guide to Subsidiary Ledger and its definition. Here we discuss types and examples of subsidiary ledger accounts along with advantages, disadvantages, and limitations. You can learn more about accounting from following articles –