A subsidiary ledger is a detailed list to support a control account. A control account appears on the balance sheet in summary or total, and are accounts like accounts receivable, accounts payable, and inventory. This video explains the theory (the video refers to a Debitor account which is Accounts Receivable and and a Creditor account which is Accounts Payable. A Debtor is a customer and a Creditor is a vendor)
This section will look at the transactions for Fooz Ball Town and how to post to subsidiary ledgers for accounts receivable and accounts payable.
Accounts Receivable Subsidiary Ledger
The accounts receivable subsidiary ledger will contain an account for each individual customer. The sales, payments, and returns and allowances are recorded into the individual customer accounts as well as the bigger picture (control account) accounts receivable account. For Fooz Ball Town, the sales entries were:
- July 5 Sold $5,000 of merchandise inventory, terms 1/15, n 30, FOB Destination with a cost of goods sold of $3,000 to Robby Red.
- July 10 Sold $1,500 of merchandise inventory for cash, FOB Shipping Point, with a cost of goods sold of $1,000.
- July 15 Received payment from Robby Red from July 5 sale less the discount.
- July 30 Sold $7,000 of merchandise inventory, terms 1/15, n 30, FOB Shipping point with cost of goods sold $5,000 to Bobby Blue.
These entries were recorded in the sales journal and cash receipts journal as follows:
|Date||Customer||DR Accounts Receivable||DR Cost of goods sold|
|CR Sales||CR Inventory|
|July 5||Robby Red||$5,000||$3,000|
|July 30||Bobby Blue||7,000||5,000|
|Cash Receipts Journal|
|Date||Customer||DR Cash||DR Sales||CR Accounts||CR Sales||DR Cost of goods Sold|
|July 10||Cash Sale||1,500||1,500||1,000|
|July 15||Robby Red||4,950||50||5,000|
These journals would be posted to the Accounts Receivable control account like this:
|Account: Accounts Receivable|
|July 31||from Sales Journal||12,000||12,000|
|July 31||from Cash Receipts Journal||5,000||7,000|
The customer (subsidiary) ledger would be updated for Robby Red and Bobby Blue as:
|Customer Account: Robby Red|
|Customer Account: Bobby Blue|
At the end of the period, a schedule is prepared to verify (or prove) the Accounts Receivable (control account) balance reported on the balance sheet. This schedule is a listing of all customers with the ending amounts owed and should always match the ending balance in Accounts Receivable. The schedule of accounts receivable for Fooz Ball Town would be:
|Fooz Ball Town|
|Schedule of Accounts Receivable|
|Total Accounts Receivable||$ 7,000|
Note: It would not be necessary to include customers with zero balances but it is included here just so you can see how the subsidiary ledger works. Notice how the schedule of accounts receivable balance equals the ending accounts receivable balance (control account).
Accounts Payable Subsidiary Ledger
The accounts payable subsidiary ledgers works the same way as accounts receivable with the control account of accounts payable and the subsidiary ledger a vendor ledger to provide a listing of everyone we owe. The purchases, payments, returns and allowances are recorded in the individual vendor accounts as well as in the accounts payable account. The purchase transactions for Fooz Ball Town are:
- July 12 Purchased $10,000 of merchandise inventory, terms 2/15, n 45, FOB Destination from Gus Grass.
- July 16 Returned $2,500 of merchandise damaged in shipment from July 12 purchase.
- July 25 Paid for the July 15 purchase from Gus Grass less the return and discount.
These transactions were recorded, under the perpetual inventory method, in the following journals:
|Date||Vendor||DR Merchandise Inventory|
|CR Accounts Payable|
|July 12||Gus Grass||10,000|
|Cash Disbursement Journal|
|Date||Account||DR Accts Payable||CR Mdse Inventory||CR Cash|
|July 25||Gus Grass||7,500||150||7,350|
|July 16||Accounts Payable||2,500|
These journals would be posted to the Accounts Payable control account like this:
|Account: Accounts Payable|
|July 16||Gus Grass Return||2,500||-2,500|
|July 31||from Purchases Journal||10,000||7,500|
|July 31||from Cash Disbursements Journal||7,500||-0-|
The vendor (subsidiary) ledger would be updated for Gus Grass:
|Vendor Account: Gus Grass|
The vendor balance for Gus Grass is $0 and the accounts payable balance is $0. Since both are zero and match, it would not be necessary to prepare a schedule of accounts payable. If there is a balance, a schedule of accounts payable would be prepared in the same manner as accounts receivable.