Definition
A General Ledger is the primary accounting record of a company that contains all the balance sheet and income statement accounts. On the other hand, a Sub Ledger is a subsidiary or secondary ledger that provides details behind an account in the General Ledger. For example, a accounts receivable sub-ledger would include detailed information about each customer’s account.
Key Takeaways
- The general ledger serves as a central repository for all the financial data recorded by a company, including assets, liabilities, equity, revenues, and expenses. It offers an overall view of the company’s financial health.
- Sub-ledgers, on the other hand, are associated with particular financial transactions, such as accounts payable or accounts receivable. They provide transaction details related to a specific area of the business, making it easier to investigate discrepancies or errors.
- While a general ledger and sub-ledgers are separate, they interact closely with each other. Entries in sub-ledgers are summarized and posted to the general ledger, ensuring that transaction data is efficiently consolidated for financial analysis and reporting.
Importance
The terms General Ledger and Sub Ledger are crucial in financial accounting as they assist in organising, sorting, and recording a company’s financial transactions.
A General Ledger serves as the central repository for all financial data, summarizing all the company’s financial activities.
Sub Ledgers, on the other hand, function as subdivisions of the General Ledger, recording specific types of transactions like accounts payable or receivable, payroll, etc.
The two ledgers together are significant as they ensure accuracy, allowing for easier tracking and auditing of financial data.
Monitoring Sub Ledgers provides a detailed transaction analysis, while the General Ledger gives an overall financial picture, thereby facilitating efficient financial management and control.
Explanation
A General Ledger (GL) serves as the main accounting record for a business, aggregating all financial transactions and data. Its key purpose is to provide a comprehensive overview of all business transactions and is used by business owners, managers, and accountants to assess overall financial health, prepare financial reports, and formulate business strategies. The GL comprises several accounts including, but not limited to, assets, liabilities, equity, revenues, and expenses.
Each of these accounts relates to various business dimensions, and their balances reflect the financial status of a company. Therefore, the general ledger’s key uses comprise the preparation of financial statements and aiding the decision-making process. On the other hand, a sub-ledger is an intermediary set of records used to track detailed transactions for a specific account category before they are summarized and posted into the general ledger.
For example, accounts receivable and accounts payable are typically tracked in separate, dedicated sub-ledgers. The purpose of sub-ledgers is to provide detailed insight into a particular kind of transaction, allowing managers to monitor specific areas of business activity closely. These details may include dates, amounts, outstanding balances, customer/vendor details, and other information relevant to the specific area.
Hence, in contrast to the GL, sub-ledgers serve a more specialized function, breaking down information to a level that facilitates daily operational management and internal controls.
Examples of General Ledger vs Sub Ledger
Invoice Management Systems: This is probably the most common situation in which sub-ledgers and general ledgers interact. When a company issues or pays an invoice, these transactions need to be logged in an accounts payable or accounts receivable sub-ledger. After a period of time, this information is then compiled and entered into the general ledger to provide a high-level view of financial activities.
Retail Business: In a retail store, for instance, a sub-ledger might be utilized to keep track of daily sales transactions, returns or discounts through cash registers. It would record each sales transaction in detail. At the end of the day, week, or another period, this information is then transferred into the general ledger where larger financial data and trends can be observed, like sales revenue.
Inventory Management: A company that handles a large inventory would have an inventory sub-ledger to track each inventory item, whether being purchased, sold, or returned. The general ledger, on the other hand, will summarize all these inventory transactions into broader account categories such as ‘inventory purchases,’ ‘cost of goods sold,’ or ‘inventory on hand’.
FAQs: General Ledger vs Sub Ledger
What is a General Ledger?
A General Ledger is the primary ledger in any accounting system which contains all the financial accounts of a business. It serves as the main source of all financial reports for a business.
What is a Sub Ledger?
A Sub Ledger, also known as a subsidiary ledger, is a detailed subset of accounts associated with the general ledger. It’s used to keep track of specific areas like accounts receivable and accounts payable.
What is the main difference between a General Ledger and a Sub Ledger?
The main difference between a General Ledger and a Sub Ledger is their function and detail level. A general ledger is a summarized record of all financial transactions in a business. In contrast, a sub ledger provides detailed information on a specific set of transactions like payables and receivables.
Why do businesses need both the General Ledger and the Sub Ledger?
Businesses need both ledgers to maintain organized and detailed financial records. While the General Ledger offers a broad view of the business’s financial health, Sub Ledgers allow for a more detailed analysis of specific business areas. By using both, businesses can ensure more accurate and efficient financial reporting and analysis.
How are the General Ledger and the Sub Ledger related?
The Sub Ledger feeds into the General Ledger. It means all the details of transactions recorded in various Sub Ledgers are summarized and then posted in the General Ledger. This way, the General Ledger provides a comprehensive view of all financial activities without the clutter of exhaustive details that are kept in Sub Ledgers.
Related Entrepreneurship Terms
- Chart of Accounts
- Accounting Periods
- Transaction Posting
- Balance Sheet Reconciliation
- Financial Reporting
Sources for More Information
- Investopedia: This source offers comprehensive explanations and comparisons on many financial terms, including general ledger and sub ledger.
- Accounting Tools: This site provides a broad range of resources including definitions, examples, and in-depth discussions of accounting and finance terms.
- Corporate Finance Institute: This professional source offers detailed courses and educational content on a variety of finance topics.
- My Accounting Course: This source is an online accounting course that also offers a wealth of information about finance terminologies and comparisons.
