What is a Creditors Control Account? Definition, Example and Importance
Creditors Control Account Definition
A creditors control account acts as a summary account for all transactions and subsidiary accounts related to accounts payable.
In other words, it provides a consolidated view of the amounts owed to suppliers and other creditors for goods and services that the business has purchased on credit.
These subsidiary accounts typically contain detailed transaction data, while the control account provides an overall view of the total balances.
Creditors Control Account Example
Let’s consider an example scenario to show how a creditors control account works.
A furniture manufacturing business starts the period with an outstanding balance of £20,000 in their creditors control account:
Creditor A | £15,000 |
Creditor B | £5,000 |
Creditors Control Account | £20,000 |
They place 3 more orders on credit with 3 of their suppliers:
Creditor A: £10,000
Creditor B: £5,000
Creditor C: £2,500
The creditors control account is updated to reflect the new purchases:
Creditor A | £25,000 |
Creditor B | £10,000 |
Creditor C | £2,500 |
Creditors Control Account | £37,500 |
The business then makes 2 payments that have fallen due:
Creditor A: £15,000
Creditor B: £5,000
The creditors control account is updated again to reflect the payments:
Creditor A | £10,000 |
Creditor B | £5,000 |
Creditor C | £2,500 |
Creditors Control Account | £17,500 |
Creditors Control Account Importance
The creditors control account is important for several reasons:
Financial Management
It provides a snapshot of a company’s total liabilities to its creditors, allowing for better financial management and planning.
Creditors control accounts help with the monitoring of credit purchases made by the company, including the amounts owed, payment terms, and due dates.
Managing Cash Flow
By tracking outstanding amounts owed to creditors, businesses can manage cash flow more effectively by ensuring they have enough liquidity to meet their payment obligations when due.
Identifying Trends
Analysis of the creditors control account over time can reveal trends in credit purchases, payment patterns, and creditor relationships, providing valuable insights for decision-making.
Internal Control
It serves as a key component of internal control systems, enabling companies to detect errors, discrepancies, or potential fraud related to creditor transactions.
Budgeting and Forecasting
It supports budgeting and forecasting by providing visibility into future cash outflows related to creditor payments.