Control Account Definition
A control account is a general ledger account created for the purpose of recording of the bulk transaction with the same nature and then summarizing the balance. This is transferred from the subsidiary account or the main account need to be shown in the financials (i.e. individual account for the same nature of transactions has been maintained of the parties, and the summarized balance is shown).
Explanation
In the accounting of the transactions, this account is created for recording the summarized balance of the individual ledgers maintained for different parties. E.g., it may be a separate account designed for vendors, and it is maintained, which summarizes the personal accounts. Hence generally, the individual account balances, and the balance of the control account will be tallied.
Purpose
The primary purpose of the control account is to make sure the accuracy of the subsidiary account 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, and any discrepancy or error is rectified therein before posting the same in the main ledger.
Example of Control Account
ABC Inc. is a manufacturing company. Trade receivable for the period stands $10000, in different debtor’s accounts and trade payable for the period stands $ 20000, in different creditors accounts. Sales in sales ledger stand $30000. 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 in Debtor account –
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Same as the trade receivable account, all the balance in individual trade payable accounts transfers in a creditor account.
Journal Entries
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, trade payable accounts, stock account, and trade receivable accounts. One account is debit, and another account is credit with a balance amount.
For example, if the balance of the sales account is transferred, then the sales account will be debited, and the sales control account will be credited.
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.
Uses
- These accounts can extract debtors or creditors balance from a single account. By extracting balance from control Accounts, it doesn’t require extracting vendor and debtor accounts individually.
- It can check the arithmetical accuracy of the accounts which are posted in 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 personal account must affect control account in this case.
Difference Between Control and Suspense Account
- A control account is a summary of ledger accounts. It is used for subsidiary accounts. A suspense account is used for doubtful entries in financials, which is not identified at the time of preparing financial accounts.
- A control account is a summary of subsidiary accounts. It should be matched with the subsidiary account. However, the balance of suspense account is transferred in a relevant account when the reason for the difference is identified. In this account, the amount is entered for temporary before actual grouping, and as and when real grouping happens amount is transferred to that relevant GL.
- The Control account contains account receivable and payable from or to the subsidiary. Suspense account accommodates the difference between debit and credit.
Advantages
- It can be maintained by any person for fraud checking.
- If any person in an organization wants to see the balance of the subsidiary, it is a birds-eye view of General Ledger That person would be able to see the balance. It reduces the details.
- With control account, reports for a management information system are speedup because it doesn’t require reconciling different General Ledger as control balance can be used without waiting for reconciliation for different individual accounts.
Limitations
- It is a summary account, so there are chances of having an error in this account.
- It doesn’t give a guarantee of the accuracy, so if there is an error in this account, then it can affect financial statements.
- 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 to create a control on the ledger posting, which provide safeguard against the possible chances of misrepresentation and fraud.
Recommended Articles
This has been a guide to Control Account and its definition. Here we discuss the types, examples of journal entry for the control account along with its uses, advantages, and limitations. You can learn more from the following articles –
