Control Account

A control account is a general ledger account created to record the bulk transaction of the same nature and then summarize the balance. It is transferred from the subsidiary account. The main account needs to be shown in the financials (the parties have maintained, i.e., an individual account for the same nature of transactions, and the summarized balance is shown).

The control ledger is the summarized account maintaining the records of individual accounts involved in the ledger, and the same is clarified and re-verified. Following this procedure helps the management create a control on the ledger posting, which safeguards against the possible chances of misrepresentation and fraud.

The term control account refers to the accounting ledger where a summary of all transactions having the same nature is recorded. The control account format is finally shown during financial reporting which reflects all the balance of subsidiary account.

This account is created to record the summarized balance of the individual ledgers maintained for different parties in accounting for the transactions. E.g., it may be a separate account designed for vendors and maintained, which summarizes the personal accounts. Hence, generally, the individual account balances and the control account balance will be tallied.

Thus, it is an adjustment account that shows the balance of all the associated subsidiary transactions. It is a very important component of a business during double entry. It helps in getting the required information regarding the company performance which shows in the financial report. However, the number of such control accounts needed will depend on the size and nature of the company operation.

This, summary control account format is widely used to summarise the accounts payables and receivables, because they typically contain huge level of transactions and needs to be tracked continuously for requirement of cash inflow and outflow details. It is necessary that the ending balance of the subsidiary account is same as the control account, otherwise it can be assumed that the required entries have not been made in both the places properly.

Here are some of the common types of such an account, which can be primarily segregated based on the nature of transaction and the type of information that is available.

• Accounts receivable – This account is a summary of all the receivable related transactions that are derived from the subsidiary ledger and consolidated in this account.
• Accounts Payable – This  is the same thing done but related to all payable transactions of the business.
• Inventory – Inventory is a very important part of any business operation. Here a complete summary of all transactions related to inventory is displayed or recorded across categories, locations or types.
• Fixed asset – This account contains the total value of all the fixed assets that the company owns. This information is taken from the subsidiary ledger of the business.
• Accumulated depreciation- The business will have various assets that are used to conduct the day to day operations smoothly. All these assets are subject to depreciation every year, which requires its value to be reduced and displayed correctly. Thus a summary of the depreciation account is very important in order to know the fair value of the assets.
• Payroll – The payroll will include all transactions cash outflows related to wage, salary, benefit, taxes, or any other liabilities related to the employees of the organizations.
• Prepaid Expense – All prepaid expenses are the ones that will be recognised overtime but they are payments made beforehand.

Thus, the above accounts are regularly reconciled in order to ensure that the ending balance in the control account will match with the subsidiary account balance. This will help in reviewing and managing the data very quickly and methodically.

The control account's primary purpose is to ensure the subsidiary account's accuracy by clarifying and rechecking the individual account and their transactions before posting it with the subsidiary account or primary account. For example, a sales ledger & debtor ledger control account summarizes the transactions entered with the individual accounts in the ledger. Any discrepancy or error is rectified before posting the same in the main ledger.

A control account is also a part of the double-entry system; the balance of all the individual accounts is transferred with a single entry, for example, Sales accounts, cash accounts, payable trade accounts, stock account, and trade receivable accounts. One account is debit, and another account is credit with a balanced amount.

For example, if the sales account balance is transferred, the sales account will be debited, and the sales control account will be credited.

Sales Control Account

And the same if the balance of trade receivable is transferred, then the trade receivable account will credit, and the trade receivable control account will debit.

Debtor Control Account

ABC Inc. is a manufacturing company. Sales in the sales ledger stand at $30000. Trade receivable for the period stands at $10000 in different debtors' accounts, and trade payable stands at $ 20000 in different creditors' accounts. The company has a control account for all these ledgers. Pass entry into the system and transfer the balance to this account.

Solution

Now all the debtor's balance in individual accounts will be transferred to the Debtor account –

Debtor Control Account

Like the trade receivable account, all the balance in individual trade payable accounts transfers to a creditor account.

Creditor Control Account

Sales Control Account

The purchase or sales ledger control account or any other form of the same are commonly used for the following purpose. Let us study same in details.

• These accounts can extract debtors or creditor's balances from a single account. Extracting balance from control accounts doesn’t require extracting vendor and debtor accounts individually.
• It can check the arithmetical accuracy of the accounts posted in the ledger.
• It can locate the error in individual or personal accounts.
•  It can set off the debtor's account with a creditor account. Entries affecting the personal account must affect the control account in this case.

Some important advantages of the concept of overhead control account are given below:

• Any person can maintain it for fraud checking.
• If any person in an organization wants to see the subsidiary's balance, it is a birds-eye view of General Ledger. That person would be able to see the balance. It reduces the details.
• With a control account, reports for a management information system are sped up. It doesn’t require reconciling different General Ledger as the control balance can be used without waiting for reconciliation for different individual accounts.

Here are some of the disadvantages of such an overhead control account.

• It is a summary account which may be purchase or sales ledger control account or any other form of the same, so there are chances of having an error in this account.
• It doesn’t guarantee the accuracy, so if there is an error in this account, it can affect financial statements.
• There may be more fraud activity in this account if scrutiny of this account is not done correctly.

Both the above are accounts are prepared by any business and widely referred to during financial statement preparation and financial reporting. But there are some differences between them, as given below:

• A control account is a summary of ledger accounts. It is used for subsidiary accounts. A suspense account is used for suspicious entries in financials that are not identified when preparing financial accounts..
• A control account is a summary of subsidiary accounts. It should be matched with the subsidiary account. However, the suspense account balance is transferred to a relevant account when the difference is identified. In this account, the amount is entered for temporary before actual grouping, and as and when natural grouping happens the amount is transferred to that relevant GL.
• The Control account contains account receivable  and payable from or to the subsidiary. A suspense account accommodates the difference between debit and credit.

This has been a guide to guide to what is Control Account. We explain its types, examples, purposes, uses, journal entries, advantages and disadvantages. You can learn more from the following articles –

• Ledger Balance Meaning
• Subledger
• General Ledger Definition
• Reconciliation Statement Types