Subsidiary ledgers provide more detailed information than the general ledger, creating a cleaner reporting process and easier account reconciliations. Control accounts dictate the information reported on the general ledger. Too many subunits can be time-consuming, and unnecessary ledgers should be reviewed.
A subsidiary ledger is a subunit of the general ledger. The subunit contains more detailed information than the general ledger. For example, a company’s general ledger contains order lines for each different business activity. However, the items representing accounts payable and accounts receivable have subsidiary ledgers with additional information. These additional ledgers have accounts for each individual or business that owes the company money or has a claim against the company’s assets, respectively.
Using subsidiary ledgers creates a cleaner general ledger. Instead of lumping all bits of financial information into one ledger, the use of additional ledgers can help create a better reporting process. Companies often have the ability to create and use as many subledgers as they like. The only caveat is that each subsidiary ledger goes up to the line item in the general ledger. All figures should be balanced against the ledger item.
The line item in a general ledger that represents a subledger is known as a control account. The control account dictates all the information reported on the general ledger order line. This is common in computerized accounting systems. When companies establish a new subsidiary ledger, they must determine which control account the general ledger covers.
Account reconciliations are also easier when a business creates a separate subledger for its financial information. Accountants can separate which books are error-prone and error-prone. These individual ledgers are set up for a monthly reconciliation. The process involves taking the total from the ledger and balancing it to the total from the subsidiary ledger. The differences between the two require investigation to discover and correct any problems.
Companies do not face requirements to add subsidiary ledgers to their general ledger systems. The use of individual ledgers is simply a financial data management system. Breaking down certain information generally helps stakeholders assess the financial health of the company. It also provides transparency for lenders and investors looking at the company’s books.
It is possible to have too many subunits of a ledger. When this happens, a company spends large amounts of time balancing each individual ledger against the general ledger. If the individual ledger contains information that does not continue in perpetuity, then the ledger is unnecessary. This will result in reviewing the general ledger to ensure no information is posted there, and the balance is zero each accounting period. Accountants spend more time managing an empty ledger when this happens.
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