Subsidiary Ledger Definition

A 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

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The three common types/components are enlisted below-

  • Accounts Payable Subsidiary Ledger – This type of ledger records all the transaction data concerning an organization’s suppliers, vendors, and creditors. It tracks every expense an organization owes to its creditors, vendors, and suppliers.Accounts Receivable Subsidiary Ledger – 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 to record every transaction data concerning individual customers and buyers. This type of ledger reflects every transaction and amount received from each buyer to whosoever the company sells its goods and services on credit.Fixed Asset Subsidiary Ledger – Fixed assetFixed AssetFixed 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 ledger is used to record every 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 an 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 M Williams and T George payments on December 10 and December 18 for $ 225,000 and $ 353,000, respectively. Accordingly, prepare the Accounts Receivable Subsidiary Ledger for ABC Ltd for the year ended on December 31, 2019.

Solution

Below is the Accounts Receivable Subsidiary Ledger for ABC Ltd for the year ended on December 31, 2019 –

Advantages

The different advantages related to the Subsidiary Ledger are as follows:

  • Elimination of Frauds and Errors – It uses only a control accountControl AccountA control account is a general ledger account created for the purpose of recording the bulk transaction with the same nature and then summarizing the balance. This is transferred from the subsidiary account or the main account and needs to be shown in the financials.read more, 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 ledger is entrusted only to one person. 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.

Disadvantages

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 many 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 getting wrongly recorded, ultimately impacting the overall accounting process.

Limitations

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 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, discounts, etc. to provide support to the general ledgerGeneral LedgerA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations.
  • read more. In this regard, it can be said that there is a vast difference between a general ledger and a subsidiary ledger.There can be just ledger accounts in a general ledger, while in a subsidiary ledger, there can be multiple ledger accounts.The general ledger contains minimal data, while the subsidiary ledger contains extensive data.It is just a part of the general ledger while the latter controls the former.

Conclusion

It is a set of individual accounts and is a part of a general accountA General AccountGeneral Account is a deposit account where an insurance company puts all its premiums collected from the policies it underwrites. This is used to fund the company’s operating expenses and the payment of several insurance claims & benefits. read more. 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 with the proper knowledge of the 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 the following articles –

  • Wholly Owned SubsidiaryGeneral Journal vs General LedgerAccounts Payable LedgerSales Ledger