What subsidiary ledgers are for: keeping the main ledger clear

As a business grows, its ledger could become one overcrowded book holding every account: one for each customer, one for each supplier, and one for every kind of income, expense, asset and liability. In practice, accountants divide the ledger into parts and keep certain accounts apart.

The result is the sales ledger, the purchases ledger and the nominal ledger. This article explains why the ledger is divided this way, not how to write up each account.

One ledger split into parts

A ledger is a set of accounts kept together. A small business can keep all its accounts in one place. As trading grows, the number of accounts multiplies and a single book becomes hard to manage.

The solution is to group the accounts that belong together. Customer accounts go into the sales ledger, supplier accounts into the purchases ledger, and everything else into the nominal, or general, ledger. This is one accounting system, sensibly split so each part holds a related set of accounts.

Personal and impersonal accounts

The split rests on the difference between personal and impersonal accounts. A personal account is for a person or business the enterprise deals with, such as a customer who owes money or a supplier who is owed money. An impersonal account is everything else: sales, purchases, rent, machinery, cash and so on.

The sales ledger and purchases ledger hold personal accounts. The nominal ledger holds impersonal ones. This meets a practical need.

The business must know how much each customer owes and how much it owes each supplier. Those person-by-person details differ in kind from the broad totals of income and expense.

The sales ledger and its customers

The sales ledger has one account for each credit customer. It records what each customer bought on credit and what each paid, so the business can see how much any customer still owes.

Chasing money owed is done person by person. A business does not send a reminder to “receivables in general”. It writes to a named customer about a specific balance.

With every customer’s account in one ledger, the business has the detail it needs. The total owed can be reported elsewhere as a single figure.

The purchases ledger and its suppliers

The purchases ledger is the mirror image. It has one account for each credit supplier, recording what was bought from each and what was paid to each. It shows how much the business owes each supplier.

Paying what is owed is also done supplier by supplier. The business must know which supplier is due and how much, not just the total. With all supplier accounts together, the individual amounts are ready when each falls due.

The nominal ledger at the centre

The nominal ledger is where the whole system comes together. It holds the impersonal accounts: sales, purchases, expenses, assets, liabilities and capital. The financial statements are drawn from these accounts.

The nominal ledger does not need the clutter of hundreds of customer and supplier accounts. It can carry one account for the total owed by customers, and one for the total owed to suppliers.

The fine detail lives in the subsidiary ledgers. The nominal ledger keeps the summarised picture of the whole business, which keeps the main ledger clear enough to produce the final accounts.

Why separating the detail helps

Splitting the ledger has several advantages.

• It keeps the nominal ledger uncluttered, so the accounts feeding the financial statements are not buried under individual balances.
• It lets the work be shared. One person can look after the sales ledger and another the purchases ledger.
• It allows a check. The subsidiary ledgers hold the detail and the nominal ledger holds a matching total, so the two can be compared. If the individual customer balances add up to the total in the nominal ledger, the records are consistent.

A structure that mirrors how business works

The division is not an arbitrary filing system. Businesses deal with named customers and suppliers as individuals, and they also need an overall view of income, expenses and position.

The subsidiary ledgers serve the first need. The nominal ledger serves the second.

Detail without a summary would be overwhelming. A summary without detail would be unusable. The split gives a business both.

Why the design is worth understanding

Once the reason for the split is clear, the layout of a business’s books makes sense. Personal accounts are kept apart so individual balances are easy to manage. The nominal ledger is kept clear so the financial statements can be prepared from it.

Once your child sees why personal accounts are separated, the recording system is much easier to follow than a list of three ledger names. One of our teachers can explain the structure in a one-to-one session, using a worked example of postings to each ledger. Book a trial class