Accounts receivable subsidiary ledger: What is it and how to use it?

Have you ever found yourself in this situation: your customer wants to extend their line of credit with you, and you need hard data to make that decision, but your general ledger just isn’t granular enough to give you what you need? That’s where an accounts receivable (AR) subsidiary ledger swoops in to save the day.

You’re not alone—87% of businesses struggle with late payments, and 7.5% of invoices end up as bad debt (Sage). Without detailed tracking, mid-sized businesses waste 14 hours weekly on manual credit management (Intuit). An AR subledger fixes this.

The tl;dr is that your AR subledger contains all of the critical information you need to extend lines of credit, track customer payment behavior and accurately reconcile your credit accounts.

But, knowing how important an AR subsidiary ledger is, and how to implement and use one, are two different things, which is why this article breaks down exactly how to do just that. But let’s start with the more comprehensive version of what an accounts receivable subledger is and does.

What is accounts receivable subledger?

An accounts receivable subsidiary ledger tracks individual customer transactions, payments, and balances when credit is extended. It provides detailed customer-specific information, unlike the general ledger's summary view of total receivables.

This subsidiary ledger is crucial for managing customer accounts and credit effectively, as it allows for tracking individual balances and sales on credit. Given that for the last 15 years (from 2010) over 40% of all credit sales invoices are not paid on agreed terms, tracking credit account data is critical to maintaining steady cash flow (Sage).

In contrast, the general ledger provides a high-level overview, summarizing total receivables and other financial positions. Without the subsidiary ledger, identifying specific amounts owed by individual customers is challenging.

Understanding accounts receivable subsidiary ledger

An accounts receivable subsidiary ledger is an accounting ledger detailing each customer's transaction and payment history when the business extends credit. It tracks:

Individual customer account balances
Sales made on credit
Payments received
Outstanding invoices

It complements the general ledger's accounts receivable controlling account, providing a detailed breakdown of the total receivables.

Accounts receivable subsidiary ledger vs. general ledger

The accounts receivable subsidiary ledger provides a detailed breakdown of individual customer accounts, while the general ledger's AR control account summarizes the total amount owed by all customers.

The table below breaks down the difference between an accounts receivable subsidiary ledger and a general ledger:

Feature	Accounts Receivable Subsidiary Ledger	General Ledger
Level of Detail	Provides detailed transaction and payment history for each individual customer.	Provides a summary of the total accounts receivable balance.
Tracking	Tracks individual customer balances, sales made on credit, payments received, and outstanding invoices.	Tracks controlling accounts and summary balances.
Use Case	Used to manage individual customer accounts and credit.	Used to provide a high-level overview of the financial position.
Manual Tracking Challenge	Relatively easy to track individual balances.	Very challenging as the general ledger only shows a lump-sum AR balance, making it impossible to identify which customers owe specific amounts without a subsidiary ledger.

Reconciliation and using control accounts

The sum of all individual customer account balances in the accounts receivable subsidiary ledger should always equal the balance of the accounts receivable control account in the general ledger. This ensures that the detailed data in the subsidiary ledger aligns with the summary data in the general ledger.

This relationship acts as an internal control, verifying the accuracy of the AR records. If there's a discrepancy, it signals an error that needs investigation.

To verify the accuracy of your accounts receivable subsidiary ledger, you need to periodically reconcile the subledger with the general ledger:

List all customer balances from the accounts receivable subsidiary ledger.
Sum all the customer balances.
Compare the total to the balance of the accounts receivable control account in the general ledger.

The total from the subsidiary ledger should match the balance in the general ledger. If there's a difference, trace the entries to identify and correct any errors.

The table below breaks down the steps of the process of reconciliation:

Process	Description
List customer balances (subledger)	Gather the ending balance for each customer from the accounts receivable subsidiary ledger.
Sum customer balances (subledger)	Calculate the total of all the customer balances obtained in the previous step.
Identify AR control account balance (gen. ledger)	Locate the balance of the accounts receivable control account in the general ledger.
Compare and reconcile	Match the total of customer balances (from step 2) with the ar control account balance (from step 3). investigate and correct any differences.

