While the general ledger may be enough for day-to-day financial maintenance, detailed subledgers are crucial components of accurate accounting, especially for businesses with a large sales volume. Subledgers help to segment data and transactions into manageable categories, which can be individually analyzed. Below, we’ll delve further into how subledgers work.
Definition and Examples of Subledgers
A subledger contains details of transactions within different categories on a business’s chart of accounts. Those detailed transactions determine a subsidiary ledger total, which then is relayed to the general ledger to provide a larger financial snapshot of a business.
Alternate name: subsidiary ledger
The different types of accounts and necessary subledgers are determined by the business and product. For example, many types of businesses have accounts receivable (AR) and/or accounts payable (AP) on their chart of accounts. Both require subledgers to record the details of customer transactions in order to track money flowing in and out of the business on credit.
How Subledgers Work
Although a business may look to a general ledger for a basic financial overview, the details in the subsidiary ledgers are important when it comes to analyzing all the transactions in a particular category. By segmenting different types of transactions, accountants, analysts, and auditors can see a more granular picture of specific business areas. Only those categories with multiple transactions require a separate ledger to record the details. When it comes to accounts receivable, for instance, it’s important for each transaction to be recorded to track the money owed from services rendered or products sold on credit. The subledger should include:
The date of the transactionThe price of the services rendered or products soldThe balance owed in case partial payment has been collectedThe name of the customerThe payment terms, which are usually 30, 60, or 90 daysAny notes that pertain to the transaction
This information should be recorded for every transaction. At the end of the accounting period, the subtotal for the accounts-receivable subledger is updated in the general ledger, so that there is an accurate snapshot of the amount of cash owed to the business. This process allows the general ledger to stay streamlined without too many clunky details, but those details recorded still are parts of the business’s accounting history. As a business grows, there are often individuals or entire departments dedicated to the oversight, maintenance, and analysis of subledgers like accounts receivable. Important subledgers can often become their own ecosystem, forming an important foundation to a business’s general ledger as well as larger financial reports.
Types of Subledgers
Private companies can choose how to structure their chart of accounts and subsequently decide which subledgers are important to include. For example, a restaurant will have very different accounting needs from those of a real estate developer. Common types of subledgers include:
Accounts payable: This subledger details what the business owes to suppliers, vendors, or contractors, as well as the amount owed, the terms of payment, and the date due. Accounts receivable: This subledger details the transactions between the business and its customers in order to track how much the former is owed. In larger companies, there may be a department dedicated to maintaining this subledger and collecting the money on time. Fixed assets: The fixed assets owned by a business can be far more complicated than a simple receipt of purchase. This important subledger details things such as depreciation, accumulated depreciation, useful life, historical cost, unrealized and realized loss or gain, and all other information related to the tangible, long-term assets held by a business. Inventory: An inventory subsidiary account details all information about inventory owned by a business, including raw materials, preferred vendors, conversion to finished stock, stock movement and location, customer holds, and damage reports. Payroll: This subledger categorizes all information and transactions related to paying employees, including salaries, tips, payroll taxes, and benefits. Research & development (R&D): R&D is an important subledger for businesses of any size. Even the smallest companies may need to record multiple transactions related to product research, business development, or investor courting.
