Bookkeeping is one of the first steps in the accounting process. This involves recording all financial transactions in the primary books of accounts and subsequent posting to the secondary accounts. The first of these secondary accounts is the ledger. A ledger is the accounting book that comprises of all accounts to which the journal entries are posted. Balanced ledger accounts are compiled into a trial balance from which the entity’s profit and loss and balance sheet are prepared. Preparation of and posting to ledger accounts is thus an important step in the preparation of financial statements.
This article looks at meaning of and differences between two types of ledgers – general ledger and subsidiary ledger.
Definitions and meanings
The general ledger is the ledger account that aggregates the balances of all the related subsidiary ledger accounts. It is akin to a master account.
Journal entries are first posed to subsidiary ledger accounts. From here, the balances of the related subsidiary ledgers are totaled and transferred to the general ledger account.
All general ledger accounts fall into one of the following 5 categories:
- Assets – accounts receivable, bank, fixed assets etc.
- Liabilities – accounts payable, loan etc.
- Equity accounts – share capital, premium account, reserves etc.
- Income accounts – sales, service income, interest income etc.
- Expense accounts – purchases, marketing expenses, distribution expenses etc.
A trading company, M/s XYZ sells its products to several different customers, such as Customer A, Customer B, Customer C and so on. When M/s XYZ records its sales transactions, it would do so by debiting the customer account and crediting sales account. At the end of the accounting period, the balances in all the customer accounts are aggregated and transferred into the ‘Accounts receivable’ account.
The ‘accounts receivable’ is the general ledger account that is a sum total of the balances of all the individual customer accounts.
After all general ledger accounts are prepared and balanced, a trial balance is drawn up.
Subsidiary ledger is essentially a sub-set of the general ledger. It is the ledger account to which journal entries are first posted. Subsidiary ledgers are created for those account categories in which there are high volume of transactions. In such cases, individual subsidiary ledger accounts are created within a broader general ledger account.
Once all journal entries are posted to the subsidiary ledger accounts, the related accounts are consolidated and their cumulative balances transferred to the relevant general ledger account.
In the above example, the individual customer accounts, Customer A, Customer B, customer C and so on are the subsidiary ledger accounts. Each customer account will contain all the important financial data related to the transactions between it and the company. For example, the subsidiary ledger will record all sales to the customers, any sales returns, advances received, remittances received against invoices etc.
Difference between general ledger and subsidiary ledger
The eight key points of difference between general ledger and subsidiary ledger are detailed below:
- General ledger is the master ledger account which consolidates all subsidiary ledger accounts and which is posted to the trial balance.
- Subsidiary ledger is a categorization of general ledger to which journal entries are first posted.
2. Number of accounts
- General ledgers are created for all those accounts which are ultimately reflected in the trial balance. As they are master accounts, they are limited in number.
- Subsidiary ledger accounts are created for all account types within the broader general ledgers. Hence, they are much higher in number than general ledgers. For example, accounts payable is a general ledger within which there may be multiple individual creditor subsidiary ledgers.
3. Quantum of entries
- The quantum of entries posted to the general ledger are limited as essentially the balances of subsidiary ledger are posted here.
- The number of entries posted to the subsidiary ledger are far more as almost every journal entry passed is posted to one or another subsidiary ledger.
4. Order of posting
- Balances to general ledgers are posted after entries are posted to subsidiary ledgers and they are totaled and balanced.
- Amounts are posted to subsidiary ledgers after the passing of journal entries. Hence, entries are posted to subsidiary ledgers first.
5. Transfer of balances
- The balances of general ledger are posted to the trial balance which ultimately form the basis for preparation of financial statements.
- The balances of subsidiary ledgers are posted to the related general ledger.
6. Part of trial balance
- General ledger accounts flow to the trial balance and hence form part of the trial balance.
- Subsidiary ledgers accounts are closed and assimilated into general ledger accounts. Hence, they do not form part of the trial balance.
- The purpose of preparing the general ledger is to compile all account balances and prepare the trial balance.
- The purpose of preparing subsidiary ledger is to hold detailed and accurate data of financial transactions posted to the journal.
- Examples of general ledger accounts include accounts payable, accounts receivable, fixed assets, bank accounts.
- Examples of subsidiary ledger accounts include individual creditor accounts, individual debtor accounts, individual bank accounts.
Conclusion – general ledger vs subsidiary ledger:
Both general ledgers and subsidiary ledgers are an important part of an entity’s accounting system. The subsidiary ledger accounts act as an intermediary between the journal and the general ledger accounts whereas the general ledger is the pathway to the trial balance. Each debit and credit of every journal entry is posted either to a general ledger or a subsidiary ledger or a combination of both.