When a company bills its customers for services rendered or purchased products, it typically maintains a general ledger of accounts receivable that keeps a record of the total amount of money customers owe to the company. To keep track of the money each individual customer owes, the company also maintains ledgers for subsidiary accounts.
About Subsidiary Accounts
A subsidiary account is an account of an individual customer who owes money to a company. Multiple subsidiary accounts make up the total value of accounts receivable. Each of these accounts appear on the company's general ledger, which is the master list of open customer accounts. Each time a customer makes a payment, the company updates the subsidiary account, its entry on the general ledger and the balance of accounts receivable.
Most businesses keep individual records for each subsidiary account to ensure that the accounts receivable balance is correct. To verify the accuracy of the balance, the company compares the total of the values of the subsidiary accounts to the total value of accounts receivable. If the values don't match, the company will examine each entry in the general ledger to find the discrepancy.
Discrepancies between accounts receivable and the general ledger may occur if an employee makes inaccurate calculations on one or more of the subsidiary accounts. Discrepancies may also occur if an employee incorrectly transfers balances from the subsidiary accounts to the general ledger. Finally, a discrepancy between accounts receivable and the total value of the subsidiary accounts may occur if an employee adds the values on the general ledger incorrectly. If a company uses software to manage these records, discrepancies typically occur when employees input values incorrectly.
Application to Fraud
If a company discovers an inconsistency between the balance in its cash account and its bank reconciliation statement, it may investigate the activity in subsidiary accounts to determine the source of the problem. Employees engaging in embezzlement often hide their crimes by making unauthorized changes to the balances of subsidiary accounts. If the company discovers a fraudulent entry, the subsidiary account's statement may become evidence in a case against the employee.