What is a Control Account in Accounting?
What is a Control Account?
A control account, also known as a general ledger account or master account, is a summary account that represents the total balances of other related subsidiary accounts.
These subsidiary accounts typically contain detailed transaction data, while the control account provides an overall view of the total balances.
The Purpose of Control Accounts
Control accounts serve several important purposes in accounting:
Summaries
Control accounts consolidate multiple transactional information into convenient, high-level summaries, which makes it much easier to evaluate and interpret financial data.
Without control accounts, accountants would have to individual add up all of the various subsidiary accounts individually in order to arrive at an overall total.
Maintaining Accuracy
Control accounts help to maintain the accuracy of a company’s financial records and enhancing internal controls by acting as a double-check mechanism to ensure that the total of individual subsidiary ledger accounts matches the balance in the control account.
By regularly reconciling subsidiary ledgers with control accounts, businesses can identify errors, potential fraud, or unauthorised transactions, which will in turn strengthen the internal controls of the business.
Financial Reporting
Control accounts simplify the process of preparing financial statements.
Rather than dealing with the extensive details of individual transactions, accountants can use the summarised data from control accounts to present a clear picture of the company’s financial health. statement.
Examples of Control Accounts
Let’s look at some examples of control accounts in real-life situations:
Sales Ledger Control Account:
Subsidiary accounts may include individual customer accounts with detailed transaction records.
The Sales Ledger Control Account is therefore a summary of the total amount owed by all customers collectively.
For example, an accountancy training provider enrolls 20 individual customers and invoices them £2,000 each for the course.
Consequently, the Sales Ledger Control Account would show a total of £40,000.
Purchase Ledger Control Account:
Subsidiary accounts can also consist of records for various suppliers and vendors.
Therefore, the Purchase Ledger Control Account is a summary of the total amount owed to all suppliers.
For example, a local leisure centre is undergoing a refurbishment, and buys £50,000 of new gym equipment, £10,000 to upgrade the changing rooms, and £5,000 on painting and decorating.
If the Purchase Ledger Control Account was at zero before the refurbishment, it would now be showing £65,000 as this represents the total owed to the suppliers.
How Control Accounts Work
Control accounts work on the principle of double-entry bookkeeping, ensuring that debits and credits are in balance (ie that all debits = credits).
When transactions occur in subsidiary accounts, corresponding entries are made in the control account.
Using a real-life example, let’s consider a business that sells computer equipment.
They have several customers who make purchases on credit, and maintain individual customer accounts in the accounts receivable subsidiary ledger.
They would also have an accounts receivable control account that summarises all of the individual customer account balances.
Step 1: Business Makes Sales on Credit
The business sells a laptop to Customer A on credit for £500.
This sale is recorded in Customer A’s individual account in the accounts receivable subsidiary ledger as a debit (increase) to their balance, which is now £500.
Customer A | Accounts Receivable Subsidiary Ledger | Debit | £500 |
Step 2: Control Account Updated
The accounts receivable control account would also be updated to reflect this transaction.
In this example, £500 is added to the accounts receivable control account (as it represents an increase in the total amount owed by all customers).
Customer A | Accounts Receivable Control Account | Debit | £500 |
Step 3: Business Makes Another Sale on Credit
The business makes another sale, this time to Customer B. They sell another laptop and a monitor for £800.
This sale is recorded in Customer B’s individual account in the accounts receivable subsidiary ledger as a debit (increase) to their balance, which is now £800.
Customer B | Accounts Receivable Subsidiary Ledger | Debit | £800 |
Step 4: Control Account Updated Again
Next, the accounts receivable control account will be updated again to reflect the new transaction.
£800 is added to the control account as it represents an increase in the total amount owed by all customers.
Customer B | Accounts Receivable Control Account | Debit | £800 |
The balance of the accounts receivable control account is now £1,300.
£500 from Customer A, and £800 from Customer B.
Step 5: Business Receives Payments
Over time, customers will make payments on their accounts, depending on the terms and conditions of the credit sale.
Let’s suggest that the payment terms for both customers are that they must pay £100 each month.
After the first month, Customer A pays £100, and Customer B pays £100.
Customer A | Accounts Receivable Subsidiary Ledger | Credit | £100 |
Customer B | Accounts Receivable Subsidiary Ledger | Credit | £100 |
Customer A’s balance is now £400
Customer B’s balance is now £700
Step 6: Control Account Updated After Payments
After receiving these payments, the accounts receivable control account will be updated again to reflect the reduced amounts owed by all customers.
Customer A | Accounts Receivable Control Account | Credit | £100 |
Customer B | Accounts Receivable Control Account | Credit | £100 |
The Accounts Receivable Control Account now has a new balance of £1,100.
The control account’s balance is frequently reconciled with the total of the subsidiary account balances to ensure accuracy, and that all debits equal all credits.
This is usually done at the end of each accounting period.
Control Account Advantages
Control accounts offer numerous benefits to businesses and accountants:
Simplification
Control accounts simplify the ledger by summarising all of the various transactions into a single account.
For example, the Accounts Payable Control Account is a combined total of all individual supplier balances that need to be paid.
Error Detection
Control accounts help identify errors quickly.
If the total of the individual subsidiary ledger balances doesn’t match the balance in the control account, it signals a potential error.
For instance, if the sum of all customer balances in the subsidiary ledger is £70,000, but the Accounts Receivable Control Account shows £72,000, then there is a discrepancy somewhere that needs investigating.
Time-Saving
Control accounts save time when reconciling accounts.
Instead of having to examine numerous individual ledger accounts, accountants can focus on a few control accounts to ensure accuracy.
This is particularly useful for large businesses with many transactions.
Efficient Auditing
Auditors will find it much easier to review financial statements when control accounts are used.
They can quickly verify the accuracy of the control account balances and then explore the subsidiary ledger if necessary.
Streamlined Financial Reporting
Control accounts enable the preparation of financial statements by providing summarised data.
For instance, the Accounts Payable Control Account can be used to determine the total amount of outstanding supplier invoices, which is needed for the balance sheet.
Improved Decision-Making and Budgeting
With accurate and up-to-date control accounts, management can make informed decisions about credit policies, inventory management, and cash flow.
For example, if the business is looking for a quick cash injection, the Accounts Receivable Control Account can help identify slow-paying customers, then efforts can be made to chase these customers for payment.
Control accounts can also aid in the budgeting process.
By reviewing historical data in control accounts, businesses can use these figures to form the basis of the next budget projections for the future.