Some general ledger accounts such as accounts receivable or accounts payable are made up of many sub-components, For example, a company may have many debtors (credit customers) and multiple transactions (credit sale, sale return, receipts) with each customer. All such transactions will be recorded in “Accounts Receivable” ledger due to which the ledger would show the opening and closing amounts receivable but it will be very difficult to calculate the individual balances receivable from various customers. To resolve this issue, most companies maintain subsidiary ledgers which provide customer wise transaction details, opening and closing balances.
Each entry is recorded in respective subsidiary ledger as well as the respective main ledger which is also called the control account. As a result, the sum of balances of subsidiary ledgers is always equal to the balance of main ledger account/ control account.
XYZ Company has opening accounts payable balance of $ 95,000 which comprises of $ 25,000, Re. NIL and $ 70,000 payable to vendors ABC, KLM and RST respectively. During the period following transactions were undertaken:
- Purchase of goods from vendor ABC worth $ 200,000
- Goods returned to vendor ABC worth $ 20,000
- Purchase of goods from vendor KLM worth $ 50,000
- Payment to vendor KLM worth $ 45,000
- Payment to vendor ABC worth $ 150,000
- Payment to vendor RST worth $ 65,000
Now review the entry of these transactions in Accounts Payable main ledger/ control account and the subsidiary ledgers of vendor ABC, KLM and RST respectively. Note that the sum of opening and closing balances of subsidiary ledgers is equal to opening and closing balance of Accounts Payable ledger respectively as each transaction has been posted in both main ledger and respective subsidiary ledgers.