Control accounts show the summarized version of general journal accounts of a business. However, they are created for selective bookkeeping records only.
A business can summarize its important subsidiary ledger accounts to show final balances as control accounts. It helps a business to keep an overview of important ledger accounts quickly.
What is a Control Account?
A control account shows the summary of subsidiary ledger accounts in the general ledger. It does not include transaction details like subsidiary ledger accounts.
Control accounts are also called adjustment or controlling accounts. They are primarily used to take an overview of subsidiary ledger accounts without delving into details.
The ending balance of the subsidiary ledger account is shown as a summary in a control account ledger. It shows a quick summary of the sub-ledger account and its ending balance must match the sub-ledger balance.
How Do Control Accounts Work?
Control accounts usually work like summarized balance sheets of a business. Their purpose is to keep the ending balances of each sub-ledger account.
A business records all transactions on its daily log books and then transfers them to the general ledger. Larger businesses with a large number of transactions can then categorize some accounts into control accounts by creating subsidiary ledger accounts for them.
The sub-ledger accounts keep all the transaction details like date, amount, transaction purpose, type, and contra-account details.
At the end of an accounting period, each sub-ledger account is balanced and the ending figure is taken to the control account.
A business can update the controlling account balances daily or frequently if it is using accounting software.
A business can create multiple controlling accounts depending on its operations and requirements based on its transaction volume.
The ending balances on control accounts are usually sufficient to carry forward to adjusted trial balance sheets. These balances are then used to create the financial statements of the reporting entity.
Like any other general ledger account, the principles of double-entry bookkeeping must be followed for controlling accounts too. An omitted transaction is usually hard to identify and the ending balances must match those in the sub-ledger balance sheets.
Types of Control Accounts
Two common controlling accounts are accounts receivable and accounts payable. A business can create as many controlling accounts as it wants.
A reporting entity will record all transactions for accounts receivable or payables in the sub-ledger. These transactions will keep all details including the client data.
A control account will only include ending balances for each category from these sub-ledger accounts without writing down all transaction details.
Common types of control accounts include:
- Accounts receivable
- Accounts payable
- Cash control account
- Revenue control account
- Inventory control account
A control account suits for a category where there is a large number of transactions. It’s easier to keep a sub-ledger account for transaction details and summary on the main ledger book.
How to Create a Control Account?
Like any other journalling procedure, a control account begins with the information captured through source documents.
A source document for accounting transactions can be an invoice, a sales receipt, a cash voucher, and so on.
With each transaction, a business creates a source document and records the amounts with details. Then this information is transferred to the book of primary entries.
Here each transaction is categorized and recorded under the relevant subsidiary ledger account heading. Each sub-ledger account contains an ending balance for each category.
This ending balance is then transferred to the control account. Unlike the sub-ledger accounts, the controlling accounts in the general ledger will not include transactions but only the ending balance.
Any subsequent changes to sub-ledger accounts will change the ending balances in the general ledger too. However, it’s a hard practice when done manually.
The ending balances for controlling and sub-ledger accounts should match and any reconciliation should focus on removing omissions and errors.
Format Sample
Let’s understand the concept of control accounts with the help of a simple working example.
Suppose a company Blue Star Co. has the following data recorded in its primary book of entries.
Source Documents | The Journal | General Ledger |
Invoices: Customer A = $2,000 Customer B = $1,200 Customer C = $700 | Customer A = $2,000 Customer B = $1,200 Customer C = $700 Sales Total = $3,900 | Sales Account Credit Balance = $3,900 |
Receipts from Customers Customer A = $800 Customer B = $200 Customer C = $700 | Cash Account Customer A = $800 Customer B = $200 Customer C = $700 Total Cash Balance = $1,700 | Cash Control Account Debit Balance = $1,700 |
Accounts Receivable Sub-Ledger Account Customer A = $1,200 Customer B = $1,000 Customer C = $0 Total Cash Balance = $2,200 | Accounts Receivable Control Account Debit Balance = $2,200 |
As you can see the ending balances on the sub-ledger accounts and the controlling accounts for cash and accounts receivable are equal.
Every transaction will change the sub-ledger account balances and hence the controlling account balance.
The illustrative control account format can be constructed like this:
Accounts Receivable Control Account | |||
Balance B/F | $X | Balance B/F | $X |
Credit Sales | $x | Sales Returns | $x |
Returned Cheques | $x | Banak Account | $x |
Interest Charged | $x | Discounts to Customers | $x |
Other Refunds | $x | ||
Balance C/F | $X | Balance C/F | $X |
What Are the Benefits of Using Control Accounts?
Control accounts do not offer much value to small businesses but large businesses with large transaction volumes can enjoy several benefits.
Identifying Errors
Auditors and managers alike can use control accounts to detect errors in the general ledger accounts.
These balances are used in trial balances and financial statements of the reporting entities. Any errors can be traced back to the book of original entries and source documents.
Clean and Clutter-Free Reporting
Recording a large number of detailed transactions on a general ledger can create clutter and slow the reporting process.
The summarized balances of the general ledger accounts are sufficient to create trial balances and financial statements.
Fraud Prevention
Segregating accounting and bookkeeping duties for the creation of general journals and controlling accounts can help you prevent fraud.
It creates an additional layer of control for managers to protect their account books.
What Are the Limitations of Using Control Accounts?
Although the use of control accounts offers several benefits, it comes with some limitations too.
Additional Labor
Creating subsidiary ledger accounts and then maintaining controlling accounts means more labor. Businesses with manual bookkeeping would need to add more bookkeepers to their existing fleet.
Additional Costs
Businesses using accounting software may also need to upgrade their subscription plans to manage larger data. Also, they may need to hire additional personnel to maintain more accounting data.
Not Suitable for Small Businesses
The practice of creating controlling accounts is not suitable for small businesses with a small transaction volume as it is a time-consuming activity.
Also, small business owners may lack the skillset required to create and maintain controlling accounts.