The general ledger can provide a great overview of where each of your accounts stands at the end of the period.
But, it’s not always the best resource if you want to get a deeper understanding of the individual transactions that make up the account’s final balance.
For this information, you’ll need to consult the account’s subledger, where you’ll find specific transaction data to drive your financial analysis and decision-making.
What are subledgers?
A subledger, or subsidiary ledger, provides a record of all transactions in highly-used accounts like accounts payable, accounts receivable, cash, sales, and others for a given period.
The ending totals for each subledger rolls into the general ledger, offering business leaders a summary of all the data needed to prepare financial statements for the company (income statement, balance sheet, and cash flow statement).
Subledgers are an important bookkeeping tool to keep financial records organized.
But, they’re also a strategic asset for financial management and decision-making, offering the granular details business leaders need to assess future cash flow needs, create a budget, and plan future spending.
Subledgers vs. general ledger
The general ledger is a summary of all accounts at the end of the period, aggregating the balance from each subledger in one central chart.
The key difference between the two is that subledgers offer a more detailed and comprehensive look at each account than what you’ll find in the general ledger.
For example, you may see in the general ledger that the ending balance for accounts payable is $3,900.
But, this does not tell you any further information, like which vendors you still owe payments to or how much you’ve already paid off over the period.
To get more specific details for a given account, you’ll need to step beyond the general ledger and reference the subledger.
The main types of subledgers
You don’t need to create a subledger for every account the business manages.
It’s useful to create a subledger to organize the transactions for accounts with a lot of activity, especially those where cash inflows and outflows are coming from multiple sources.
But, if an account receives just one debit and credit over the period (like an interest payable account) it’s likely not necessary to create a subledger.
In this case, the ending balance for the account that’s shown in the general ledger paints a complete picture of all of the transactions that occurred over the period.
So, the types of subledgers you create and manage will be unique to your business and transaction patterns.
Here are some of the most common types of subledgers:
Accounts payable ledger
Your business likely owes payments to more than one supplier or vendor at any given moment, which are reflected as one total amount with the accounts payable balance on the general ledger.
To help you reconcile vendor accounts and get a more detailed breakdown of the individual transactions and payables owed to each supplier, an accounts payable ledger can be a helpful resource.
Accounts receivable ledger
Similarly, an accounts receivable ledger tracks transactions related to sales made on credit, including all payment history and any outstanding balances.
Unlike the total accounts receivable balance shown in the general ledger, an AR ledger will provide you with an overview of how much each individual customer still owes you.
Inventory ledger
In an inventory ledger, you can track crucial information like the amount of finished goods, works in progress, and raw materials you have.
Any transactions that impact inventory will be listed in this subledger, helping you assess the value of goods you have available for sale at a given moment.
Cash ledger
For an in-depth look at your cash balance and what is driving inflows and outflows, creating a cash ledger can provide you with specific information that you won’t find in the general ledger.
The cash account is likely one of–if not the most–active for your business, so this subledger is a crucial resource that will help you organize and assess a large portion of your financial data.
Fixed assets ledger
Another common subledger is created for your fixed assets, which helps manage transactions related to your property, plant, and equipment.
Similar to the other accounts we’ve discussed so far, your fixed asset account is likely impacted by numerous sources (i.e. multiple pieces of equipment, numerous properties, machinery, technology systems, furniture, etc.).
So, a subledger is helpful for keeping track of each asset’s financial data individually rather than compiled into one balance on the general ledger.
The benefits of using subledgers
The purpose of creating subledgers is to provide businesses with a more detailed view of the transactions that occurred in each account over the period.
As a result, there are a number of benefits that come from maintaining accurate and up-to-date subledgers, including:
Detailed transaction records
Even small businesses can have hundreds of transactions occur each period. For larger businesses, this is closer to the thousands.
Subledgers give businesses a way to keep transaction data organized and segmented by account.
In turn, subledgers can offer valuable insights into the business’s financial activities, helping to drive budgeting and financial planning decisions.
More accurate financial reporting
Managing subledgers for active accounts supports more accurate financial reporting, as it provides businesses with a way to double-check the balances shown for each account in the general ledger.
For instance, if the balance of all the transactions in your accounts payable ledger totals $6,200, this should be equal to what is listed for the AP account in the general ledger.
If there is a mismatch between these two values, you’ll need to dig deeper into the individual vendor accounts, invoices, and payments to find out what’s causing the discrepancy.
By reconciling your subledgers to the general ledger, you can ensure you report the correct amount in your financial statements.
Enhanced audit process
Subledgers contribute to a more efficient audit process by segregating data so it can be easily verified.
Each revenue stream and source of debt is clearly tracked and recorded in a subledger.
This makes it much more straightforward for auditors to trace where certain cash is going or coming from without a ton of extra digging.
Best practices for managing subledgers
If you’re still creating and managing subledgers by hand, here are some best practices to adopt to help enhance productivity and accuracy while completing this crucial task.
Regular reviews and reconciliations
Make sure to regularly review your subledger accounts and reconcile them against the general ledger.
Typically, it’s a good idea to do so at the end of each period, before financial statements are finalized.
Specifically, you’re checking to make sure the balance shown in a subledger equals what’s shown for the corresponding account in the general ledger.
This way, you can be more proactive with catching any errors and discrepancies between the two balances, investigating and resolving them before they seriously affect your financial positioning.
If you catch a mistake too late, it can become more difficult to uncover where the discrepancy stems from and completely rectify the error.
Make adjusting entries if needed
If you do catch a discrepancy between a subledger and your general ledger, you need to make the appropriate adjusting journal entries to close out your accounts for the period.
Missing transactions or duplicate entries are common sources for general ledger discrepancies, which you’ll need to make adjusting entries for so your books are balanced.
Skip low-volume accounts
If you’d like, you can create a subledger for every type of account your business manages.
However, for efficiency’s sake, it’s best to stick to creating subledgers only for the accounts that see a large volume of transactions.
Managing the subledgers for highly active accounts can take a lot of your team’s resources as they spend time reviewing and recording each transaction.
So, if you can skip over the low-volume accounts that only have one or two transactions each period, you can save some valuable time and still get a comprehensive view of the account in the general ledger.
Leverage automation
Most accounting software programs will automatically manage your subledger totals based on the transactions recorded in the platform.
These totals will be rolled up into the general ledger, ensuring that all balances are equal and there are no discrepancies between the transactions you’ve recorded for the period and what’s ultimately shown in your chart of accounts.
How to streamline your accounts payable management
Though the general ledger offers the official summary for each account balance, the subledger is where you can get a more in-depth view of the transactions that occurred over a given period.
Supporting accurate financial reporting and a transparent audit trail, there are many reasons why you want to keep up-to-date subledgers–even if it can be a bit tedious.
As your business scales, the growing volume of transactions can become difficult to record and manage by hand.
Specifically for your accounts payable, using an automated AP solution like BILL can make it easier to manage vendor payables accurately, ensuring you’re making payments on time and helping you reconcile accounts faster with an automatic 2-way sync with your accounting platform.
Learn more about how our automated AP solution can help you spend less time managing accounts payable.
