5 Reasons Subsidiary Ledgers are Used in Accounting

When getting started with subsidiary ledgers, it is important to understand why they are used in accounting. First of all, there is no point in spending time working on something that is not yet understood.

In the past, most accounting systems have only general ledgers, which are the controlling accounts for constructing financial statements. It was an era in which financial transactions are recorded in physical cash books, journal books, and others. At present, many applications can automatically create subsidiary ledgers for tracking. It enables recording transactions that give more detail for an account in a general ledger. In the future, it is believed that subsidiary ledgers will still exist for the same purposes right now. Sub-ledgers would usually be created for cash in bank accounts and other GLs.

It is discussed in this post the rationality behind the usage of subsidiary ledgers in accounting. For instance, the reasons below are ordered based on the most important to the least important. It is usually believed that business owners want to know more about their customers and creditors, hence; they are listed first. However, people may believe that one reason is more important than the other, so there is no particular order in this post.

The reasons are listed below:

For tracking debtors and creditors

Subsidiary ledgers are used for tracking debtors and creditors. For example, it is like a bank where every client has an account number, and the bank maintains subsidiary ledgers to track each client’s transactions. Each client can request a bank statement for viewing all money transactions within a period. Furthermore, all transactions with debtors and creditors are recorded in a corresponding subsidiary ledger(s) for future reference. This allows for easy monitoring of payment patterns and helps identify clients who have an excellent track record of paying their dues. Moreover, it is easy to get customers’ data whenever needed when using SLs in accounting. Data retrieval should be speedy for business transactions.

For monitoring bank accounts

A company may have few bank accounts that are required to run its operation effectively. For instance, expenses for money transfers are reduced by adding a bank account. Money transfers from one bank to another can be costly due to bank charges. Moreover, check clearing is faster, which can improve liquidity. Check collections from customers are credited immediately to a company’s account because the bank is the same as a check drawer. In addition, transactions with clients are more efficient and effective. Clients can pay easily online given that the banks are the same.

The reasons above require accounting to use subsidiary ledgers for monitoring bank accounts. For example, Bank A should have separate records from bank B. Mixing financial transactions on both banks is a recipe for disaster. Indeed, almost all businesses do not keep one bank account only. It is inefficient and costly. Surely, each bank is tracked in an SL because a CEO will not approve a check issuance, for example, without knowing the latest bank balance. It is grounds that the processing of checks involves accounting as well.

For tracking inventories

Inventories are also tracked with subsidiary ledgers, no matter what costing method is used. For example, an item is assigned an account number for control. Accounting software, as an illustration, usually allows users to create subsidiary ledgers for an inventory item. Moreover, with the FIFO method, the cost of goods sold is calculated from the previous cost up to the present. The calculation also requires recording the purchase costs of an inventory item through an SL. Furthermore, quantities of inventory items are also recorded and managed together with the said SL. Quantities of purchase are required to compute unit costs of goods sold.

For storing backup data

Subsidiary ledgers are usually printed every quarter for backup purposes. Indeed, most organizations do it in case database backups fail. It is a security procedure that is often recommended in accounting. Also, government agencies are required to submit subsidiary ledger balances to an auditor for review and backup purposes. The frequency would normally be quarterly. Moreover, storing data would enable fast retrieval of information in unforeseen events. Some events can be data corruption due to power outages and unavoidable software viruses.

For review and easy access to data

Subsidiary ledgers enable users to review, correct and access data faster and for business improvements. For instance, an auditor can request accounts receivable subsidiary ledgers and randomly select accounts for auditing. It enables an auditor to provide a reliable opinion on the financial statement and give recommendations to a company. Indeed, an accountant can likewise generate SLs to review whether there are errors in accounting. SLs can show negative balances when there are errors in recording in the books of accounts. Notably, management can also use a subsidiary ledger to identify non-paying customers for policy making. A policy can prohibit additional sales credit when the previous receivables are still outstanding.