Prudent business managers don't relegate their company's recordkeeping to the accounting department — at least not entirely. That doesn't mean managers have to be CPAs or debit-and-credit experts. But having a basic understanding of a business's accounting records shouldn't be considered optional. More than one firm has floundered because the company continued to spend beyond its means, suffering cash flow shortages while managers remained in the dark — until the accounting department showed up with bad news.Central to any modern accounting system is the general ledger, also known as the book of accounts. It's "general" because it contains all the accounts of the business. These include balance sheet accounts such as cash, accounts receivable, accounts payable, property and equipment, owner's equity, and the like. Also included are accounts presented on the profit and loss statement: sales revenue, salary and administrative expense, cost of goods sold, and so on. If the accounts are accurate, a report from the general ledger known as a "trial balance" will show that debits (entries on the left side of the ledger) and credits (entries on the right) agree. That's the essence of double-entry bookkeeping. It's simply a way of making sure that financial transactions are recorded accurately.
A business may also maintain separate accounting journals and subsidiary ledgers, sometimes called "books of original entry" because that's where transactions are first recorded before information is "posted" (transferred) to the general ledger. The detail in the subsidiary substantiates the account balance in the general ledger.
Why use subsidiary ledgers?
For one thing, recording every accounting transaction directly to the general ledger can make analysis challenging and tedious. Subsidiary ledgers focus on a single type of transaction such as accounts receivable or accounts payable. By analyzing an accounts payable subsidiary ledger, for example, a manager might discover problems with collections and payments that may have gone undetected if buried in the general ledger.
In a similar way, an accounts receivable subsidiary ledger contains the individual accounts of a company's charge clients. Tracking customer payments and balances is, therefore, simplified. Maintaining separate cash receipt and disbursement journals may provide a similar benefit, making it clear, at a glance, where the company is getting and spending its cash.
A foundational knowledge of your company's financial records can help you make better decisions and keep your business on track. Call us if you have any questions.