Accounts Receivable Subsidiary Ledger
A ledger that keeps a record of the customers that a business has extended credit to and how much they owe. It also includes a compilation of their payment history and credit transactions.
Accounts Receivable Subsidiary Ledger Details
The accounts receivable subsidiary ledger records everything having to do with a business's extended credit. It is virtually impossible for a large-scale business to adequately track its financial position without an accounts receivable subsidiary ledger.
Information a company records in this ledger includes invoice amounts and dates issued, customers' names, payment flags (whether the customer paid or not), credit memorandums, payments made for the credits issued, discounts, returns made, refunds, and allowances. Some customers may opt to clear their debt in installations or purchase additional credit before finishing their initial debts. A company adds these transactions to the ledger as well.
The balance on the accounts receivable subsidiary ledger should correlate to the general account balance sheets (otherwise known as the control account). e This makes it very easy for bookkeepers to detect any errors that could lead to losses if a company leaves those errors unchecked.
Accounts Receivable Subsidiary Ledger Example
For this example, let's assume each one of the names listed below represents 1,000 customers. A wholesale flour company called Barbie Mills recently allowed their loyal customers to take bales of flour on credit. The said customers can take goods up to three times without paying immediately.
Barbie Mills keeps a general control account that shows all its total sales amount to $100,000,000. Its customer's outstanding debt stands at $500,000. The account subsidiary ledger should have a total of $500,000.
Among Barbie Mill's loyal customers, three of them have outstanding debts. Rahab took goods worth $100,000 on October 2, 2020. Doris took goods worth $30,000 on March 29, 2020, and $70,000 on May 13, 2020. Mary took goods worth $300,000 on April 5, 2020. Out of the three, Mary cleared $150,000 of her debt on August 20, 2020.
The company will include all of this information in the accounts receivable subsidiary ledger. The total will come out to $500,000.
Significance of an Accounts Receivable Subsidiary Ledger
At a glance, it would seem like keeping an accounts receivable subsidiary ledger is an extra burden. The same information is in the general control account. However, if you analyze the specific details, you will see that it is worth the extra effort.
One of the advantages of the ledger is that it gives businesses in-depth insights to revise budgets and plan business expansions. Having a separate ledger also increases efficiency and reduces errors. Since one person is typically in charge of one ledger, they are always aware of discrepancies, the business's financial health, and ensures the ledger is maintained.
Having an accounts receivable subsidiary ledger gives employees in the credit department access to pinpointed credit sales details. This is very useful for businesses with sensitive client information. Also, a subsidiary ledger is one of the best tools to prevent internal fraud and embezzlement. Examples of frauds include lapping, debiting clients' payments to the wrong account to hide the theft, fictitious receivables paid for by actual sales, etc.
A subsidiary ledger helps manage projects with businesses that deal with a separate group of people. Since you can easily classify this ledger, you can keep track of customer payments and reduce the possibility of overpayment. It also gives the company a greater feel of their most profitable demographic. Lastly, it helps a business issue prompt reminders for overdue invoices and generates a credit scoreboard for future transactions.
Accounts Receivable Subsidiary Ledger vs. Aging Subsidiary Ledger
People often confuse an aging subsidiary ledger with an accounts receivable subsidiary ledger. You can only make an aging subsidiary ledger after you fully draft an accounts receivable subsidiary ledger. This is because the aging account is a list of all the unpaid invoices in the accounts receivable subsidiary ledger.
Keeping an aging subsidiary account not only helps businesses plan in terms of obtaining inventory, but it also helps them resolve overdue customer accounts. Some businesses opt to send payment reminders via email to their customers. If that doesn't work, they enforce a payable interest to prompt a reaction. After which, they are liable to take legal action.
Accounts Receivable Subsidiary Ledger vs. General Ledger
As the name suggests, a general ledger is a ledger that records all of a business's transactions. These transactions include anything that it can classify as accounts payable, cash management, fixed assets, and bank management. A company only has one general ledger, while some companies have a couple of accounts receivable subsidiary ledgers. A general ledger contains a summarized volume of data, while the accounts receivable subsidiary ledger has very detailed descriptions of the data. A general ledger has a chart of accounts, unlike an account receivable subsidiary ledger. Lastly, in a general ledger, most transactions have different characteristics, but in an accounts receivable subsidiary ledger, a company records all transactions similarly.