The process of accounting usually appears intimidating to a lot of people, especially when they start reading terms like general ledger and subledger. They are just technical terms that could confuse someone who does not know accounting otherwise it should be straight forward.
Let us take one step backward and look at where the term ledger and subledger come up. When the business does a financial transaction like a receipt for a purchase or an issued invoice to a customer, the accountant records that transaction in their books. The general ledger is that central repository of the data.
Both the general ledger and subledger can be a way of categorising the business transactions where general ledger have the main category and the subledger is the subcategory.
Essentially, it is documentation of all the transactions in your business that took place in specific time frames. This is where your journal entries of each account are indicated within a timeframe that you have set. If you track your transactions monthly or quarterly, then your general ledger will cover every penny that came in and went out of your organisation. Each of the amounts it will contain will reference specific accounts in the business. An example of these accounts would be your account receivables, which pertain to incoming money or could be your account payables, which could be specific outgoing transactions of your business. Other accounts that you may see in your general ledger could be the operating expenses, also.
To cut the long story short, the general ledger is the documentation of all your transactions put together. It should give you a concrete picture of the dealings that took place in a specific time frame. It would be from this document that you would want to base your business decisions on. You can also establish trends to review based on the time frames you have set.
This is the journal of each account that is present on your general ledger. This helps establish the credibility of the information on your general ledger, as each account is broken down further. As such you would be able to see what were the specific activities for each of the accounts. A good example would be your account payables. Even if you see this term represent your subledger’s name, you can reference it to the different products or services that your business has paid for.
If you think about it, it would appear like you are writing a diary of your finances. The only difference is that the general ledger is already the accumulation of the different aspects of your transaction put together. In short, a general ledger is to be supported by subledgers of each account reflecting on it. Below will give you a the main differences between them.
Data Goes to Different Sets of Readers
You may be curious as to who gets to read these two. The general ledger is usually the one that the owners read about. The details reflecting on it must be easy to digest and reference. The details should also be well presented. This way, if the owner would want to review trends and charts, the details on the general ledger would be easy to extract.
The subledger, then, would have to be on hand with all the relevant details that support the data indicated on the general ledger. This way, if a review is done about that specific account, the numbers would talk about the story in itself. Remember, you would want to talk about the story as to why the final balance showing on your main ledger is the way it is.
Not only about readers, the subledger can work as a restriction for the accountant doing entries. Junior accountants may have access for certain accounts. Let us say management of a company granted their accountant for a certain subledger for example the accounts payables, the reason they did that is to hide the big picture which is reflected on the general ledger from the employee by hiding other accounts like the receivables for example.
Data is More Specific on the Subledger than on the General Ledger
You would want to ensure that your general ledger is not too congested with data. If it starts to reflect that way, you may have to assess if there may be a need for you to create a new subledger. Keep in mind that your main file is to be read by the CEO, so if you put yourself in his shoes, would you want to bother yourself with all those? What you need to make sure of is that the balances showing up on your general ledger is well supported and defined on the subledgers. This way, there would no longer be a need to explain each. Instead, each ledger from the accounts could speak of their own stories for that specific time frame.
Now that you have a better idea about how accounting works as a whole, I am quite sure that ideas are already reeling in your head. You may have still had questions but it is nice to realise much about these two major terms. Their dynamics explains a lot about how each complement and supports one another, especially when it comes to the data ledgers present.
The nice thing about accounting is that it is not limited to the basic cash flow of an entity. Instead, it also includes even the smallest dealings. The best practice that I can share with you is that you need to keep separate documents of each of those transactions. This way, you would have the peace of mind that you are not missing out on a single cent from what you are supposed to be earning. As such, you would then want to understand, “what will I use to keep track of the main transactions?” The answer is quite simple, this is where your general ledger comes into the picture.
More importantly, you can make better business decisions and strategies because you can understand the pieces of information in your journals. It is like reading a story and being able to read between the lines better. As your knowledge increases, you also have an increased responsibility to act on opportunities that you may spot from your books. The direction of your business is now reliant on what changes you will implement and those you will keep. It is also easier for you to know about what has been going on in your business and should equip you with the best ways to strengthen those that used to be weaknesses.
You should also be able to identify the causes of the financial dips that you see on your graphs. It would be a matter of making the most of what you see from your general ledger and how the subledgers support that information. You may also want to take various approaches to understand this data like pulling up graphs to see the peaks and valleys of your business. From such, you are sure to explore more and appreciate what accounting can offer for entrepreneurs like you.
Dynamics of General Ledger and Subledgers in Accounting
You will have a Better Idea of How your Business is being Managed
Understanding your ledgers is a smart way of management rather than spending time on the physical premises. In reality, you should realise that you only have a pair of eyes to see the daily activities of your employees. I would not promote for you to make this a regular thing. Instead, you only need to see your ledger to have an idea. It would be similar to reading your diary a month back to understand what actions you did right and which ones to avoid next time. More importantly, it should help you decide your strategy for the next month, quarter, or year.
Your General and Subledgers will Help you Make Sound Business Decisions
Before you even decide, it is always ideal to review your books and take all information in a more granular approach. It would be from this that you can refer to debit and credit transactions that your organisation makes. It is always good to understand what these transactions are for and how each helps contribute to your earnings. Hence, this is where your subledgers come in, as all of them end up documented on these.
The Subledger Supports the Transactions of Each Specific Account Indicated on the General Ledger
You can enjoy a sense of security about the transactions mentioned on the general ledger with a corresponding subledger. This is supposed to represent each account, hence, show that these transactions can be validated. This must be achieved by subledgers, as it allows business owners to take a more granular review of their business.
As a whole, you must know that accounting is about documenting all the transactions done by a business entity or organisation. It is essential that all incoming and outgoing transactions are noted, to keep track of the flow of cash. In essence, it is a big process of documenting anything and everything that is going on in a business.
Hold this thought and you would be able to picture out how the general ledger and subledgers work together.
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