What is a Subledger and why Your Business Should Have One ?
While it is not necessary to have an in-depth knowledge of accounting to run a business, it is advantageous for a business owner to have some understanding of basic accounting procedures. Knowing the fundamentals of accounting will enable you to better track your income and expenditures and monitor your cashflow. One of the most valuable accounting tools is the subledger.
Subledgers are part of a general ledger and used to record the details of specific transactions that a business makes during its daily operations. Confused? Don’t worry. This article will provide you with all the information you need to understand what subledgers are, how they work and why they are a vital part of any business’s accounting practices.
What is a subledger?
Sometimes referred to as a subsidiary ledger, a subledger is subcategory of the general ledger. Unlike the general ledger, which provides details only on the final balances of accounts, a subledger records information about specific transactions relating to specific accounts within a company. This specific information is then used to form part of the totals covered by the general ledger which in turn can be used to provide the information an accountant or bookkeeper requires to create financial statements.
Subledgers give business owners precise information on general ledger accounts that see high levels of activity. If your business makes a large number of sales, then subledgers can ensure that your accountant can keep close track of what accounts have been paid for and what accounts are still outstanding.
The number and type of subledgers that a business has will depend on the nature of the business itself and the scale of its operations. Some business may have accounts receivable and accounts payable sections on their chart of accounts. Both of these accounts may need subledgers to accurately keep a record of transactions. It must be noted that subledgers may not be as useful for smaller businesses as they are for larger enterprises.
How subledgers work in practice
As its name implies the general ledger of a business provides only generalised information on its accounts. Conversely, the subledgers within the general ledger provide detailed records of all transactions made within every type of account in the business.
The details recorded in the subledgers depend on what types of accounts they are for. For example, the subledger for the accounts receivable should contain the following information for each transaction:
- The date the transaction occurred
- The total price of the services or goods sold to the customer
- Details on any partial payments, if they have been made or a payment plan allocated as well as the remaining amount owed by the customer
- The contact details and name of the customer
- Details of the payment terms, which are typically within 30, 60, or 90 days
- Any other information or notes that are relevant to the transaction
When the accounting cycle ends, all the data in the subledger is totalled and then recorded in the general ledger. This makes it easier to manage the general ledger and provides detailed information on cash that is flowing in and out of the business on certain dates.
In the case of a rapidly expanding business with a large number of transactions, it may be that each separate subledger is managed by a dedicated department. The largest subledgers can develop into complex financial ecosystems requiring ongoing oversight, analysis, and maintenance.
An example of how a subledger works
Let’s take an example to further look into how a subledger works in practice.
Joel owns a motorbike repair shop. His general ledger states that his business owes £5,000 to his suppliers and that his customers currently owe him £3,500. However, when looking at this data in the general ledger, Joel has no idea who the suppliers are that he owes money to or what customers in particular are behind in their payments.
The details contained in the accounts receivable and the accounts payable subledgers of Joel’s general ledger will give him all the information he requires. These subledgers will detail which customers have not paid their accounts and which suppliers are owed money. It will also show Joel what dates these amounts are due. This way, Joel knows which suppliers he needs to pay right away and which customers he needs to urgently follow up on for payment.
Different types of subledgers
It depends on the chart of accounts as to what subledgers are contained in a general ledger. A busy shoe store will have a very different cross section of subledgers than a large car manufacturer, for example. Often, a business will have an ongoing subscription to a particular accounting software that will automatically create subledgers in the master or general ledger.
There are, however, some common types of subledgers used by a variety of businesses.
Typical subledgers include the following:
The accounts payable subledger
This subledger will contain information on amounts that the business currently owes to suppliers, contractors, lenders, utilities, rent and so on. The terms of payment will be recorded as well as the date the amounts are due.
The accounts receivable subledger
This subledger will contain information on transactions between the business and its customers. All payments made will be recorded as well as any outstanding accounts, customer contact details, the terms of payment will be recorded and the date the amounts are due.
The fixed assets subledger
This subledger will contain information on all the fixed assets owned by the business. Fixed assets are long-term assets that cannot be turned into cash. These include:
- Investments held for the long-term
The inventory subledger
This subledger will contain information on the total amount of inventory the business currently owns. This includes all raw materials, details on suppliers, finished stock, the movement of stock and any damage reports.
The payroll subledger
This subledger will contain information on the wages and salaries paid to all employees, contractors, and freelancers within the current accounting cycle. Taxes, pensions, and bonuses will also be recorded in this section.
Why a subledger is crucial for your business
A growing business will require more involved accounting procedures. Maintaining subledgers within your general ledger ensures that your accountant or bookkeeper can easily monitor and update transactions as they occur to better manage cash flow. Subledgers segment transactions into easily accessible sections that can then be analysed to provide a detailed overview into the financial history of a business.
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