A company needs to review its general ledger regularly to keep track of all the accounts that they currently handle. This is one of the most important practices that one needs to follow when handling a general ledger account. Subledger, which is also known as a subsidiary ledger, is a detailed report of accounts that consists of transaction information.
A general ledger is your master chart of accounts that shows a list of transactions, you cannot run a business without it. General ledgers use T accounts to show debits and credits to each account that makes up the ledger. If a transaction has been refunded or voided, it is not removed from the ledger but has a reversal entry made. Financial statements are commonplace for any business that does in-house bookkeeping. We rely on the trial balance to show us the perfect match for any given accounting cycle.
- Each can provide crucial details on different aspects within those areas.
- The General Ledger generates financial reports that provide insights into the overall financial health and performance of the company.
- A general ledger is the main accounting record of a company that shows all financial transactions.
The importance of subledgers and general ledgers in accounting
Serves as the initial posting point focused on individual transactions related to specific account categories. Ledgers are used to record financial information and transactions as per the accounting principle. The principal set of accounts is managed by the general ledger, whereas, a subledger is the subset of a general ledger.
Because general ledger accounts only provide an ending balance for each particular account, a subsidiary ledger is used to provide the details that result in that general ledger balance. Only high-activity accounts in your general ledger will use a subledger. For those that decide to use sub-ledger accounts to improve their understanding of their financial health, there are some things you need to remember to do. By implementing these to your accounting process, you will keep your books balanced and easy to understand.
The sales of inventory then affect Accounts Receivable which will also affect Income. There is a separate account for discounts to account for loss of income. Subledgers, especially, are vital for growing companies, which benefit from the organizational power they offer. A sub-ledger does not provide information to go into the accounting system. Essentially, the sub-ledger only improves the quality of the information provided in the latter. These are two very different accounting regards in the purpose they serve.
Consider shifting to an automated accounting system
At Tratta, we offer a consumer self-service platform that can simplify your accounts receivable process and improve cash flow. Overall, the general ledger is an accounting record to summarize and categorize financial transactions. The subsidiary ledger comes first since the balances of a general ledger are posted after entries are made in the subledger accounts. Bookkeeping is an important part of the accounting process since it records every transaction and reports all activities that impact a business’s financial performance.
One of the key attributes of a Subledger is its ability to maintain transaction-level details. A general ledger has a few accounts in the following categories; assets, liabilities, income, expenses, and equity. They also have a few sub-accounts, such as accounts payable and accounts receivable.
Once a business grows to the point where they have multiple accounts within each of their main five accounts, subledger accounting will become a necessity to keep things running smoothly. The bank accounts subledger records the cash that is available in the company’s bank accounts and short-term investments. The total of all the accounts in this subledger will indicate the amount of cash-on-hand the company has at a given moment. Not every business elects to use the same number or types of subledgers. How each company sets up their bookkeeping will depend on the business’ needs.
Best Practices For Subledger Accounts
If you’re still using a manual accounting system, there are some things you’ll need to pay close attention to when using a subledger. Though designed to function together, there are quite a few differences between a gross income vs net income general ledger and a subledger. Furthermore, if your income is overstated, you could get a loan or investor and then be in hot water when it is learned to be untrue.
In other words, the general ledger can function just fine without subledgers, but a subledger requires a general ledger to function properly. No one wants to read pages and pages of transactions, so sub-ledgers save the day. Furthermore, you can delegate the accounting processes between more than one employee. The general ledger shows summaries can you claim your dog on your taxes of your double-entry accounting at any given point in time. A sub-ledger records the detailed information of the summaries of the general ledger. You have probably looked at your general ledger a million times without thinking much about it.
Accountants spend less time on data entry and more on valuable tasks like strategic planning and advising. In the world of accounting, keeping track of finances is like piecing together a complex puzzle. Each transaction is a piece that must fit perfectly into place to reveal the complete financial picture of a business. Some auditors, such as worker’s compensation, only look at specific accounts which will save you time on preparing paperwork. Investors and banks want to know that you have a viable business before providing you with capital. Company cars and telephone equipment, anything you can imagine needing will have its own subsidiary account.
Reduction in the number of general ledger accounts
It’s common for business owners and accountants alike to scratch their heads over the difference between a subledger and a general ledger—two critical components in any accounting system. Using automation ensures that every transaction is accounted for as soon as you pay something or receive payment. Your bookkeeper will get notifications if something is off balance and you can generate your reports easily. If there is a problem, it won’t take as long to figure out the issue and solve it. Another key factor in using subsidiary accounts is that it doesn’t bog the general ledger down. If you didn’t have such accounts a Trial Balance could become overwhelming with so many accounts being listed.
Here are some common types of subsidiary ledgers that businesses may decide to create. As stated above, companies post the total of each book in it after regular intervals. At each year-end, companies close every account within the general ledger. The general ledger records every financial transaction under a separate account. Essentially, it summarizes and categorizes each transaction into a different account. As stated above, this account can be debit or credit based on that account.
Bank accounts
More often than not, that account is the cash you have available in your bank accounts and short-term investments (something you can convert into cash within 90 days). A sub-ledger account will show each bank account and the transactions within it to show why the amount is $180,000. There are several differences between general ledgers and subledgers, mostly revolving around the fact that a subledger is a subsidiary data source to the general ledger. Each subsidiary ledger exists only as a support to the general ledger.