A subsidiary account refers to an account that provides detailed information about a specific item within a main general ledger (GL) account. Subsidiary accounts support the figures reported in the main GL account by tracking individual transactions. When summed up, the balances of these subsidiary accounts should match the balance in the corresponding general ledger account.
Subsidiary accounts are particularly useful in situations where you need to keep track of details for numerous individual entities under a broader category. They are commonly used in conjunction with accounts receivable and accounts payable ledgers to track amounts owed by individual customers or amounts owed to individual vendors, respectively.
Examples of Subsidiary Accounts:
- Accounts Receivable:
- The general ledger might have an “Accounts Receivable” account that shows the total amount owed to the company by all its customers.
- Each customer will then have their own subsidiary account within the accounts receivable ledger. This individual account tracks all transactions related to that specific customer: sales, payments, credit memos, and other adjustments.
- By reviewing a subsidiary account for a customer, the company can quickly see the total amount owed by that specific customer.
- Accounts Payable:
- The general ledger might have an “Accounts Payable” account that shows the total amount the company owes to all its vendors.
- Each vendor will have its own subsidiary account within the accounts payable ledger. This account tracks all transactions related to that specific vendor: purchases, payments, debit memos, etc.
- By looking at a subsidiary account for a vendor, the company can determine the total amount owed to that specific vendor.
- Fixed Assets:
- While the general ledger may have a “Building” account showing the total cost of all buildings owned by a company, subsidiary accounts can be maintained for each building to track its original cost, accumulated depreciation, improvements, and other related transactions.
In essence, subsidiary accounts provide a detailed breakdown, ensuring accuracy and allowing for easier tracking and management of specific entities within a broader category. Periodically, it’s essential to reconcile subsidiary ledgers with their corresponding general ledger accounts to ensure consistency and accuracy.
Example of a Subsidiary Account
Let’s delve into a practical example related to Accounts Receivable:
Scenario: “TechGadget Innovations Corp.”
Background: TechGadget Innovations Corp. sells electronic gadgets to various retailers. At the end of the month, the balance in their general ledger for Accounts Receivable is $500,000, representing the total amount owed to them by all their retailer customers.
Subsidiary Accounts: To ensure accurate tracking of what each retailer owes, TechGadget maintains subsidiary accounts for each retailer within the Accounts Receivable ledger. Let’s look at three of these retailers:
- Retailer A:
- January 1 balance: $20,000
- January 10: Purchased additional gadgets worth $50,000
- January 15: Made a payment of $40,000
- January 31 balance (end of the month): $30,000 ($20,000 + $50,000 – $40,000)
- Retailer B:
- January 1 balance: $10,000
- January 20: Purchased additional gadgets worth $15,000
- January 25: Returned defective items worth $2,000 (credit memo issued)
- January 31 balance (end of the month): $23,000 ($10,000 + $15,000 – $2,000)
- Retailer C:
- January 1 balance: $50,000
- January 5: Made a payment of $30,000
- January 28: Purchased additional gadgets worth $100,000
- January 31 balance (end of the month): $120,000 ($50,000 – $30,000 + $100,000)
Reconciliation: At the end of January, TechGadget would sum up the balances from all the subsidiary accounts of all retailers. Just from the above three, the total comes to $173,000 ($30,000 + $23,000 + $120,000). This amount, combined with balances from all other retailers, should reconcile to the general ledger Accounts Receivable balance of $500,000.
If there’s a discrepancy between the summed subsidiary ledger totals and the general ledger account, TechGadget would need to investigate and rectify the inconsistency.
This example showcases how subsidiary accounts allow a company to keep track of individual balances for each entity (in this case, retailers) within a broader category (Accounts Receivable). It also illustrates the importance of reconciling subsidiary ledgers with the general ledger to ensure data consistency.