Sub ledger

Sub Ledger, called as a subsidiary ledger or a journal as well, is a book or database that helps to keep specific transactions segregated on separate accounts. One sub ledger may have a large number of individual accounts and all activities posted in sub ledger can relate to different area (e.g. sales, purchases, cash disbursements). The balance of sub ledger is usually reflected in the general ledger as summary-level entry. The sub ledgers are applied predominantly in large companies due to their nature and high volume of transactions(Bragg S.M. 2011, p. 29-30).

Common sub ledgers

The balance of below sub ledgers are called in general ledger accordingly. Listed sub ledgers are three of the most common examples, however it is possible to create a subsidiary ledger for almost all account in the general ledger, e.g. work in progress(Warren C., Reeve J., Ducha J. (2008), p. 218):

• Accounts receivable (or customer ledger) - sales invoices and receipts that reflect all funds received from clients
• Accounts payable (or creditor ledger) - list of transactions related to amount owned to a particular vendors that helps to manage invoices and payments
• Inventory ledger - financial records associated with individual items on stock that provide the information about quantity, movements, prices and costs
• Fixed assets ledger (or equipment ledger) - list of transactions related to each assets separately that support managing purchases, sales and allocation of items
• Projects subsidiary ledger - financial activities associated with a specific project that helps to monitor capital expenditure, labor and overhead costs and compare them easily with budgets
• Cash management ledger - cash receipts and payments that enable to reconcile the sub ledger balance with bank statements, including fund transfers between bank accounts.
• Payroll subsidiary ledger - financial records of costs related to employees for providing their services in specific period of time, e.g. salaries, wages, bonuses. Maintaining separate payroll ledger helps to keep detailed information about earnings, contribution or deduction.

Sub ledger posting procedure

Posting on sub ledger is an easy way to manage all information and have full visibility of transactions. Despite of the fact that booking on sub ledger has similar procedure to general ledger (from accounting perspective), it requires some additional activities to ensure the correctness of data(Needles B.E, Powers M., Crosson S.V. (2010), p. 305):

• Entering each transaction with required information (e.g. date, customer name, invoice number) on sub ledger account
• At the end of month posting the balance of sub ledger to general ledger
• Verifying the accuracy of the posting by comparing controlling account in general ledger with sub ledger balance.

Advantages of sub ledgers

In literature there are four advantages of subsidiary ledger mentioned(Weygandt J.J., Kieso D.E., DeFranco A.L, Kimmel P.D. (2004), p. 178):

• Providing up-to-date information related to specific customer or vendor due to showing transactions in a separate accounts
• Avoiding of excessive data in general ledger thanks keeping vast number of information in sub ledger account
• Helping to catch the errors due to better visibility of transactions and using control accounts.
• Facilitating the division of labor and defining responsibilities to employees
• Moving transactions easily due to low sizes of ledgers.

Examples of Sub ledger

• Accounts Payable Sub Ledger: This is a sub ledger that records all payments made to suppliers and vendors. It contains individual accounts for each vendor and records the details of all invoices, payments and credits.
• Accounts Receivable Sub Ledger: This sub ledger records all money owed to the company by its customers and clients. It contains individual accounts for each customer and records the details of all invoices, payments and credits.
• Inventory Sub Ledger: This sub ledger contains all the details of the items and materials that are held in the company’s inventory. It records details such as the type and quantity of items held in the inventory, as well as the cost and sale price of each item.
• Fixed Assets Sub Ledger: This sub ledger contains the details of all the company’s fixed assets, such as machinery, vehicles and property. It records the details of the purchase price and depreciation of each fixed asset, as well as any repairs or maintenance carried out.

Limitations of Sub ledger

Sub Ledgers have a few limitations which must be taken into consideration:

• They are more difficult to set up and maintain than general ledgers, as they require specific accounts to be established and monitored.
• The data within the sub ledger may not always be reflected in the general ledger, as the data may be too detailed for the general ledger to accurately show.
• The data in the sub ledger may be more inaccurate than the general ledger, as it is more difficult to check the accuracy of the data and verify that it is up to date.
• Sub ledgers cannot be used to monitor the entire company's financial activity, as they are limited to the specific accounts they are associated with.
• Sub ledgers may be labor-intensive to maintain, as they require more manual effort to input, update and reconcile data.

Other approaches related to Sub ledger

• The sub ledger is also used in conjunction with other approaches to accounting, such as double entry bookkeeping and accrual accounting.
• Double entry bookkeeping is a system of accounting where every transaction has two entries, a debit and a credit, in order to record a transaction. This system is used to ensure that all transactions are recorded accurately.
• Accrual accounting is a system of accounting which records transactions as they occur, rather than when the money is received or paid. This system is used to ensure that all transactions are recorded accurately and that the financial statements accurately reflect the economic activity of the business.
• In addition, the sub ledger may be used to track specific items that are purchased or sold, such as inventory or fixed assets. This allows the company to properly track the cost of goods sold and the depreciation of fixed assets.

In summary, the sub ledger is a book or database that helps to keep specific transactions segregated on separate accounts and is used in conjunction with other approaches to accounting, such as double entry bookkeeping and accrual accounting. It can also be used to track specific items that are purchased or sold, such as inventory or fixed assets, in order to properly track the cost of goods sold and the depreciation of fixed assets.

Sub ledger — recommended articles

Purchases ledger — Control account — Nominal account — Purchases journal — Subsidiary ledger — Book of original entry — Nominal ledger — Books of original entry — Open item

References

• Bragg S.M. (2011), Bookkeeping Essentials: How to Succeed as a Bookkeeper, John Wiley & Sons, USA,
• Needles B.E, Powers M., Crosson S.V. (2010), Principles of Accounting, Cengage Learning, USA
• Warren C., Reeve J., Ducha J. (2008), Financial & Managerial Accounting, Cengage Learning, USA
• Weygandt J.J., Kieso D.E., DeFranco A.L, Kimmel P.D. (2004),Hospitality Financial Accounting, John Wiley & Sons, New Jersey,

Author: Łukasz Buczak