Learning Outcomes
After studying this article, you will be able to explain why subsidiary ledgers are used, differentiate between their types, describe the process of posting transactions from books of prime entry to subsidiary ledgers, and understand how control accounts are maintained and reconciled. You will also be able to apply these principles in practical bookkeeping and exam scenarios.
ACCA Maintaining Financial Records (FA2) Syllabus
For ACCA Maintaining Financial Records (FA2), you are required to understand how business transactions flow from source documents to books of prime entry, subsidiary ledgers, and the general ledger. This article addresses the following syllabus points:
- The purpose, structure, and uses of subsidiary ledgers (such as the receivables and payables ledgers)
- Types of prime books and how transactions are initially recorded
- The process for posting transactions from the prime books to subsidiary ledgers
- The concept and function of control accounts
- Reconciliation between subsidiary ledgers and control accounts
- Record keeping and internal controls over receivables and payables
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the primary reason for maintaining subsidiary ledgers in addition to the general ledger?
- Which document provides the original record of a sales transaction for later entry into the subsidiary ledger?
- When posting from the sales day book to the subsidiary ledgers, which accounts are updated?
- True or False: Control account balances should always match the total of the subsidiary ledger balances at period end—explain why or why not.
Introduction
Accurate bookkeeping depends on systematically recording business transactions through a defined workflow. Transactions are first entered in books of prime entry, then posted to subsidiary ledgers, and finally summarized in control accounts within the general ledger. Understanding the movement and linkage of information at each stage is required for both day-to-day accounting tasks and for scoring well on the ACCA exam.
Key Term: prime book
A record—such as a sales day book or purchases day book—used for the initial entry of financial transactions before posting to ledgers.Key Term: subsidiary ledger
A ledger that contains individual accounts providing details for a particular type of transaction, such as accounts receivable or payable, supporting the general ledger control account.Key Term: control account
A summary general ledger account representing the total balance of related accounts held in a subsidiary ledger.
The Purpose and Types of Subsidiary Ledgers
Subsidiary ledgers—sometimes called memorandum ledgers—enable detailed tracking of transactions relating to individual customers, suppliers, or assets. The most common subsidiary ledgers are:
- Receivables (sales) ledger: Provides a running balance for each credit customer.
- Payables (purchases) ledger: Tracks the balances owed to each supplier.
- Other types: Fixed asset registers, payroll ledgers, or inventory ledgers, depending on business needs.
Recording in subsidiary ledgers improves accuracy, facilitates error detection, and supports credit control and supplier payment management.
Separation of Duties and Internal Control
Maintaining subsidiary ledgers enhances internal controls by allowing segregation of duties. For example, the person posting to the subsidiary ledger may be different from the one preparing the control account, making it easier to detect discrepancies or unauthorized changes.
Posting Transactions from Prime Books
Transaction Flow
- Prime Entry: A transaction originates from a business document (e.g., sales invoice), and is entered into a prime book appropriate to its type, such as the sales day book (for credit sales) or cash book (for cash receipts and payments).
- Posting to Subsidiary Ledger: Periodically (often daily or weekly), individual entries from prime books are posted to the relevant account in the subsidiary ledger. For example, each customer's sales are listed in the receivables ledger.
- Control Account Update: The total for the period from the prime book is posted to the control account in the general ledger.
Key Term: sales day book
A prime book that lists all credit sales before they are posted to the sales ledger and sales control account.
Worked Example 1.1
A business issues three sales invoices in September:
- Invoice 101 to Alpha Ltd for £1,000
- Invoice 102 to Beta Ltd for £500
- Invoice 103 to Gamma Ltd for £1,200
These are recorded in the sales day book. Explain the postings required to subsidiary ledgers and the control account.
Answer:
- Each individual invoice is posted to the respective customer’s account in the receivables (sales) subsidiary ledger:
- Alpha Ltd Dr £1,000
- Beta Ltd Dr £500
- Gamma Ltd Dr £1,200
- The total credit sales (£2,700) is debited to the sales ledger control account in the general ledger, with a corresponding credit to sales revenue.
Control Accounts and Reconciliation
The control account in the general ledger provides an overall balance that should equal the combined balances of all individual accounts in the related subsidiary ledger. This acts as a key internal check and simplifies trial balance preparation.
Reconciliation Procedure
- At regular intervals, the total of the individual balances in the subsidiary ledger is compared to the control account balance.
- Any discrepancies must be investigated and resolved, commonly arising from posting errors, omitted transactions, or timing differences.
Key Term: reconciliation
The process of comparing balances between different records (such as the control account and subsidiary ledger) to identify and correct inconsistencies.
Posting Other Transactions
Subsidiary ledgers also require updating for credit notes, payments, receipts, discounts, and returned goods. These are sourced from the relevant prime books (returns day book, cash book) and posted individually to the relevant accounts.
Worked Example 1.2
A supplier statement reconciliation reveals that a payment of £600 made to Lark Supplies has not been recorded in the payables subsidiary ledger, but it has been updated in the control account.
Answer:
The payment should be posted to Lark Supplies’ account in the payables subsidiary ledger (credit £600) to match the control account and ensure both records agree.
Exam Warning
In the exam, you may be asked to spot or correct situations where the control account and subsidiary ledger totals do not agree. Common causes include postings to the wrong customer or supplier account, forgetting to post an entry, or posting a payment to the wrong side of an account.
Benefits of Subsidiary Ledgers
- Provides detailed records for managing and collecting receivables or making timely payments to suppliers.
- Enables regular reconciliation and prompt detection of errors or fraud.
- Reduces congestion in the general ledger by keeping detailed entries in the subsidiary ledgers only.
Summary
Subsidiary ledgers support detailed management of receivables, payables, and other accounts. Posting individual transactions from prime books ensures each customer or supplier balance is accurate, while control accounts in the general ledger provide summarized totals for trial balance and financial statement purposes. Regular reconciliation between subsidiary ledgers and control accounts is essential for completeness and accuracy.
Key Point Checklist
This article has covered the following key knowledge points:
- Explain the role and types of subsidiary ledgers
- Describe the posting process from prime books to subsidiary ledgers and control accounts
- Define and use control accounts for financial control
- Understand the need for and method of reconciliation between subsidiary ledgers and control accounts
- Apply these procedures in accounting records and exam contexts
Key Terms and Concepts
- prime book
- subsidiary ledger
- control account
- sales day book
- reconciliation