What’s the Difference Between a Sub Ledger & General Ledger?

If you're doing your own bookkeeping, you may use a general ledger by itself or a general ledger with several sub ledgers (short for subsidiary ledgers). The choice partly depends on the size of your business and partly on the complexity of your operations. Understanding the similarities and differences between a sub ledger vs. a general ledger and how each fits into double-entry accounting will help you use these money-tracking tools to their best advantage.

Sub Ledger vs General Ledger 

The main difference between a general ledger and sub ledger is that a general ledger provides a complete snapshot of your company's financial situation while sub ledgers provide the details.

General Ledgers

A general ledger is a complete record or journal of all of the financial transactions that occur in a business. The general ledger provides a trial balance and is used to prepare financial statements such as the monthly income statement, balance sheet, cash flow statement, and profit and loss statement.

Within the general ledger, transactions are separated into categories as defined by the chart of accounts. Master accounts often include:

• Assets. These include fixed assets like vehicles, buildings, machinery, computers, and equipment, as well as current (short-term) assets such as cash, inventory, and accounts receivable.

• Liabilities. These include everything your company owes others, including accounts payable and bank debt.

• Income/Revenue. This includes income from sales, services rendered, and interest.

• Expenses. These include purchases and bills.

• Equity. This includes share capital, reserves, premium account, building equity, and so on.

Sub Ledgers

Sub ledgers help you to keep your general ledger better organized. Let's take Bakin' Buns as a hypothetical example. This Jacksonville, FL bakery started out as a two-person micro business and gradually expanded. As they grew, the owners found that they needed to create sub ledgers to better understand their finances without wading through dozens of transactions in the general ledger. 

Bakin' Buns now has the following subsidiary ledgers that all feed into the general ledger:

• Accounts payable (vendors and bank loans)

  • Bank loan for equipment

  • Bank loan for premises

  • Flour wholesaler

  • Egg wholesaler

  • Sugar wholesaler

• Accounts receivable (customer accounts)

  • Mustard Dog Catering Company

  • Happy Valley Elementary School

  • Hundred Oaks Elementary School

• Fixed assets

  • Building

  • Company car

  • Office computer

  • Point of sale (POS) tablet

  • Commercial mixer

  • Commercial oven

  • Coffee machine

  • Cold room

• Business bank accounts

  • Savings account

  • Checking account

  • Credit card account

• Inventory

  • Hot dog buns

  • Hamburger buns

  • Sandwich loaves

  • Breadsticks

  • Bagels

• Cash on hand

To keep track of the bakery's operations, transaction information is posted to the relevant sub ledgers daily including details such as discounts applied, to whom each order was sold, vendor credits, and unsold inventory that was donated or otherwise written off. Depreciation of fixed assets is also noted in the relevant sub ledger.

Once a week or once a month, a summary of the transaction information from the related subsidiary ledger accounts is posted to the general ledger so that it contributes to the trial balance. While the general ledger doesn't have to be balanced, each sub ledger account must be balanced once a month to make sure every dollar has been accounted for and no transactions have been missed.

Why Use Sub Ledgers?

Using sub ledgers in your accounting process might merely seem to complicate things, but it usually ends up making your accounting process simpler. Because the detailed information about each transaction is contained in the applicable subsidiary ledger, your general ledger will be far less cluttered and much easier to read.

At the same time, your subsidiary ledgers allow you to go into far more depth when analyzing your business operations. For this reason, they are especially helpful for potential investors and lenders. For example, if Bakin' Buns wanted to attract more investors or take out a new loan, the potential investors or lenders could refer to their sub ledgers to see how many regular clients they had, calculate the average order size, and work out the potential earnings if the business were to expand.

If Bakin' Buns were to be selected for a Florida sales tax audit, having detailed sub ledgers would make the audit process more straightforward, too. They or their Florida small business accountant could simply show the auditors their income or revenue sub ledgers rather than giving the auditors access to their general ledger, which might raise further questions or lead to an unnecessary exploration of the bakery's assets.

How the General Ledger and Sub Ledgers Are Updated Using the Double-Entry Accounting Method

Companies that follow a double-entry accounting process must post every transaction twice—once as a debit and one as a credit. The amount of the debit and credit must match to keep the accounts balanced.

For example, when Bakin' Buns receives a payment of $250 from their client Mustard Dogs Catering Company, they post a credit of $250 to their checking bank account sub ledger and a corresponding debit of $250 to the Mustard Dogs Catering Company sub ledger account. 

Posting these transactions to the sub ledger accounts has the effect of increasing the balance of Bakin' Buns' Income/Revenue account by $250 and reducing the balance of their Assets (under Accounts Receivable) by $250 in the general ledger.

How Accounting Software Can Help

To streamline the process of posting balances and transactions, many businesses find it helpful to use a program like QuickBooks Online. QuickBooks can import account balances from the previous month plus the monthly statements from your financial accounts, making it easy to balance your individual general ledger accounts without missing anything.

Businesses that choose to post their transactions and reconcile in QuickBooks Online can get QuickBooks training from a certified ProAdvisor and reconcile their accounts in-house or pay for outsourced bookkeeping services. Whichever option you choose, the important thing is that each transaction is posted correctly and the accounts are balanced each month.

Sub Ledger vs. General Ledger: Tools to Help You Track Transactions Easily

It can take a bit of experience to appreciate the nuances of sub ledgers vs. the general ledger, but subsidiary ledgers are basically the "zoomed in" financial transaction records that feed into the general ledger. Both serve a distinct purpose and both are necessary for most businesses. 

If your small business is growing and you're struggling to keep track of all of your vendor, client, and loan accounts, it could be time to start using sub ledgers. Not only will you better be able to manage your business, but it could help you attract new investors and qualify for business loans as well.