Today, you’ll learn how to administer subsidiary ledgers.
Most new bookkeepers and accountants usually do not know how to manage subsidiary ledgers. Indeed, they, though graduates in accounting, are making the same mistakes by duplicating a sub-ledger. It is common because of failing to check whether an SL already exists. Furthermore, at colleges, there are usually no real-world examples that are taught to students. Most graduates know it and intelligent ones usually go to accounting and auditing firms for deep immersion. Moreover, new accounting graduates may have had no experience at all before working in an organization. This is true among lucky people who get a job after college.
Subsidiary ledgers, useful tools in accounting and bookkeeping, are usually not used to their full potential. For instance, some accounting persons do not use the SLs for preparing Aging schedules. Relying on paid software could result in a loss of data which will be discussed further below. Also, inventories are not tracked with multiple ledgers. Tracking each item in an Inventory Account is usually required to correctly calculate the accurate costs. In addition, histories of financial transactions are not monitored using SLs. Accounting for cash transactions, with multiple cash in the treasury and bank accounts, is required to safeguard the assets of an organization.
Ensure that there is only one subsidiary ledger for an account
Subsidiary ledgers are managed by ensuring that their creation is limited to one SL per account name. For instance, a debtor or creditor has only one ledger. It is important to have some controls, for example, every person’s name starts with a family name to avoid multiple additions to the same name. There are exceptions, for example, a person can have several bank accounts, so each bank account should have a different account number. Hence, confusion can be avoided when a transaction is recorded in the books of accounts.
An accountant can assign one subordinate for controlling additional subsidiary ledgers in a general ledger account. Indeed, when there is more than one, mistakes can occur. It is usually common that the same account name exists in multiple sub-ledgers and bookkeepers are confused about which ones to use when recording financial transactions. Furthermore, a sole in charge could create a master list to limit the creation SLs that are already existing. A master list can provide extra control to avoid duplicating an SL. However, if there are too many to handle, having more than one person is necessary, but separate their responsibilities by General Ledger Accounts.
Employ subsidiary ledgers for receivables and payables
Subsidiary ledgers are usually required for receivables and payables, especially for big companies. For example, a debtor or a creditor has its own account in a general ledger. This is needed so that all transactions and histories with a person or an organization are stored in one sub-ledger. Indeed, when there are large transactions, tracking the dealings of clients and business partners can be tedious. An inquiry from a customer, for example, can be easily generated when sub-ledgers are available. On the contrary, small entities can also use subsidiary ledgers for faster generating of financial reports. It is better to manage subsidiary ledgers while a company is still growing rather than waiting after becoming larger.
Use it for simplifying the preparation of Aging Schedules
Aging schedules are regularly prepared for supporting an amount in a balance sheet. For instance, an accounts receivable figure must show how much are the current and non-current receivables. Both are important for analyzing the financial health of an entity. In addition, an accounts payable has got to present the total one year and more than one-year obligations. It shows the ability of an organization in paying for its liabilities. Furthermore, Aging Schedules are expected for estimating uncollectible receivables and long overdue payables.
Subsidiary Ledgers can help accountants in preparing aging schedules. For example, ledgers are simply generated from an accounting system whenever available. It is often just a click of a button after setting a period. Moreover, dates are grabbed from each SL necessary for creating a report after extracting data. Dates are necessary for estimating the amount of current and non-current accounts. Then, the IF function, from Excel or Google Sheets, is used in calculating the number of days outstanding on a collectible or an obligation. They are usually grouped by 30, 60, and more than 360 days outstanding.
Why not use an accounting system to generate aging schedules?
Well, in the past, when data is still small, an accounting system usually can generate an aging schedule, easily. In the present, when data gets bigger, the system usually becomes slower, so there is a need to migrate ending balances from an old database to a new database. Then, in the future, after the transfer of data, an accounting system would not be able to produce reliable aging reports because only the ending balances are transferred.
What if we transfer also the dates of the outstanding receivables and payables?
Well, if there are thousands of subsidiary ledgers, there will be no enough time to complete a transfer of data.
Track Cash on Hand and Cash in Bank Accounts
Subsidiary ledgers are also administered to each Cash on Hand account and individual bank account. For instance, a cashier has a ledger for recording deposits and collections. It is an internal control that prevents misuse of an organization’s funds. Furthermore, all bank accounts have their own SL account numbers also. This makes the preparation of bank reconciliation statements easier and faster. Hence, cash transactions are correctly accounted for when using one SL per Cash on Hand and per bank account. They can be used for audits in the future.
Manage multiple inventories
Inventories are also managed by creating subsidiary ledgers for each product. For instance, a Samsung TV has a separate SL from a PC monitor. Different products are tracked separately to ensure that prices are not mixed. Surely, the SLs should also have space for encoding a unit cost and a quantity for each entry. It is usually required so that the FIFO method of accounting can be used (though some use the weighted average method of inventory). Indeed, similar products should have the same SL account number to calculate their costs correctly. Accurate inventory costing will prevent misstatements in the financial statements.