Why accounts receivable subledger matters for SMB

An accounts receivable subledger provides SMBs with a detailed view of customer credit and payment activities, unlike the general ledger's consolidated figures. This granular tracking enables effective credit management, informed decisions on credit limits, and proactive collection efforts to minimize bad debt and improve cash flow.

The subledger ensures financial record accuracy with a comprehensive audit trail and simplifies discrepancy resolution. Reconciliation with the general ledger's control account serves as an internal control, detecting errors or potential fraud.

Essentially, the AR subledger is vital for credit risk management, cash flow forecasting, and reliable financial statements, empowering SMBs to make sound financial decisions and maintain stability. Without it, SMBs lack actionable insight into customer receivables, hindering credit management and increasing financial risks.

How to set up an AR subledger (with flowchart)

While the exact setup of your AR ledger will change based on the needs of your particular company, here is a general outline of what steps you might typically find within the process of setting up an AR subledger.

Choose accounting software or system: Decide whether to use accounting software or create a manual system (e.g., spreadsheets). Software often simplifies AR subledger management.
Create customer accounts: Set up individual customer accounts in the chosen system. Include details like customer name, contact information, credit terms, and credit limits.
Record sales on credit: When a sale is made on credit, record the transaction in the customer's specific account. This includes invoice number, date, amount, and due date.
Track payments: Record any payments received from customers against their outstanding invoices. This ensures accurate balances are kept.
Generate reports: Regularly generate reports from the subledger to review customer balances, overdue invoices, and payment history.
Reconcile with general ledger: Periodically compare the total of all customer balances in the subledger to the AR control account balance in the general ledger to ensure accuracy.

Pro tip: Automate reconciliation (like 76% of Payer Rating users) to ensure subledger-GL alignment and flag discrepancies in real time

Real-world example:

A security firm using Chaser’s AR automation slashed DSO by 58% and saved 107 hours/month—freeing their team to focus on growth.
An accounting firm reduced debtor days from 60 to 24 by pairing their subledger with automated reminders, improving cash flow within months.

General flowchart outline

Step	Description
1. Start: Select System	Choose accounting software or manual system.
2. Create Customer Accounts	Set up individual customer accounts with relevant details.
3. Record Credit Sale	Record each sale on credit in the corresponding customer account.
4. Track Payments Received	Record customer payments against outstanding invoices.
5. Generate AR Subledger Reports	Create reports to review customer balances and payment status.
6. Reconcile with General Ledger	Compare subledger totals with AR control account balance in general ledger.
7. Are Balances Equal?	Check if subledger and general ledger balances match.
8a. Yes: Subledger Setup Complete	If balances match, subledger setup and recording are correct.
8b. No: Investigate & Correct Errors	If balances differ, investigate and correct errors in recording or reporting.
9. End: Monitor and Maintain AR Subledger	Regularly monitor and maintain the subledger for ongoing accuracy.

Note: This is a general outline. Specific steps may vary depending on your accounting system and business needs.

AR subledger template for SMBs

Customer	Inv #	Inv Date	Due Date	Amount	Pymt Date	Pymt Amt	Balance	Notes

Download your template here:

Instructions for use:

Customer: Enter the customer's name.
Invoice #: Input the unique invoice number.
Invoice date: Record the date the invoice was issued.
Due date: Note the date the payment is due.
Amount: Enter the total bill amount.
Payment date: Record the date a payment is received.
Payment amount: Input the amount of the payment received.
Balance: Calculate the remaining balance (Amount - Payment Amount). Update this field with each payment.
Notes: Add any relevant notes or comments.

How to update the subledger:

New invoices: Add a new row for each new invoice issued on credit.
Payments: Update the row for the relevant invoice with payment details when a payment is received. Recalculate the Balance after each payment.
Regular review: Review the subledger regularly to track overdue invoices and customer balances.

