Control accounts are general ledger accounts that summarize lower-level activity into a single balance. Used with subsidiary accounts, your control balance should always be equal to the balance in the control account.
Used primarily in larger businesses that are still using manual ledger systems, general ledger control accounts are also used in accounting software applications and are created during the chart of accounts setup process.
Overview: What is a control account?
Control accounts are typically used in larger organizations that have hundreds or even thousands of transactions. Control accounts are part of double-entry accounting, which states that any debit posted to the general ledger will have a corresponding credit posted to the general ledger as well.
The balance of the control account should always be equal to the balance in the subsidiary ledger accounts. Accounts payable and accounts receivable control accounts are the most frequently used control accounts, although inventory and fixed asset control accounts can also be used.
If you have hundreds or thousands of customers or bills to pay, you should be using accounting software, which eliminates the need to set up control accounts because they’re automatically included in the structure of the chart of accounts.
However, if you’re still using a manual ledger system, the purpose of control accounts is to take the balance of the accounts in the subsidiary ledgers and post the total into the general ledger. Doing this allows you to produce a trial balance and balance sheet without all of the transactions displayed.
If you need to view a specific transaction, you would need to access the appropriate subsidiary ledger in order to view the details. Again, all of this information is automatically completed if you use accounting software.
What is the role of the control account?
Control accounts work as a summary account, presenting the balance of the subsidiary accounts without including the transaction details. Companies using a control account typically post balances from the subsidiary ledgers daily to make sure that they’re always in balance.
3 benefits of using control accounts
If you’re using a manual accounting system, there are benefits to using control accounts.
1. Locate errors
Because control accounts summarize information in subsidiary ledgers, they should always remain in balance. If at any time the control account and the subsidiary ledger are not in balance, the subsidiary ledger will need to be reconciled to locate and correct the error.
2. Eliminate clutter
Imagine your trial balance or balance sheet with hundreds of transactions appearing on it.
Instead of displaying a detailed (and long) list of transactions, these transactions are recorded in detail in subsidiary ledgers with only the aggregate balance reflected in the general ledger, which is where all financial data are pulled from to create financial statements.
3. Protect against fraud
Using a control account can guard against fraud, particularly if you have someone else maintain the control account. For example, if your bookkeeper or accounting clerk is responsible for entering sales or purchases transactions, you can have someone else be in charge of the control account, thus providing a safeguard against fraud.
An example of a control account
Particularly helpful for businesses with a large number of accounts payable or accounts receivable transactions, the control account aggregates the total of all the entries posted to subsidiary ledgers, with only the balance reported in the general ledger and financial statements.
When using a control account for accounts receivable, a variety of subsidiary transactions will be included in the control account balance.
Invoices that have been created, customer payments, product returns, refunds, and credit memos posted in the various accounts receivable ledgers will all be included in the accounts receivable control account.
For example, Jim’s hardware store invoiced two customers for a total of $700. He also received a payment in the amount of $275 from a previous invoice.
If Jim is using a control account for accounts receivable, he should debit $700, which increases his accounts receivable balance, and credit $275, which will decrease his balance.
Jim doesn’t need to post the details of any of the transactions since the details are already recorded in the subsidiary ledger. He only needs to post the totals for each type of transaction.
If Jim had any returns or customer discounts, he would also post them in the control account to make sure that the subsidiary accounts and the control account remain in balance.
The process would be completed for the accounts payable control account, which would record transactions from the purchases journal as well as the cash account.
Control accounts can be useful
If you’re still using manual ledgers to record accounting transactions, the best thing you can do is make the switch to accounting software, which includes complete control account management.
However, if you’re not ready to make the jump, using control accounts can help keep your general ledger uncluttered while providing a way to make sure that transactions are properly recorded and financial statements are accurate.
View more information: https://www.fool.com/the-blueprint/control-account/