Companies rely on their accounting function to record and report transactions accurately. This function provides the base for the company to prepare financial statements. Initially, the process starts when a financial transaction occurs.
The accounting function processes that transaction and records it in the books. Usually, this process happens through an automated system.
All financial transactions go into the books of prime entry. Initially, it is the first area where these transactions enter the accounting system.
Similarly, these books come in several forms. They may include the cash book, sales book, purchases book, general journal, etc. Companies may consist of more books of prime entry based on their needs. From there, the transactions go into the ledger.
Before entering the ledger, companies sum all transactions and post the total to the ledger. However, some people may confuse about whether they should include these totals in the general ledger or sub-ledger.
These are two very different accounting regards in the purpose they serve. Before understanding the difference between them, it is crucial to study each individually.
What is General Ledger?
The general ledger is an accounting record that companies keep as a part of their accounting function. It represents a system where companies maintain their records relating to financial information. On top of that, the general ledger segregates those records into debit and credit accounts.
The general ledger serves a crucial purpose in preparing financial statements. It forms the base for the trial balance.
The general ledger records every financial transaction under a separate account. However, it usually includes the totals of those records. Essentially, it summarizes and categorizes each transaction into a different account. As stated above, this account can be debit or credit based on that account. Usually, these accounts fall into more categories.
The general journal includes accounts of several types. These include assets, liabilities, equity, income, expenses, contra accounts, etc.
Similarly, each account has a type based on its category. Usually, asset and expense general ledgers are debit accounts. The other types of general ledger accounts fall under credits. Contra accounts can relate to both sides.
The general ledger uses the books of prime entry as a base. As stated above, companies post the total of each book in it after regular intervals. These intervals may involve daily, weekly or monthly posting. At each year-end, companies close every account within the general ledger. This process creates a balance in each account. These balances then become a part of the trial balance.
Overall, the general ledger is an accounting record to summarize and categorize financial transactions. It serves a critical purpose within the accounting process. Usually, this ledger takes input from the books of prime entry.
Subsequently, financial transactions get summarized and become a part of the trial balance. The general ledger is crucial in accumulating various transactions under similar accounts.
What is the Subledger?
The general ledger includes a summarized form of various financial transactions. However, it may not provide a detailed analysis of how these transactions occurred. On top of that, other crucial information may also be required related to those transactions.
Therefore, companies also maintain a sub-ledger or subsidiary ledger. It provides details of the transactions posted to the general ledger.
The sub-ledger includes a subset of several general ledger accounts. Usually, it provides details on specific areas, including accounts receivables, accounts payables, fixed assets, etc. Having more information than the general ledger offers is highly crucial. The details may include the source of those transactions, the date, description, original balance, etc.
A sub-ledger does not provide information to go into the accounting system. In most cases, it is secondary to the general ledger. Essentially, the sub-ledger only improves the quality of the information provided in the latter.
For most companies, this information is only necessary internally. Therefore, the sub-ledger does not enhance the information provided in the financial statements.
However, it does not imply that the sub-ledger is futile. On the contrary, it can be highly crucial in maintaining detailed records.
Although the sub-ledger is secondary to the general ledger, the balance on both should agree. In this case, the general ledger acts as a controlling account for the former. Even auditors check that the account balances for both records match as a part of their audit procedures.
Overall, the subsidiary ledger is a secondary financial record that enhances the information in the general ledger. It provides detailed information on the financial transactions posted to the latter. Furthermore, the sub-ledger is crucial in various areas.
The most critical of those include accounts payable, accounts receivable, and prepaid expenses. Subledger balances should also agree with their corresponding general ledger account balances.
Subledger Vs. General Ledger: What are the key differences?
The sub-ledger and general ledger have many differences. Although the former is optional and may not be mandatory under accounting rules, they are still crucial.
Nonetheless, both play a critical role in the accounting system for a company. The primary differences between sub-ledgers and general ledgers include the following areas.
A sub-ledger is an intermediary financial record that links with the general ledger. It provides a detailed analysis of the balances existing for each account.
However, it does not contribute to the preparation of financial statements. On the other hand, the general ledger is a crucial accounting record. It includes a set of accounts with balances to record financial transactions.
Number of accounts
The sub-ledger may include various accounts for a specific item. Each can provide crucial details on different aspects within those areas.
Usually, companies can choose how many sub-ledgers to create. However, the general ledger only includes one ledger account for each area. It is crucial to maintain these accounts separately to differentiate them within the trial balance.
Quantity of information
The sub-ledger is an internal record that companies prepare as a part of the managerial accounting process. It does not fall under the same regulations and rules as the general ledger. Therefore, companies can choose the quantity of information that goes into it.
However, the general ledger comes within specific rules. Companies can only post limited financial information within those records.
Despite the differences, the general ledger and sub-ledger also relate to each other. However, their relationship differs based on the item under consideration.
The sub-ledger enhances the information provided within the general ledger. Essentially, it is a part of the latter. However, the general ledger acts as a control account for the sub-ledger.
Chart of accounts
The sub-ledger does not have a chart of accounts. It enlists the financial accounts companies set up for recording transactions. Since sub-ledgers relate to the general ledger, they don’t need a chart of accounts. However, the same does not apply to the general ledger.
As stated above, each account within this ledger includes a type. This type relates to the chart of accounts for that underlying company.
The following table summarizes the differences between a sub-ledger and a general ledger.
|Definition||It provides detailed information about the financial transactions posted in the general ledger.||It is a primary accounting record that includes a set of accounts to record financial transactions.|
|Number of accounts||It may include many accounts depending on the needs of a company.||Includes one account for every area.|
|Quantity of information||Includes detailed and higher volume of information about financial transactions.||It only includes limited information depending on accounting conventions.|
|Relationship||It is a part of the general ledger and enhances the information within it.||Serves as a control account to the sub-ledger.|
|Chart of accounts||Does not require a chart of accounts.||Requires a chart of accounts.|