BUSINESS ENTERPRISE SIMULATION

2ND SEMESTER SCHOOL YEAR 2020-2021

TOPIC 3: SUBSIDIARY LEDGERS

Source: University of San Carlos Basic Accounting

Compiled by:

KAYE EARVIN L. VILLAESTER, CPA

Subject Teacher
TOPIC 3: SUBSIDIARY LEDGERS

After studying this chapter, you should be able to:

 describe the use of controlling accounts and subsidiary ledgers

 prepare and prove the accuracy of subsidiary ledgers

Completed business transactions are recorded chronologically, for the first time,
in books of original entries called journals. From the journals, the financial data are
transferred to the ledger accounts by a process known as posting. The purpose of
posting is to classify the transactions in order that their effects on each accounting
element can be summarized in one place, the ledger or ledger account.

The general ledger, also known as the primary ledger, contains all accounts that
are used in the recording, classifying, and summarizing process – real, nominal, and
mixed accounts. It is the main source of information regarding the balance of an
accounting element. At the end of the reporting period, adjusted balances from the
general ledger are used in preparing the reports about the business’ financial position
and results of operations.

The number and nature of accounts found in the general ledger depend on the
types of the transactions of the business and on the size of the enterprise. As the
volume of the transactions increases, the accounts in the general ledger will also
increase. The general ledger provides a useful overview of the financial transactions,
yet they may not provide the details that are needed in the day-to-day operations of the
business.

Important details become readily available if subsidiary ledgers are maintained.

Imagine a general ledger that contains the accounts receivable from a thousand
customers and the accounts payable to a hundred suppliers. The general ledger
becomes thick and difficult to handle. If the general ledger becomes too cumbersome to
handle, there may be a need to divide it into several parts in order that there will be
systematic division of posting responsibilities among several accounting employees.

To break up the general ledger, specific groups of similar accounts are taken out
from it to become separate books called subsidiary ledgers or special ledgers. Each
group of similar accounts taken out is replaced by one account called controlling
account.

Controlling Accounts

The general ledger account that summarizes the information found in a

subsidiary ledger is called a controlling account or control account. The separate
subsidiary ledger accounts provide details that are not convenient to incorporate in the
related controlling account. For example, the total amount collectible from all the
customers is summarized in the accounts receivable controlling account that is found in
the general ledger, while the details about each customer are shown in the customer’s
subsidiary account.

The removal of a specific group of similar accounts from the general ledger will
not affect the equality of the trial balance since a controlling account replaces it. The
balance of a controlling account is equal to the total of all the detailed balances found in
its related subsidiary ledger. There will be as many controlling accounts as there are
subsidiary ledgers or subsidiary files.

Types of Forms and Subsidiary Ledgers

There is no limit in the number of subsidiary ledgers that a business may keep as
long as a controlling account replaces them in the general ledger. The use of a general
ledger is compulsory, while the use of subsidiary ledgers is optional. A business that
uses subsidiary ledgers still needs to keep a general ledger. The general ledger
contains all the accounts, while the subsidiary ledger contains only specific group of
similar accounts.

A subsidiary ledger that is useful to a merchandising business may not serve any
purpose to a service enterprise, or vice-versa. A ledger suited for a small business may
not be suited for a big business, or vice-versa. The types and forms of the subsidiary
ledgers that a business may keep depend on the following factors:

 The information needs of the business

 The types of transactions that comprise the normal operations of the enterprise
 The volume of the busines transactions
 The nature and size of the business
 The skills and number of the accounting employees assigned to keep the
records
 Internal control procedures within the enterprise

Posting to the General Ledger and Subsidiary Ledgers

Most of the time, the balances of the general ledger accounts are needed only as
of the end of a month, or when financial statements are about to be prepared. For a
small enterprise, making immediate postings to the general ledger is not usually
necessary; instead, postings can be done periodically – as of the end of the week or
end of the month. However, as the volume of transactions increases and the operations
become more complex, the number of the ledger accounts and the volume of postings
will also increase. This increase requires systematic planning in order that the workload
will be evenly distributed during the month and among several accounting employees.

