Tony taught Business and Aeronautics courses for eight years; he holds a Master's degree in Management and is completing a PhD in Organizational Psychology
When it comes to business accounting, there are lots of accounts to track. One way that accountants are able to stay organized is to use subsidiary ledgers. This lesson will describe what subsidiary ledgers are and how they are used.
Businesses must track a lot of things in order to manage their money and ensure they keep making profits. For example, they have customers that owe them money, many types of assets, or items owned by the business, inventory, work in progress, and suppliers.
One way businesses get more sales is to allow customers to buy on credit. You or someone you know may have a credit card from retailers such as Macy's, Sears, J.C. Penney, Lowe's or even an online store. In order to keep track of how much you owe, every customer must have his or her own account with each business. Otherwise, the company would have one big accounts receivable amount and not know who owes them or how much. This is where subsidiary ledgers come in handy.
Definition and Examples
Subsidiary ledgers are groups of accounts that are of the same type, such as each customer account that is totaled and posted in the balance of accounts receivable. The accounts receivable is the controlling or master account. It displays the total of all of its subsidiary accounts. Some types of controlling accounts are:
Work in progress
For example, assume that you started a tutoring business and began charging five of your classmates an hourly rate for your services to help them with their math homework. To make it easier for your customers, you keep track of your hours and bill them for the hours tutored at the end of each week. You allow them one week to pay, so they can take care of the balance when they receive their allowance and/or paycheck.
At the end of the first week, your records showed the following balances:
Each of these customers would have an individual account in the subsidiary ledger so you can track their increases in amount owed and payments made under the controlling accounts receivable account. The balance in your accounts receivable would be the total of each of the individual accounts, which would be $60. The same concept is typically used for each supplier under the accounts payable account.
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Another use for a subsidiary ledger is keeping track of inventory used to manufacture products. In this case, inventory is the controlling account, and there may be subsidiary accounts for each type of item, such as nuts, bolts, pounds of steel, microchips, etc. The controlling account would show the total value of all the inventory.
Using controlling accounts is very important, especially when utilizing a job order costing system. Job order costing systems help businesses track all of the costs associated with each job, while also knowing the total value through the work in progress controlling account. Profits and loss can be tracked for each job so that future job estimates can be made more accurately.
Subsidiary ledgers are groups of similar accounts that are put together under a controlling account, which keeps track of the total of all of the subordinate accounts it controls. Examples of controlling accounts include accounts receivable, accounts payable, inventory, equipment, and work in progress. Businesses can keep track of costs for individual jobs through a system of job order costing while also monitoring total costs of work in progress for all current tasks. Controlling accounts provide the overall totals and general information in the general ledger, whereas subsidiary accounts contain all of the details needed for specific analysis and tracking of individual customers, suppliers, and projects.
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