Control Accounts

What is a Control Account?

In a small business the accounts can be kept in one accounting general ledger and a trial balance can be extracted from that ledger. In a larger business, where the transactions are too many to be managed by one person, subsidiary ledgers such as the accounts receivable ledger (sales ledger) and the accounts payable ledger (purchase ledger) will be opened. The subsidiary ledgers are now part of the double entry system, and to extract a trial balance it would be necessary to collect information on the balances from each of the ledgers. In order to avoid this situation the general ledger maintains control accounts for each of the subsidiary ledgers.

Advantages of Control Accounts

Control accounts are mainly used to help identify errors in the subsidiary ledgers, but the use of them gives a business a number of additional advantages.

• The use of a control account allows the extraction of a single trial balance from the general ledger.
• If the trial balance does not balance, only the accounts whose control account does not reconcile need to be checked for errors.
• A different person can maintain the control account as a check against fraud.
• Control accounts speed up the process of producing management accounts information as the control account balance can be used without waiting for the individual balances to be reconciled and extracted.
• A control account reduces the amount of detail needed in the general ledger.

Control Account and the Double Entry System

There are two options when using a control account as shown below, either are acceptable.

• The subsidiary ledgers (Receivables ledger, Payables ledger) are part of the double entry system in which case the control accounts are only for information and are not part of the system. or
• The control account is part of the double entry system and the subsidiary ledgers are for analysis only.

Posting of Control Accounts

The source of information for the control account postings are the books of prime entry:

• Sales day book
• Purchases day book
• Sales returns day book
• Purchases returns day book
• Cash book

Control Account Posting Example

Using credit sales and the receivables control account as an example, and assuming the control accounts are considered to be part of the double entry system and the subsidiary ledgers are for analysis only, the posting process would be as follows:

• Details of each sale are recorded in the sales day book which is then totalled.
• The general ledger records total sales DR: Receivables control account, CR: Sales
• The sales day book entries are also recorded for analysis to the individual accounts receivable ledger accounts.
• The total from the receivables ledger and the receivables control account are reconciled

Types of Control Accounts

There are numerous control accounts which can be used, but the two main ones used by most businesses are the receivables control account and the payables control account.

Receivables Control Accounts

The information posted to the accounts receivable control account and the source of that information are shown in the table below.

Payables Control Accounts

The information posted to the accounts payable control account and the source of that information are shown in the table below.

Sectional Balancing System

The use of accounts receivable and accounts payable control accounts creates an accounting system where only the general ledger is self balancing. The subsidiary accounts receivable and payable ledgers have only one sided entries and therefore do not self balance. As only a section of the accounting system is self balancing such a system if sometimes referred to as a sectional balancing system. In contrast an accounting system in which all ledgers are individually balanced is referred to as a self balancing system.