Use of Control Accounts
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, control accounts are maintained in the general ledger 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.
- Control accounts allow a single trial balance to be extracted 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.
- Control accounts reduce the amount of detail needed in the general ledger.
Control Account and the Double Entry System
There are two options when using control accounts as shown below, either are acceptable.
- The subsidiary ledgers (Accounts receivable ledger, Accounts payable ledger) are considered 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 considered to be 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 accounts receivable 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 total sales are recorded in the general ledger DR: Accounts receivable 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 accounts receivable ledger and the accounts receivable control account are reconciled
What are the Main Control Accounts?
There are numerous control accounts which can be used, but the two main ones used by most businesses are the accounts receivable control account and the accounts payable control account.
Accounts Receivable Control Accounts
The information posted to the accounts receivable control account and the source of that information are shown in the table below.
|Posting||Dr / Cr||Source|
|Beginning balance||Debit||Accounts receivable ledger|
|Sales||Debit||Total credit sales from sales day book|
|Cash receipts||Credit||Total cash received from customers from cash book|
|Sales returns||Credit||Total from sales returns day book|
|Bad debts||Credit||Total from journal postings|
|Discounts allowed||Credit||Total from cash book|
|Ending balance||Debit||Accounts receivable ledger|
Accounts Payable Control Accounts
The information posted to the accounts payable control account and the source of that information are shown in the table below.
|Posting||Dr / Cr||Source|
|Beginning balance||Credit||Accounts payable ledger|
|Purchases||Credit||Total credit sales from purchase day book|
|Cash payments||Debit||Total cash paid to suppliers from cash book|
|Purchase returns||Debit||Total from purchase returns day book|
|Discount received||Debit||Total from cash book|
|Ending balance||Credit||Accounts payable ledger|
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.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.