## **Learning Outcomes**

After reading this article, you will be able to explain the purpose and structure of subsidiary ledgers, including the sales ledger and purchases ledger. You will understand how these ledgers relate to the general ledger, the information they provide, and their practical role in maintaining accurate and efficient accounting records for ACCA FA2.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand how subsidiary ledgers are used to maintain detailed records of receivables and payables. This article covers the following syllabus points:

- The reasons for dividing the ledger system into general ledger, sales ledger, and purchases ledger
- The structure and purpose of subsidiary ledgers
- Recording individual customer and supplier accounts in subsidiary ledgers
- Reconciling subsidiary ledger totals with general ledger control accounts
- The importance of subsidiary ledgers in supporting efficient credit control and supplier management

## **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._

1. What is the primary purpose of maintaining a sales ledger as a subsidiary ledger?
2. True or false? The purchases ledger records both individual supplier balances and the overall liability owed to all suppliers.
3. In what account is the total balance of the sales ledger recorded in the general ledger?
4. Briefly state one advantage of using subsidiary ledgers for managing accounts receivable and accounts payable.

## **Introduction**

In an entity with frequent credit sales and purchases, the number of customer and supplier transactions can overwhelm the general ledger. Subsidiary ledgers solve this by providing detailed records for each customer and supplier, while consolidating totals in control accounts within the general ledger. This ensures both accuracy and clarity for financial reporting and day-to-day operations.

> **Key Term: subsidiary ledger**
> A ledger containing individual accounts for large categories, such as each customer or supplier, supporting a corresponding control account in the general ledger.

## **THE STRUCTURE OF SUBSIDIARY LEDGERS**

Subsidiary ledgers are specialized ledgers used to track detailed transactions for high-volume categories, specifically receivables and payables.

### Sales Ledger (Receivables Ledger)

The sales ledger holds a separate account for every credit customer. Each account records invoices issued, payments received, sales returns, and any discounts or write-offs related to that customer. This allows the entity to see how much each customer owes at a glance.

> **Key Term: sales ledger**
> A subsidiary ledger containing a separate record for every credit customer, detailing all transactions that affect amounts owed to the business.

### Purchases Ledger (Payables Ledger)

The purchases ledger maintains individual accounts for each credit supplier. It includes invoices received, payments made, purchase returns, and any discounts received. This ledger enables up-to-date monitoring of what is owed to whom and when payment is due.

> **Key Term: purchases ledger**
> A subsidiary ledger containing individual accounts for every supplier from whom goods or services are bought on credit, showing amounts owed at any time.

### Relationship with the General Ledger

The totals of the sales and purchases ledgers are summarized in respective control accounts in the general ledger:

- **Sales Ledger Control Account**: Shows the total receivables from all customers.
- **Purchases Ledger Control Account**: Represents total payables due to suppliers.

This relationship ensures that while individual customer or supplier activity is managed in the subsidiary ledgers, the general ledger shows only the total balances required for the financial statements.

### Benefits and Controls

Using subsidiary ledgers provides the following advantages:

- Reduces clutter in the general ledger by holding only control account balances.
- Enables assignment of specific credit control and supplier management roles to staff.
- Facilitates easier error detection and correction through reconciliation.
- Segregates duties, improving accountability and minimizing the risk of fraud or error.

### **Worked Example 1.1**

A business has 500 credit customers and 80 credit suppliers. All credit sales and receipts from customers are recorded in the sales ledger, and all credit purchases and supplier payments are in the purchases ledger. At the end of the month, the total of all unpaid customer balances is \$56,000, and the sum owed to suppliers is \$42,000.

**How are these totals reflected in the general ledger, and why is this structure useful?**

> **Answer:**
> The balance of \$56,000 owing from customers is recorded as the balance on the sales ledger control account in the general ledger. The \$42,000 owed to suppliers is recorded as the purchases ledger control account balance. This structure means that management and financial statements focus on total amounts due and owed, while individual payment and collection matters are handled in the subsidiary ledgers, maintaining efficiency and clarity.

### Reconciling the Ledgers

Regular reconciliation between the total of the subsidiary ledgers and the corresponding control account ensures the accuracy of records. Discrepancies may indicate errors, omissions, or fraud and must be investigated promptly.

### **Worked Example 1.2**

Suppose the sum of individual customer account balances in the sales ledger totals \$98,750, but the sales ledger control account in the general ledger shows \$99,100.

**What should the accountant do next?**

> **Answer:**
> The accountant should reconcile the sales ledger to the control account to find and correct the \$350 difference. This may involve checking for errors in posting, missing transactions, or journals affecting the control account only.

### **Exam Warning**

> In the ACCA exam, you may be required to identify the correct ledger for particular transactions and explain how the sales ledger, purchases ledger, and their control accounts interact. Pay careful attention to the use of control accounts and the importance of regular reconciliation.

## **Summary**

Subsidiary ledgers, specifically the sales (receivables) ledger and purchases (payables) ledger, track individual balances and activity for customers and suppliers. The control accounts in the general ledger summarize these totals for use in trial balances and financial statements. This structure supports accuracy, responsibility, and control in the accounting system.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Describe the purpose and structure of subsidiary ledgers (sales and purchases ledgers)
- Explain how individual customer and supplier accounts are managed within subsidiary ledgers
- Relate subsidiary ledger totals to control accounts in the general ledger
- Understand the role of ledger reconciliation in maintaining accurate accounting records
- Recognize the operational and control benefits of subsidiary ledgers

## **Key Terms and Concepts**

- subsidiary ledger
- sales ledger
- purchases ledger

Subsidiary ledgers - Sales ledger and purchases ledger structure