A control account is a general ledger summarising an account representing a collection of connected subsidiary accounts. Its goal is to give a sense of control and an overview of each individual transaction within the subsidiary accounts. For instance, a control account for receivables would combine all of the individual client balances to create a total sum for the company's receivables.
Knowing some accounting terms will be helpful if you run your small business. Control accounts are one such term. Control accounts are summarised accounts in a general ledger. Financial reporting is based on control accounts. Transaction details from subsidiary ledgers determine the balances of control accounts. An organisation's control accounts provide an overview of its transactions. A control account balance that doesn't match the sub-ledger subtotal should be corrected. A company's unique profile determines the types and numbers of control accounts, including accounts payable and accounts receivable. Keep reading to learn more about the control account's meaning, purpose, use, advantages, and limitations.
Did You Know? During the Mauryan Empire in India, Chanakya wrote a manuscript similar to a financial management book. There are few precise details regarding the maintenance of a sovereign state's books of accounts in his book Arthashastra.
What Is a Control Account?
Control accounts contain only the balances of the associated subsidiary accounts in the general ledger. Various subsidiary ledgers record the details of a company's transactions, balanced and summarised in the corresponding control account. By focusing merely on the balances of each account, control accounts allow for high-level analysis, whereas subsidiary accounts are vital for recording a company's transactions. In large companies with a high volume of transactions, they are essential for reconciling account balances.
Alternatively, the control account may be called the controlling or adjustment account. Companies that sell products on credit may have many transactions in their accounts receivables sub-ledger. A sub-ledger contains details of those transactions, while a control account keeps track of the balance. In an accounts receivable control account, the total amount owed to the company at any given point in time is shown without the details of the transactions with each customer.
What Is a Cost Ledger Account?
A cost ledger control account is also known as General Ledger Adjustment Account. The cost control account appears in the financial ledger of an accounting system that keeps separate books for financial and cost records. The cost ledger control account balance should be equal to the cost ledger net total entries.This account is used to complete double entries. This account is credited with all expenditures. A debit is made to this account when sales are made, and a credit is made when net profits or losses are transferred from costing profit and loss accounts. It represents the net total of all the balances in the impersonal account at the end of the particular period.
Purpose of Control Account
Before posting the transactions to the subsidiary or primary account, the control account clarifies and rechecks each account and its transactions to ensure accuracy. Control accounts, such as those for sales and debtor ledgers, summarise transactions entered into individual accounts. Discrepancies or errors are corrected before posting to the main ledger.The purpose of control accounting is to ensure accurate reconciliation and to produce clean financial reports. Control accounts for accounts receivable must match the subtotals of the customer balances in the sub-ledger. It is, therefore, necessary to correct an error in the books if it does not.
How Control Accounts Work?
Control accounts are an essential component of double-entry accounting and constitute the basis of the general ledger. These reports summarise each sub-ledgers total balance, allowing a streamlined analysis of a company's balance sheet without the lengthy details contained in each. Control accounts provide summary balances that are sufficient for analysing financial reports.
Some general ledgers contain multiple control accounts, such as accounts receivable, which are informed by various sub-ledgers, depending on the size and complexity of the business. A summary balance is associated with each control account in the general ledger. Each sub-ledger contains many transactions, so that number represents a reconciliation of those transactions.For instance, accounts receivable sub-ledgers record and maintain the details of each transaction, including data about the customer, the sale, any refunds, returns, and payment terms. The accounts receivable control account is calculated by adding sub-ledgers for each reporting period. An accounts receivable control account shows the total amount owed to a company, while its sub-ledger shows the individual amounts owed to customers. Double-entry accounting may allow smaller companies to rely on control accounts if they remain balanced. The accounts receivable balance increases as invoices are issued, debiting the control account. As payments arrive, the control account is credited, decreasing its balance.
Types of Control Accounts
In double-entry accounting, accounts receivable and accounts payable are the most commonly used control accounts.
Among the most common control accounts are:
1. Accounts Receivable: The accounts receivable are the funds customers owe for products or services a company has invoiced.
2. Accounts Payable: A company's Accounts Payable is when it purchases goods on credit that the company repays within a short time frame.
3. Fixed Assets: Fixed assets are long-term physical properties or equipment that generate income for a business.
4. Inventory: In inventory, a business holds all the goods, merchandise, and materials it plans to sell.
5. Payroll: A company's payroll is the total of all the compensation it pays its employees on a given date.
Accounting software facilitates accurate data segmentation by automatically categorising data and creating control accounts and sub-ledgers. However, additional control accounts may be necessary depending on the company's size, type, and industry. It's essential to ensure that each aspect of your business has a control account since it comprises the general ledger used for financial reporting.
Also Read: Limitations and Drawbacks of Financial Accounting Explained
Control Account Examples
ABC company is a manufacturing company. The sales ledger shows ₹30000 in sales. The trade receivable for the period stands at ₹10000 in different debtors' accounts, and the trade payable at ₹20000 in different creditors' accounts. For all these ledgers, the company has a control account. Transfer the balance to this account by passing entry into the system.
Solution
Now transfers all the individual accounts' debtor's balance to the debtor's account.
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Debtor Control Account
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All individual balances have been transferred to the debtor's control account. Similarly to trade receivables, all trade payable balances are transferred to creditor accounts.
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Debtor Control Account
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All individual balances have been transferred to creditors' control accounts.
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Sales Control Account
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All sales have been transferred to the sales control account.
Uses of Control Accounts
1. Extract Debtor and Creditor Balance: You can use a control account to extract debtor and creditor balances. It is unnecessary to extract vendor and debtor accounts separately to extract balances from control accounts.
2. Helps to Calculate Arithmetic Accuracy: Using it, you can verify the arithmetic accuracy of the ledger accounts.
3. Find Errors in Accounts: You can use a control account to locate errors in individual or personal accounts.
4. Set Off Debtor’s Account with Creditors: A control account can set off a debtor's account with a creditor's account. The control account must also be affected when the personal account is affected.
Advantages of Control Accounts
Control accounts are used in accounting for several reasons.
1. Helps to Identify Errors: Error identification is the first reason. Subsidiary ledger errors are easily identified when reviewing control ledgers. Because the control account only examines the end balance, there is a lower risk of miscalculation. In most cases, the subsidiary ledger has the error if your accounts do not match. Accounts receivable subsidiary ledgers are one place where this can happen quickly.
2. Helps in Reviewing General Ledger: You can also review the general ledger using control accounts and catching errors. It is possible to remove a trial balance from the general ledger. Certain control accounts need to be checked if they do not balance. This is both a preventative measure and a catch-all measure.
3. Prevents Fraud: Control ledgers also provide the capability of preventing fraud. One person can manage subsidiary accounts, while another person can manage control. In other words, no one can manipulate the ledgers. This is a very effective security measure.
Control Account Limitations
Control accounts are excellent, but they have one major disadvantage. They produced another account that needs to be reviewed. Even though they may give you complete control, they require more work. Control account managers are responsible for monitoring these accounts. Their job is to monitor all activities related to control accounts. This may seem small, but it must still be accomplished. It is not a good idea for the person in charge of your general accounts to also be in charge of your control accounts.
Also Read: What Are the Three Golden Rules of Accounting? Explained with examples
Conclusion
A control account is a summarised account that maintains the records of the individual accounts in the ledger, and that is clarified and re-verified regularly. As a result of following this procedure, the management can create control over the ledger posting, which prevents the possibility of fraud and misrepresentation.
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