Definition
The control account is a summarized account in the general ledger. It contains aggregated total for the transactions that are posted in the subsidiary ledger. It is also called a controlling account because it enables us to perform reconciliation control on the ending balance.
In other words, control account enables us to reconcile the aggregated balance of the subsidiary ledger with the total balance to be used in trial balance.
We perform reconciliation between these balances (although, both balances are same, one balance is an aggregate of the party wise/subsidiary ledger and another balance is control account balance which is obtained by movement of the relevant accounts affecting on the ending balance).
So, if reconciliation/control proves that there is no difference between two balances, it means figures are reliable and can be used to prepare the financial statement.
Detailed understanding of the control accounts
In the accounting cycle, the first step is posting entries in the books of accounts. Once different accounting entries are posted in the books, different ledgers are created that help to set structured and complied data related to different business operations.
So, Ledger accounts help accumulate all entries of the specific period for a specific account under one head, such as ‘account payable’ and ‘account receivable etc.’ Later these balances can easily be tracked and updated as needed.
For instance, all the transactions regarding credit purchases will be posted in the subsidiary payable accounts, where party-wise data is maintained along with purchase returns and discounts received. At the period end, we have a ledger for each of the parties.
Each party’s total is accumulated at one place, and a certain balance is calculated to be used in the trial balance for the formation of financial statements. This is the balance obtained from general ledger.
However, before using specific balance calculated, we need to apply control and ensure the accuracy of the balance. We need to apply control because these accounts are expected to have a massive number of transactions. So, there are higher chances for errors and mistakes.
Hence, we need to exercise some controls. To do so, we get accumulated balances that affect the movement of accounts. For instance, Accounts payable is effected by credit purchases, payment made to the supplier, purchase returns, and discounts received.
So, we obtain a aggregate of these balances and make an account with these balances; this account is called a control account specifically prepared just for reconciliation with the total balance of the general ledger’s account.
Control account for accounts payables (reconciliation perspective)
Suppose the closing balance of the accounts payable in the control account (prepared with accumulated balances) is the same as the total accounts payable balance in the general ledger. In that case, our confidence in the closing balance increases as these are reconciled.
However, sometimes there can be no match between the closing balance in the control account and the total of the party-wise accounts. In this case, there are three possibilities of errors that include the following.
- There is/are an error/errors in the control account.
- There is/are error/errors in general ledger accounts.
- There are errors in both control and general ledger accounts.
It’s important to note that the control account balance does not impact the figures in the trial balance and financial statement. It’s prepared just for the control purpose.
Control account for accounts payable (reconciliation perspective)
Similarly, all the entries regarding credit sales are posted in the account receivable ledger, along with sales returns and discounts allowed. To ensure accuracy of the ending balance for accounts receivables, we obtain accumulated figures for the credit sales, cash received, sales return, and discount allowed to construct the control account.
So, the control account equalizes all subsidiary accounts, and it helps simplify and organize general ledger account. Once we have reconciled the balance of accounts receivables in the general ledger with accumulated movement of the accounts receivable (control account), we can reliably use the ending balance to prepare financial statements.
Usually, companies generate two types of control accounts: sales ledger control accounts and payable ledger control accounts. The reason for these control account preparation is that there are more transactions in these account balances, and chances of error are higher as well.
Let’s discuss these types of accounts in some detail.
Types of control account
There are mainly two types of control accounts, as discussed below.
1- Sales ledger control account – (SLCA)
Sales ledger control account is also known as debtor control account or Trade debtor control account. It explicits total trade debtors of a business entity at a specific given period. Further, it elaborates the total amount owed by all customers in a given time frame.
It serves the purpose of the reconciliation that increases our confidence in the ending balance of accounts receivables.
Example of sales ledger control account
Suppose that on December 31, 2020, the total debtors in the general ledger of ABC manufacturing company valued at $180,000 as break-up is shown.
| Serial number of Debtors | Debtor | Amount in $ |
| 1 | Thomas traders | 20,000 |
| 2 | Interior decorations | 50,000 |
| 3 | United group of stores | 30,000 |
| 4 | Thomson retailers | 80,000 |
| Total Debtors | 180,000 |
Let’s look at the control account movement and assess if ending balances in the control account are the same as given in the ledger.
Following are the accumulated balances of the figures that impact the ending balance of accounts receivables.
Sales Control Account
| B/S | $200,000 | |
| Credit sales | $300,000 | |
| Sales return | $15,000 | |
| Discount allowed | $25,000 | |
| Provisions | $20,000 | |
| Cash collected | $260,000 | |
| C/D | $180,000 | |
| $500,000 | $500,000 |
As we can analyze, that carried forward balance of the control account is equal to the closing balance in the general ledger, totaling to $180,000.
Hence, we have reconciled the control account and receivable balance in the general ledger. Now, we are confident in the accuracy of the receivable balance and can be used to form a financial statement.
2- Purchase ledger control account – (PLCA)
Purchase ledger control account is also known as Trade creditors control account. It shows the total purchases along with discounts received on purchases and the purchase returns for a specific period.
Simply we can say that it tells how much business owes to the suppliers of a business at a particular time period. It means the aggregate accounts payable are included in this control account.
Example of purchase ledger control account
Suppose the closing balance of creditors in the general ledger is valued at $3,45,000 as of December 31, 2021, and the following is the break-up of the balance.
| Serial number of Creditors | Creditors | Amount in $ |
| 1 | Robin traders | 42,300 |
| 2 | Robust corporation | 50,000 |
| 3 | United Group of Companies | 75,345 |
| 4 | UX manufacturing | 67,000 |
| 5 | Fans club | 22,000 |
| 6 | Denial firm | 88,355 |
| Total Creditors | $345,000 |
Purchase Control Account
| B/S | $400,000 | |
| Credit purchase | $500,000 | |
| Purchase return | $50,000 | |
| Discount received | $15,000 | |
| Cash paid | $490,000 | |
| C/D | $345,000 | |
| $900,000 | $900,000 |
We can analyze that the total balance in the payable ledger amounts to $345,000 and carried forward balance in the payable control account amounts to the same balance. Hence, we have reconciled the balances and can use this balance in the preparation of financial statements.
A practical example for the control account
A common example of a control account is account receivables. It’s the account that is used to record all credit transactions made in terms of sales. Further, all the related transactions like cash collected from credit customers, discount allowed, provision recorded, and sales return are recorded in the control account.
However, these balances are in aggregate, and it’s difficult to trace the specific balances in the control account. So, to trace the balance of the specific party, we need to analyze the subsidiary ledger/party-wise ledger.
Frequently asked questions
What is the purpose of the Control Account?
A control account is used to check the numerical accuracy of the balances that are posted in general ledger accounts. It can find out mistakes and errors in personal or individual accounts.
The other accounts for which control account can be used are equipment, machinery, and inventory of a business. Further, it’s advisable that a control account be prepared for the account balance with a higher number of transactions.
What are the disadvantages of control accounts?
Disadvantages of the control accounts include the following,
- Not all types of errors can be detected with the control account.
- Sometimes, there can be errors in both balances, including the ledger balance and the balance in the control account. (so, it’s difficult to locate an error)
- It’s a summarized account, and party-wise details cannot be traced.
What are the benefits of a control account?
Following are some of the benefits associated with the control accounts,
- Reconciliation of the general ledger with the control account helps to enhance the accuracy of the account balance.
- Trial balance contains aggregated balances, so it’s not difficult to produce control accounts, and their role in checking balance accuracy is vital as well.
- It helps in strategic analysis of the balances as there is no much detail.