Reconciliation with the general ledger:

Total subledger balances: Sum the "Balance" column in the subledger to get the total accounts receivable balance.
General ledger AR control account: Find the balance of the Accounts Receivable control account in the general ledger.
Compare totals: Compare the total from the subledger to the balance in the general ledger.
Reconcile: The totals should match. If they don't, investigate and correct any errors in either the subledger or general ledger.
- Review entries for accuracy.
- Check for missing entries.
- Ensure all payments are recorded correctly.

Common pitfalls for AR subledger

Small and medium-sized businesses often face significant hurdles in managing their accounts receivable subledger effectively. This critical component of financial management tracks individual customer balances and the details of outstanding invoices. Inefficiencies in this area can lead to inaccurate financial reporting, cash flow problems, and ultimately, hindered growth. Here's a more in-depth look at common pitfalls and actionable solutions, emphasizing the advantages of automation and reliable tracking tools:

1. Inconsistent entries: The foundation of inaccuracy

Problem: When data entry processes for invoices, payments, and adjustments are not standardized, it leads to a lack of uniformity in the AR subledger. This can manifest in varying date formats, inconsistent use of naming conventions for customers or items, missing or incomplete invoice numbers, and discrepancies in how discounts or credits are recorded. Such inconsistencies make it difficult to generate meaningful reports, reconcile data accurately, and gain a clear understanding of outstanding receivables.
1. Solution: Implement stringent data entry standards and ensure all personnel involved are thoroughly trained on these procedures. Utilize predefined templates within spreadsheets or leverage the structured data fields available in accounting software. Establish clear guidelines for entering customer information, product or service codes, invoice details, payment terms, and any adjustments. Regularly review entries to identify and correct inconsistencies.
  1. Preventative tip: Invest in accounting software that enforces data validation rules, prompting users to adhere to predefined formats and preventing the entry of incorrect or incomplete information. Regularly audit a sample of entries to ensure compliance with established standards.

2. Lack of reconciliation: A recipe for discrepancies

Problem: The AR subledger serves as a detailed record of individual customer balances, while the Accounts Receivable control account in the General Ledger (GL) provides a summary view. Failing to regularly reconcile these two sets of records can lead to significant discrepancies over time. These discrepancies can arise from data entry errors in either the subledger or the GL, timing differences in recording transactions, or even missed or duplicated entries. Without regular reconciliation, it becomes challenging to identify and correct these errors, leading to inaccurate financial statements and flawed decision-making.
1. Solution: Establish a strict schedule for reconciling the AR subledger to the GL control account – ideally on a weekly or at least a monthly basis. This process involves comparing the total balance of all individual customer accounts in the subledger to the balance of the AR control account in the GL. Investigate and resolve any discrepancies identified promptly. Document the reconciliation process and any adjustments made.
  1. Preventative tip: Utilize accounting software that offers automated reconciliation features. These tools can automatically match transactions between the subledger and the GL, highlighting potential discrepancies and significantly reducing the manual effort involved in the reconciliation process.

3. Manual errors: The human element of risk

Problem: Relying heavily on manual processes for data entry, calculations (e.g., applying discounts, calculating sales tax), and transferring information between systems increases the likelihood of human error. These errors can range from simple typos in invoice amounts to incorrect calculations of balances or misallocation of payments. The cumulative effect of these manual errors can significantly impact the accuracy of the AR subledger and lead to incorrect customer statements, payment delays, and strained customer relationships.
1. Solution: Implement a policy of double-checking all manually entered data, especially critical information like amounts and dates. Where possible, incorporate data validation rules in spreadsheets (e.g., using formulas to flag out-of-range values) or, more effectively, transition to accounting software that automates many of these calculations and data entry processes. Minimize the need for manual data transfer between different systems by integrating them or using a unified platform.
  1. Preventative tip: Embrace automation for repetitive tasks such as generating invoices, applying recurring charges, and processing payments. Train staff on best practices for manual data entry and the importance of accuracy. Consider implementing a segregation of duties where one person enters data and another reviews it.

4. Delayed entry of data: Losing the pulse of receivables

Problem: When sales transactions, invoices, and payments are not recorded in a timely manner, the AR subledger quickly becomes outdated. This lack of real-time information makes it difficult to get an accurate picture of outstanding receivables, monitor customer payment behavior, and proactively address potential payment issues. Delayed data entry can also lead to inefficiencies in follow-up processes and increase the risk of overlooking past-due invoices.
1. Solution: Establish clear timelines and procedures for recording all AR-related transactions promptly. Ideally, invoices should be generated and recorded immediately after a sale or service delivery. Payments received should be entered into the system on the same day.
  1. Preventative tip: Leverage mobile apps or cloud-based accounting software that allows for real-time recording of transactions from any location. Integrate your sales or point-of-sale (POS) system with your accounting software to automatically transfer sales data and reduce manual entry.

5. Poor record keeping: The absence of evidence

Problem: Inadequate systems for organizing and retaining critical documents such as invoices, purchase orders, proof of delivery, and payment records can lead to significant challenges. Missing documentation can make it difficult to resolve customer disputes, track down payments, and provide necessary support during audits. Poor record keeping also hinders the ability to analyze payment trends and identify potential issues proactively.
1. Solution: Implement well-organized digital or physical filing systems for all AR-related documentation. Utilize cloud storage solutions for digital documents to ensure accessibility and data security. Establish clear protocols for naming and categorizing files. Scan paper-based documents and store them electronically.
  1. Preventative tip: Adopt a document management system or utilize the document attachment features within your accounting software to link supporting documents directly to relevant transactions. Regularly back up all digital records to prevent data loss.

6. No audit trail: Obscuring accountability and traceability

Problem: Without a comprehensive audit trail, it becomes nearly impossible to track changes made to AR records, identify who made those changes, and when they occurred. This lack of transparency can make it difficult to detect and correct errors, investigate discrepancies, and ensure accountability. A weak audit trail also poses a significant risk during financial audits.
1. Solution: Implement accounting software that automatically maintains a detailed audit trail, logging all additions, modifications, and deletions of AR-related data, along with timestamps and user identification. Establish policies that require all adjustments or corrections to be properly documented and authorized.
  1. Preventative tip: Regularly review the audit trail to identify any unusual or unauthorized activity. Ensure that user access controls are in place to restrict access to sensitive AR data and functions based on roles and responsibilities.

7. Failure to update balances: Misleading customer information

Problem: When customer balances are not updated promptly after payments are received, it leads to inaccurate statements and can cause confusion and frustration for customers. It also hinders the ability to accurately assess outstanding receivables and manage collections effectively. Sending incorrect balance information can damage customer relationships and lead to unnecessary disputes.
1. Solution: Establish a process for updating customer balances immediately upon receipt of payment. This should include accurately recording the payment amount, date, and method.
  1. Preventative tip: Utilize accounting software with automated payment processing and reconciliation features. These systems can automatically update customer balances when payments are received and matched, significantly reducing the risk of errors and delays. Integrate your payment gateway with your accounting software for seamless data flow.

8. Poor credit management: Increased risk of bad debt

Problem: Failing to track overdue invoices diligently or monitor customer credit limits can lead to an accumulation of bad debt. Businesses using payer ratings (a subledger feature) reduced DSO by 76%, while auto-call users got paid 20 days faster (Chaser). Without regular aging reports and analysis of payment patterns, SMBs may not identify slow-paying customers or those at high risk of default until it's too late. Lack of clear credit policies and consistent enforcement can exacerbate this issue.
1. Solution: Generate and review accounts receivable aging reports regularly (at least weekly). These reports categorize outstanding invoices based on how long they have been past due. Monitor customer payment history and identify any trends or red flags. Establish clear credit terms and limits for customers and consistently enforce them. Implement a proactive follow-up process for overdue invoices.
  1. Preventative Tip: Utilize accounting software that offers features for generating automated aging reports, setting up payment reminders, and tracking collection efforts. Consider implementing credit checks for new customers and periodically reviewing existing credit limits.

9. Lack of clear roles: responsibility and accountability gaps

Problem: When the responsibility for managing the AR subledger is not clearly defined, it can lead to tasks being overlooked, inconsistencies in processes, and a lack of accountability for the accuracy of the data. This can result in inefficiencies, errors, and delays in critical AR functions.
1. Solution: Assign specific roles and responsibilities for all aspects of AR subledger management, including data entry, reconciliation, collections, and reporting. Ensure that the assigned personnel have the necessary training and resources to perform their duties effectively.
  1. Preventative tip: Document the assigned roles and responsibilities in job descriptions or process manuals. Provide ongoing training to staff involved in AR management to ensure they stay up-to-date on best practices and the use of relevant software.

The power of automation and reliable tracking tools

Here's a breakdown emphasizing the benefits of automation and reliable tracking tools for managing an accounts receivable subledger:

1. Streamlined data entry and consistency

Automation ensures standardized data entry, reducing errors and inconsistencies in invoice formats, customer details, and payment records.
Software with data validation rules enforces accuracy, minimizing the risk of incorrect or incomplete information.

2. Accurate reconciliation and error detection

Automated reconciliation tools match transactions between the AR subledger and the general ledger, highlighting discrepancies and saving significant manual effort.
Regular reconciliation ensures data accuracy and prevents errors from accumulating over time.

3. Reduced manual errors

Automation minimizes manual calculations, data transfer, and entry, reducing human error in applying discounts, calculating taxes, and updating balances.
Software automates repetitive tasks like generating invoices and processing payments.

4. Real-time data and timely recording

Cloud-based accounting software and mobile apps enable real-time recording of transactions, providing up-to-date information on receivables.
Integration with sales or POS systems automatically transfers data, eliminating delays and manual entry.

5. Enhanced record keeping

Digital filing systems and cloud storage solutions organize and secure AR-related documents, ensuring accessibility and preventing data loss.
Accounting software with document attachment features links supporting documents to transactions, simplifying retrieval and review.

Enhancing your accurate accounts with an accurate AR subledger

Maintaining an accurate accounts receivable subledger is crucial for managing customer credit, tracking payments, and ensuring financial record accuracy. It allows businesses to have a detailed view of individual customer transactions, which is not available in the general ledger.

A well-maintained AR subledger provides actionable insights into customer receivables, empowering businesses to make sound financial decisions and maintain stability. Without it, businesses risk poor credit management, increased financial risks, and hindered growth.

Streamline your accounts receivable process with Chaser. This tool offers features designed to automate and simplify the management of outstanding invoices, helping businesses improve cash flow and reduce administrative burden. Try it for free, or speak to an expert about Chaser today.

Frequently asked questions (FAQs)

What if a customer disputes a charge?

To handle disputed charges: review the invoice and documentation, contact the customer, issue a credit memo if an error occurred, document the dispute and resolution in the subledger notes, or provide evidence if the charge is valid.

How often should I reconcile?

Reconcile the accounts receivable subsidiary ledger with the general ledger's AR control account weekly or monthly to promptly identify and prevent data discrepancies and errors. Businesses reconciling weekly get paid 7–20 days faster (Chaser).

Does this comply with audit standards?

A well-documented and accurate accounts receivable subsidiary ledger, reconciled regularly, supports audit compliance. Maintaining an audit trail of all transactions and changes with supporting documentation is crucial. Adherence to GAAP facilitates auditing.

What if I already use a lockbox?

Implement the integration of lockbox payment data with the accounts receivable subsidiary ledger to guarantee timely and precise recording and reconciliation with the general ledger. Automation of this integration is recommended to optimize the process.