Credit purchases are tracked on subsidiary ledgers to forecast financial situations for a company. Credit sales can also represent assets a company possesses on its account receivable. Subsidiary Ledgers are not overly complicated, but you do need to create and maintain them in a certain appropriate fashion. The accounts in the this ledger are predominantly customer accounts with some exceptions. Focusing on the customer accounts, this makes sense for a subsidiary ledger chart because a general ledger would become increasingly dense if every customer and individual account was included in the general ledger. At the same time, the financial statements would become increasingly dense as a consequence.

What Is The Purpose Of Subsidiary Ledgers?

Subsidiary ledgers can also be used in a job order costing system which can help increase profits by tracking detailed information in several accounts. A subsidiary ledger is a group of similar accounts whose combined balances equal the balance in a specific general ledger account. The general ledger account that summarizes a subsidiary ledger’s account balances is called a control account or master account. For example, an accounts receivable subsidiary ledger (customers’ subsidiary ledger) includes a separate account for each customer who makes credit purchases. The combined balance of every account in this subsidiary ledger equals the balance of accounts receivable in the general ledger.

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The use of accounting software can simplify the process of maintaining multiple subledger accounts, eliminating the need to record multiple transactions manually. It can also reduce the amount of time you need to spend on researching and reconciling out-of-balance accounts. If your business is very small, and you only have one or two vendors or customers, you can easily track your balances in your general ledger. But once vendor or customer activity increases, you’ll need a way to track the individual transactions that make up the balance of those general ledger accounts.

This information can be gleaned from the accounts receivable subsidiary ledger. The ledger will show, for example, that Customer A owes $15,000, Customer B owes $25,000, Customer C owes $5,000, and so on. The accounts receivable subsidiary ledger shows all the sales made on credit by a business. It provides details on these sales by showing invoice dates and numbers, credit memorandums, payments made against the credit sales, discounts, and returns and allowances. The sum of all invoices in the accounts receivable subsidiary ledger should equal that of the accounts receivables on the general ledger, also known as the control account.

The general ledger is part of your chart of accounts

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. It provides the user with the ability to continuously update the balance after posting each transaction. Management needs to know the total it owes its various vendors, how much it owes its individual vendors, and What Is The Purpose Of Subsidiary Ledgers? when each payment is due. We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.