Control Account Definition

Explanation

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 balancesAccount BalancesAccount Balance is the amount of money in a person’s financial account, such as a savings or checking account, at any given time. Furthermore, it can refer to the total amount of money owed to a third party, such as a utility company, credit card company, mortgage banker, or other similar lender or creditor.read more and the control account balance will be tallied.

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Purpose

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 ledgerSales LedgerA sales ledger is a ledger entry that records any sale in the book of records, even if the payment is received or not yet received. It records the sales and the cash when received and the amount owed to the business.read more & 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.

Example of 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 receivableTrade ReceivableTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet.read more account, all the balance in individual trade payable accounts transfers to a creditor account.

Creditor Control Account

Sales Control Account

Journal Entries

A control account is also a part of the double-entry systemDouble-entry SystemDouble Entry Accounting System is an accounting approach which states that each & every business transaction is recorded in at least 2 accounts, i.e., a Debit & a Credit. Furthermore, the number of transactions entered as the debits must be equivalent to that of the credits. read more; the balance of all the individual accounts is transferred with a single entry, for example, Sales accounts, cash accounts, payable trade accounts, stock accountStock AccountStock accounting is the process of recording the transactions entered into by a business enterprise beginning with investments made by anyone, whether a corporation or an individual, in the company in exchange for the issuance of something that can be easily traded in the open market.read more, 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.

And the same if the balance of tradeBalance Of TradeThe balance of trade (BOT) is the country’s exports minus its imports. BOT is one of the significant components for any current economic asset as it measures a country’s net income earned on global investments.read more receivable is transferred, then the trade receivable account will credit, and the trade receivable control account will debit.

Uses

  • 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.

Difference Between Control and Suspense Account

  • A control account is a summary of ledger accountsLedger AccountsLedger in accounting records and processes a firm’s financial data, taken from journal entries. This becomes an important financial record for future reference. It is used for creating financial statements. It is also known as the second book of entry.read more. It is used for subsidiary accounts. A suspense accountSuspense AccountSuspense Account is a general ledger account that holds records of temporary transactions that which do not have sufficient evidence for double entry or appropriate vouchers. This account is settled within the accounting period and does not appear anywhere in the financial statements.read more 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 receivableAccount Contains Account ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year.
  • read more  and payable from or to the subsidiary. A suspense account accommodates the difference between debit and credit.

Advantages

  • 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 reconciliationReconciliationReconciliation is the process of comparing account balances to identify any financial inconsistencies, discrepancies, omissions, or even fraud. At the end of any accounting period, reconciliation involves matching balances and ensuring that debits (credits) from one account for one transaction is same as the credit (debits) to another account for the same transaction.read more for different individual accounts.

Limitations

  • It is a summary account, 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 statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.There may be more fraud activity in this account if scrutiny of this account is not done correctly.

Conclusion

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.

This has been a guide to Control Account and its definition. Here we discuss the types and examples of journal entries for the control account along with its uses, advantages, and limitations. You can learn more from the following articles –

  • Ledger Balance MeaningSubledgerGeneral Ledger DefinitionReconciliation Statement Types