General and Subsidiary Ledgers

Accounting cycle revolves around identifying transactions, making relevant journal entries, posting those journal entries to ledgers and preparing trial balances and financial statements from those ledgers. Accounting ledgers are critical component of an accounting information system because they classify the effect of different journal entries such that we get a broad overview of the overall assets, liabilities, shareholders’ equity, revenues and expenses.

There are two types of accounting ledgers: general ledger and subsidiary ledgers.

General ledger

A general ledger is the set of all accounts where journal entries are posted. It is the main database of accounting transactions and provides input for preparation of a trial balance and eventually a complete set of financial statements.

While the general journal records debit and credit effects of accounting transactions, the general ledger presents the cumulative view of those journal entries on the balance in each account.

Subsidiary ledger

Since general ledger hold all the historical journal entries, some key general ledger accounts become so complex that a separate ledger is needed to keep track of its transactions. For example, a company’s general ledger might include only one accounts receivable account yet the company may have thousands of customers. In such a situation, it is necessary to create a subsidiary ledger to hold each customer account and include the grand total of that ledger in the general ledger.

Examples

On 24 September 2014, XYZ, Inc. made cash sales worth $20,000 and credit sales of $5,000 to Mr A, $10,000 to Mr B and $15,000 to Mr C. By 30 September 2014, Mr A paid his complete balance while Mr B paid $6,000. Mr C defaulted on his payments.

Following are opening balances of relevant accounts:

General ledger accounts
Cash$12,000
Accounts receivable$24,000
Subsidiary ledger accounts
Mr A$0
Mr B$1,000
Mr C$0

XYZ, Inc. will make the following journal entry on 24 September 2014:

Cash$20,000
Accounts receivable (5k + 10k + 15k)$30,000
Sales$50,000

General Ledger Example

The journal entries are posted to general ledger accounts as follows:

At the end of the month, when cash is received and Mr. C defaults, following journal entries are posted to general ledger accounts:

Subsidiary Ledger Example

Accounts receivable account included in the general ledger above is a control account, i.e. a summary account that summaries accounts receivable subsidiary ledger. A subsidiary ledger is needed for accounts receivable control account because there are potentially thousands of accounts receivable transactions in a period and the subsidiary ledger makes it easier to keep track of those transactions.

Below is an except from accounts receivable subsidiary ledger showing entries made on 24 September 2014:

At the end of the month when payment is received and Mr. C defaults, following entries are made in the subsidiary ledger:

Accounts payable subsidiary ledger and fixed assets subsidiary ledger are other commonly used subsidiary ledgers.

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork