Question

Which of the following is incorrect concerning subsidiary ledgers? a. The purchases ledger is a common subsidiary ledger for creditor accounts. b. The accounts receivable ledger is a subsidiary ledger. c. A subsidiary ledger is a group of accounts with a common characteristic. d. An advantage of the subsidiary ledger is that it permits a division of labor in posting.

Short answer

None of the given options are incorrect based on traditional definitions.

Step-by-step solution

Understand the Question

We need to decide which statement about subsidiary ledgers is incorrect. A subsidiary ledger is a detailed ledger for specific accounts that support the general ledger.

Analyze Option (a)

Option (a) states that the purchases ledger is a common subsidiary ledger for creditor accounts. The purchases ledger typically records details of purchases from creditors, so this statement is correct.

Analyze Option (b)

Option (b) says that the accounts receivable ledger is a subsidiary ledger. Accounts receivable includes records of customers' accounts, which is indeed a function of subsidiary ledgers, making this correct.

Analyze Option (c)

Option (c) claims that a subsidiary ledger is a group of accounts with a common characteristic. Subsidiary ledgers, such as accounts receivable and accounts payable, share common characteristics, so this statement is correct.

Analyze Option (d)

Option (d) states that an advantage of the subsidiary ledger is that it permits a division of labor in posting. Subsidiary ledgers help distribute the workload of recording transactions, so this statement is true.

Determine the Incorrect Option

Since options (a), (b), (c), and (d) are correct based on known characteristics of subsidiary ledgers, recognize that one must contain an error or misrepresentation.

Key concepts

Purchases Ledger

A purchases ledger is a type of subsidiary ledger used by businesses to keep detailed records of transactions involving creditors or suppliers. This ledger helps in tracking all purchases made on credit. The purchases ledger maintains a detailed account for each creditor, stating how much the business owes and any payment issues.
Having a purchases ledger offers several advantages. It ensures that all creditor-related transactions do not clutter the general ledger, which should only contain summary information. It also provides a more accurate and detailed view of a company's liabilities at any given time.
Most importantly, the purchases ledger aids in efficient financial management. Accounting staff can quickly see outstanding bills and due dates, which helps in planning cash flow and avoiding late payment fees. By using this ledger, businesses can also build better relationships with suppliers by ensuring timely and correct payments.

• Helps track purchases from suppliers on credit.
• Prevents the general ledger from becoming overly detailed.
• Aids in managing cash flow by tracking payable accounts.

Accounts Receivable Ledger

The accounts receivable ledger is another type of subsidiary ledger, focusing on transactions involving customers. It contains individual records for each customer that owes the business money. This ledger details what customers owe, payment terms, and any discrepancies.
It streamlines the tracking of money due from customers, providing a clearer picture of incoming cash flow. Unlike the general ledger, which only holds aggregate information, this subsidiary ledger gives a detailed breakdown of individual account balances.
Utilizing an accounts receivable ledger improves business efficiency. It helps identify slow-paying customers, allowing a company to address potential cash issues before they escalate. Additionally, the ledger can manage credit limits for each customer, which is vital for maintaining a balanced financial position.

• Tracks what customers owe the business.
• Offers detailed information on each customer account.
• Improves cash flow management and credit control.

Division of Labor in Posting

With the use of subsidiary ledgers, such as the purchases ledger and accounts receivable ledger, businesses can enjoy the benefit of distributing the workload of posting financial transactions. This concept is known as the division of labor in posting.
This process means that different accounting staff members can focus on specific ledgers, making data entry more manageable and reducing errors. By dividing tasks, employees can specialize, leading to improved efficiency and accuracy in record-keeping.
Furthermore, this approach enhances accountability and control within the accounting department. Different sections of the financial data are checked and managed in smaller, more focused chunks, ensuring no detail is overlooked in the broader financial picture.

• Allows for specialization among accounting staff.
• Reduces errors and increases accuracy in posting.
• Improves accountability and internal controls.