A posting to the ledger account, whether it is to a general or subsidiary account,

has the following parts:
 The date of the posting
 A very brief explanation, if it is necessary and feasible to incorporate with the
posting
 The posting reference that indicates the source journal and its page
 The amount of the transaction

Some postings are done immediately and separately to individual ledger accounts,
while others are at the end of the month based on the total of the special column.
Some amounts are posted to the general ledger only, while others are also posted to
subsidiary accounts.

After posting is completed, it is necessary to go back to the source journal and write
the posting reference under the PR column – which is the code of the destination
ledger account and/or a check (✓).

Accounts Receivable Subsidiary Ledger

The general ledger may include an account for each customer. However, if the
business has many charge customers, the general ledger becomes very long. This
situation will improve if there will be a separate accounts receivable subsidiary
ledger. This ledger, also called accounts receivable ledger or customer’s ledger,
contains a detailed record for each charge customer.

Whenever a sale of merchandise is entered into with a new customer on account

term; a subsidiary account for that customer is opened. Among the information
shown in a customer’s subsidiary account are: the complete name and address of
the customer, any assigned account code, the dates and amounts of all the charges
and payments, the current balance owed, and the customer’s contact person. It also
show the returns made and discounts availed of by the customer. The accounts
receivable ledger provides the information used in billing the charge customers and
in reviewing their paying habits and creditworthiness. Each subsidiary account
provides a complete history of the charge transactions between the enterprise and
the individual customer.

If the business has 200 customers who buy on account term, there will be 200
accounts in the accounts receivable ledger. The total of the balances of the
subsidiary accounts must be equal to the balance of the accounts receivable
controlling account that is in the general ledger. A subsidiary ledger may be broken
further into several auxiliary ledger if one accounting employee cannot conveniently
handle all the postings to the particular subsidiary account. For example, a large
business enterprise may maintain a separate subsidiary ledger for customers with
surnames beginning with letters A to L, and another one for those with surnames
beginning with letters M to Z.

The debit postings to a customer’s ledger usually come from the service income
journal (for service concern) or sales journal (for merchandising concern), while the
 credit postings come from the cash receipts journal. Occasional postings may come
from the general journal if there are returns, adjustments in the billings, or
settlements in the form of non-cash assets. The running balance form of ledger
account is popular since it shows the up-to-date balance of the individual account.

Accounts Payable Subsidiary Ledger

An accounts payable subsidiary ledger or accounts payable ledger is used if a

business enterprise has numerous on account transactions with the suppliers. Each
supplier has a subsidiary account in this ledger, which is why this is sometimes
called supplier’s ledger.

Each account shows the supplier’s complete name and address, any assigned
account code, the dates and causes of the increases and decreases in each
obligation, the supporting documents of the posted transactions, the balance due,
and other important details related to the liability.

The credit postings to the supplier ledger mainly come from the purchases
journal, while the debit postings come from the cash payments journal. Postings
from the general journal may be related to returns to the supplier, adjustments in the
billings, or settlement of the liability in the form of non-cash assets.

Illustration:

Using the same information from Pinoy Trading, here are the steps to post the
Sales Journal data to the General and Accounts Receivable Subsidiary Ledger.

Step 1 – Every time a sales on account is recorded in the Sales Journal, make a
Corresponding posting to its individual subsidiary ledger.

For cross indexing purposes, indicate the sales journal page number in the
subsidiary ledger while in the Sales Journal check the PR column to show that the
transaction has been posted to its subsidiary ledger.

The same process must be performed for the rest of the transactions under the
Sales Journal.

Step 2 – Once the sales journal transactions are completely recorded and totaled, the
total amounts are posted to the General Ledger. Please see illustration below.

Based on the transactions recorded in the special and general journals of Dante
Trading, a completely posted General Ledger for Accounts Receivable account and its
subsidiary ledgers for the month of November, 2021 are shown below:
The balance of the Accounts Receivable account is always equal to the total of the
individual Accounts Receivable Subsidiary Ledger. Same process is followed when
preparing the Accounts Payable Subsidiary Ledger: but their transactions will mostly
come from the Purchases and Cash Disbursements Journal.