A general ledger with a single Accounts Receivable account is fine when a business has three customers. It falls apart when a business has three hundred customers, because the general ledger would need a separate account for every single one, bloating the chart of accounts and making the ledger impossible to manage. The solution is a Subsidiary Ledger — a group of accounts of one type, usually organized in alphabetical order — kept completely separate from the general ledger.
| Subsidiary ledger | Contains | Matching control account in the general ledger |
|---|---|---|
| Accounts Receivable Ledger | A subsidiary ledger that contains only customers' accounts in alphabetical order | Accounts Receivable Control Account |
| Accounts Payable Ledger | A subsidiary ledger that contains only creditors' accounts in alphabetical order | Accounts Payable Control Account |
A Control Account is a general ledger account where the account totals are to equal the related totals in the subsidiary ledger. The Accounts Receivable Control Account replaces individual customer accounts in the general ledger — it holds the total of everything owed by ALL customers combined, while the subsidiary ledger behind it holds the detail of who owes what. The Accounts Payable Control Account works the same way for suppliers, replacing the individual creditor accounts in the general ledger.
Proving the ledger
A Schedule of Accounts Receivable is a list of the customer accounts and balances prepared to prove the mathematical accuracy of the accounts receivable ledger — the total of every individual customer balance should exactly equal the Accounts Receivable Control Account balance in the general ledger. A Schedule of Accounts Payable does the identical job for creditors.
Direct posting, indirect posting, and batch journalizing
- Direct Posting is the recording of information from source documents directly into the subsidiary ledger accounts — used for the day-to-day detail, one invoice at a time.
- Indirect Posting is the process of recording information from source documents in the journal and then posting it to both the general ledger control accounts and the individual subsidiary ledger accounts — the standard double-posting pattern.
- Batch Journalizing is the process of recording the totals of a number of source documents of one type in a single journal entry — instead of journalizing 40 separate sales invoices, their combined total is journalized once, while each invoice is still posted individually (directly) to its own customer's subsidiary account.