More Related Content Similar to Finance - General Ledger Overview (20) More from www.technofunc.com (12) Finance - General Ledger Overview4. FINANCE – GENERAL LEDGER ‐ GENERAL LEDGER OVERVIEW 2012
© Chartered Technofunctional Institute Page 4
Subsidiary Ledgers:
Balances in General Ledger are often supported by various sub ledgers. A subsidiary ledger is a group of
similar accounts whose combined balances equal the balance in a specific general ledger account.
Subsidiary Ledgers facilitate recording of complete financial and other information related to the
transaction.
To give you an example; In the Fixed Assets Subsidiary Ledger you can find all the details pertaining to
fixed assets owned by the company. Apart from the financial details like cost of the assets, other
information like date of purchase, date when asset was put to use in business, name of the supplier,
storage and location of the asset etcetera is also captured in subsidiary ledgers.
The general ledger account that summarizes a subsidiary ledger's account balances is called a Control
Account or master account. Accounting transactions are captured in General Ledger at a summarized
level and all relevant details for that transaction are available in the subsidiary ledgers.
Diagram on the right depicts some of the commonly used subsidiary ledgers, they are “Fixed Assets”,
“Accounts Payable”, Accounts Receivable”, “Projects” and “Inventory Management” and they all send
the financial data to the General Ledger.
Let’s now understand the concept of Subsidiary Ledger by having a look at Accounts Receivable Process:
We have “Accounts Receivable” (AR) subsidiary ledger that includes a separate account for each
customer who makes credit purchases. The combined balance of every account in this AR subsidiary
ledger equals to the balance of “Accounts Receivable Account” in the general ledger. “Accounts
Receivable Account” is also known as “Customer Receivable Control Account”.
Subsidiary ledgers contain supplemental accounts that provide the detail to support the summary
balance in a control account. Subsidiary Ledgers also capture details pertaining to financial transactions
like “Tax Numbers”, “Contact Person”, “Telephone Number” or “Copy of Invoice”. In I T; subsidiary
ledgers are also called Modules in the accounting system.
Let’s move and see some examples on subsidiary ledgers.
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“Accounts Receivable” – Accounts Receivable, which is also abbreviated as “A” “R” is used to manage
sales of goods and services to customers and entering receipts for the sales made. Main transactions are
recording of sales invoices and managing the receipts from the customers. From Accounts Receivable
sub ledger you can get details of amounts receivable from any customer at any point in time.
“Inventory”– Inventory Ledger, is used to manage your stock or items you buy, sell or manufacture.
Inventory Ledger is used to manage item prices and movements of stock items due to trading
transactions. From Inventory sub ledger you can get details of quantity and cost price of any inventory
item at any point in time.
“Fixed Assets” – Fixed Assets, which is also abbreviated as “F” “A” is used to manage purchase, sale,
allocation and retirement of fixed assets. Depreciation on assets is calculated in this ledger to depict the
current value of the Fixed Assets. Main transactions are recording of purchase of fixed assets, calculating
depreciation on assets and retirement of assets. From Fixed Assets sub ledger you can get details of any
fixed asset like original cost, current depreciated value, location etcetera at any point in time.
“Projects” – Certain companies like Real Estate Builders and Construction Companies undertake various
independent projects. They are interested in financial information for each of the project. In that case a
sub ledger is required for each project. “Projects” is used to track project milestone, costs and resources
and to make billing to the customers. From “Projects” sub ledger you can get details of any project like
percentage complete, current cost etcetera at any point in time.
“Cash Management” – Similarly “Cash Management” sub ledger is used to manage cash and its
reconciliation with bank. It provides you with the current position of the cash flows.
“Payroll” – Payroll subsidiary ledger can be used to manage salaries and wages. You can record
calculations & payments made to each of the employee in this sub ledger.
Now as we have basic understanding of GL and its subsidiary ledgers let’s look at some benefits of
having an automated general ledger system.
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4. Review Transactions/Edit Transactions: Once you have the transactions available in the general
ledger system, you can review them and edit them for any errors.
5. Transaction Approval: Segregation of Duties concept requires having more than one person to
complete the “Journal Creation Task”. In GL the separation by getting the financial transaction
approved by more than one individual prevents fraud and error.
6. Analyze and Manipulate: You can inquire your transactions and balances in General Ledger
System. You might need to analyze and manipulate your data to comply with your management
and statutory reporting needs. If any adjustments need to be done they can be carried out in
the General Ledger.
7. Manage Consolidation: You may need to consolidate your accounts for Statutory Reporting or
Management Reporting purposes. If your currencies between your various entities are different,
you may need to revalue and translate your balances. Then you need to bring all your balances
in common format for consolidation.
This process is called accounting cycle because this is an ongoing process. Accounting principle of
“Going Concern” assumes that the business will remain in existence for an indefinite period of time.
During this time, your accounting periods will change. At the end of the period you will consolidate
and close your books. Then you will open a “New” period and continue recording transactions. And
the accounting cycle continues forever with business cycle
In the next topic we will understand the transaction flow in the General Ledger system.