The Hierarchy
GENERAL LEDGER (the filing cabinet—ALL accounts live here)
├── Cash
├── Accounts Receivable ─────────────► SUBSIDIARY LEDGER (by customer)
├── Raw Materials
├── Work in Process ─────────────────► SUBSIDIARY LEDGER (job cost sheets)
├── Finished Goods ──────────────────► SUBSIDIARY LEDGER (by completed job)
├── Accounts Payable ────────────────► SUBSIDIARY LEDGER (by vendor)
├── Manufacturing Overhead ──────────► SUBSIDIARY LEDGER (by cost type)
├── Sales Revenue
├── Cost of Goods Sold
└── ... etc.
| Term | What It Is | Analogy |
|---|---|---|
| General Ledger | The collection of ALL accounts | The filing cabinet |
| Account | A record tracking one type of item | A folder in the cabinet |
| Subsidiary Ledger | Detailed breakdown backing up certain accounts | A separate binder with itemized records |
Control Accounts vs Regular Accounts
Not every account needs detailed backup. The ones that do are called control accounts.
| Type | Has Subsidiary Ledger? | Why? |
|---|---|---|
| Control account | Yes | Need to track individual items (customers, jobs, vendors) |
| Regular account | No | One balance is sufficient |
Examples:
| Control Account | Its Subsidiary Ledger Contains |
|---|---|
| Accounts Receivable | Individual customer balances |
| Accounts Payable | Individual vendor balances |
| Work in Process | Individual job cost sheets |
| Finished Goods | Individual completed job records |
| Manufacturing Overhead | Individual overhead cost records by type |
| Regular Account | Why No Subsidiary |
|---|---|
| Cash | One balance tells you what you have |
| Rent Expense | Don’t need breakdown by… what? |
| Sales Revenue | (Though some companies do track by product line) |
The Reconciliation Rule
Control account balance = Sum of subsidiary ledger balances
If they don’t match, something was recorded incorrectly.
Example: WIP as a Control Account
General Ledger Subsidiary Ledger (Job Cost Sheets)
───────────────── ─────────────────────────────────────
Work in Process Job 101: $15,000
$47,000 (control) = Job 102: $22,000
Job 103: $10,000
────────
Total: $47,000 ✓
When you debit WIP $6,000 for direct materials on Job 101:
- The general ledger WIP account increases by $6,000
- Job 101’s cost sheet (subsidiary) increases by $6,000
Both update simultaneously. The job cost sheet is the subsidiary record.
Clearing Accounts
A clearing account is a different concept—it’s an account where debits and credits should net to zero over time.
| Term | Meaning |
|---|---|
| Control account | Has subsidiary detail that must reconcile |
| Clearing account | Receives offsetting debits and credits |
MOH is both:
- Control account → backed by detailed records of each overhead cost type
- Clearing account → actual costs flow in (debit), applied costs flow out (credit)
Manufacturing Overhead (Clearing Account)
┌─────────────────────┬─────────────────────┐
│ Debits │ Credits │
│ (Actual costs) │ (Applied to WIP) │
├─────────────────────┼─────────────────────┤
│ Indirect materials │ Applied overhead │
│ Indirect labour │ (via POHR × actual │
│ Factory utilities │ activity) │
│ Factory depreciation│ │
│ Factory insurance │ │
├─────────────────────┼─────────────────────┤
│ $50,000 │ $48,000 │
└─────────────────────┴─────────────────────┘
Balance: $2,000 debit (underapplied)
Ideally debits = credits and MOH clears to zero. When it doesn’t → underapplied or overapplied overhead. See LO7.
The Two Distinct Processes
The textbook emphasizes that recording actual overhead and applying overhead are “two separate and entirely distinct processes”:
| Process | When It Happens | Entry | What It’s Based On |
|---|---|---|---|
| Recording actual | Throughout the period as costs incur | Dr. MOH / Cr. Various | Real dollars spent |
| Applying to jobs | When jobs use activity | Dr. WIP / Cr. MOH | POHR × actual activity |
Why this matters: These processes happen independently. You don’t wait to see how much actual overhead you incurred before charging jobs. You apply overhead using the predetermined rate as work happens. The two amounts (actual collected vs applied released) won’t automatically match—that’s why MOH can have a year-end balance.
See Applied vs Actual for the full explanation of why overhead uses applied (estimated) costs while direct materials and direct labour use actual costs.
Account Classifications
Accounts can be categorized multiple ways simultaneously:
By Financial Statement
| Type | Examples | Where It Appears |
|---|---|---|
| Asset | Cash, AR, Inventory, WIP, Equipment | Balance Sheet |
| Liability | AP, Wages Payable, Notes Payable | Balance Sheet |
| Equity | Common Stock, Retained Earnings | Balance Sheet |
| Revenue | Sales Revenue, Service Revenue | Income Statement |
| Expense | COGS, Rent Expense, Wages Expense | Income Statement |
By Permanence
| Type | Year-End Treatment | Examples |
|---|---|---|
| Permanent (Real) | Balance carries forward | Assets, Liabilities, Equity |
| Temporary (Nominal) | Closes to Retained Earnings | Revenues, Expenses |
By Detail Level
| Type | Has Subsidiary? | Examples |
|---|---|---|
| Control account | Yes | AR, AP, WIP, Finished Goods, MOH |
| Regular account | No | Cash, Rent Expense |
By Function (Managerial)
| Type | Purpose | Example |
|---|---|---|
| Clearing account | Collects costs then releases them | Manufacturing Overhead |
| Accumulation account | Builds up costs on a cost object | Work in Process |
Why This Matters for Job-Order Costing
| Account | Role | Control? | Clearing? |
|---|---|---|---|
| Raw Materials | Holds materials before production | Yes (by material type) | No |
| Work in Process | Accumulates costs on jobs | Yes (job cost sheets) | No |
| Finished Goods | Holds completed job costs | Yes (by job) | No |
| Manufacturing Overhead | Collects indirect costs, releases via POHR | Yes (by cost type) | Yes |
| Cost of Goods Sold | Receives cost when jobs sell | No | No |
MOH is unique—it’s the only one that’s both a control AND a clearing account.
North: Where this comes from
- Financial Accounting Fundamentals (ledger structure basics)
- Double-Entry Bookkeeping (debits and credits must balance)
East: What opposes this?
- Single-Entry Systems (simpler but less control)
- Cash Basis Accounting (doesn’t need accrual-related accounts)
South: Where this leads
- FMGT-2294 Chapter 5 - Notes from the Textbook (job-order costing uses this structure)
- Reconciliation Procedures (verifying control = subsidiary)
- Underapplied and Overapplied Overhead (what happens when clearing account doesn’t clear)
West: What’s similar?
- Database Normalization (summary tables vs detail tables)
- Parent-Child Relationships (one-to-many structure)