Control Accounts


What is a Control Account?

Control account is a summarized version of the many subsidiary ledger accounts, to be recorded in the general ledger. The individual subsidiary ledger accounts such as account receivables and account payables are so many in number so they are summarized into a receivables and payables control accounts to record total amount in the general ledger. Otherwise, the general ledger will be congested and difficult to read. The fundamental purpose of a control account is to detect mistakes in subsidiary ledgers. The final balance of the control account must be the accumulated amount of the associated individual subsidiary ledgers.

Primary Control Accounts

Accounts Receivables Control Account

It is made up of all the trade Receivable accounts such as customers, and all accounts associated with these. It is also called a Sales ledger control account (SLC).

The basic double entry that is recorded to move the sales book total into general ledger is:

Receivables Control Account               Dr

                         Sales Revenue                        Cr

All the individual ledger/accounts that are included in it are:

  • Sales ledger
  • Sales returns ledger
  • Discount on Receivables ledger
  • Interest in Receivables ledger
  • Cashbook

For Example: An SLC account has to be made of a company-X for month January, with an opening balance of $8,000. All their sales are credit sales and are recorded in individual receivables ledgers. Eventually the total of those is transferred into SLCA. In January, the sales total up to $55,000. The company has a policy of recording a bad debt of 5% of each month’s sales. They also charge interest on customers who take too long in paying their dues so interest earned for this month is $1,250. Discounts given are $1,500. Some sales got returned during the month amounting to $9,000 and some customers who paid their debts in the bank are $32,500. Now let’s put all this information together and create a SLCA into a T-account format. 

Solution: First of all the $8,000 opening balance of SLCA almost all of the time comes on the debit side. Then the total from individual receivable ledgers $55,000 is moved as sales into the debt side, along with interests charged for the month of $1,250. Now all the item which reduce the receivables from sales amount in any way are credited, so paid off amount $32,500, bad debts (55000*5%=)$2,750, returns on sales $9,000 and discount $1,500 will appear on the credit side. Lets illustrate it in the following T-account. In order to balance off the T-account we calculate the balancing figure to be $18,500. This amount is still remaining to be recovered from this month’s sales.

Accounts Payables Control Account

It is made up of all the trade Payable accounts such as suppliers, and all accounts associated with these. 

The basic double entry to record transfer of purchase daybook to general ledger is:

Purchases                                          Dr

      Payables ledger Control Account           Cr

All the individual ledger/accounts that are included in it are:

  • Purchases ledger
  • Purchase returns ledger
  • Discount in Purchases ledger
  • Cashbook

For Example: A PLC account has to be made for the same company-X for the same month, an opening balance of $5,000 (Credit). All of their Purchases are on Credit and for January they are $46,000, from which $7,250 were returned due to faulty goods. They paid for some purchases amounting to $24,000 and got an early bird discount of $1,000. They also got a small refund of $1,250. Now let’s create a PLCA from this example.

Solution: The opening balance of $5,000 comes on the credit side. Majority of the time opening balance is on credit, as organizations have dues of its suppliers. But it’s not the case every time, sometimes an organization pays in advance to its suppliers, in such cases opening balance shows up on the debit side. The purchases of $46,000 will also be on credit. This account is debited when the organization pays off its debts, or receives a discount on payment, or returns the purchases to the supplier. As Shown, there is payment to the suppliers of $24,000, a discount allowed by the supplier of $1,000 and returns of $7,250. Some returns are adjusted by refunds so $1,250 is recorded on the credit side of PLCA. After all the adjustments, the closing balance at the end of the month is a credit figure of $20,000, which is still payable. Similar to opening balance, closing balance can either be debit or credit. Following is the illustration.

 

What is Contra-Entry and its accounting?

A Contra entry occurs when you have a creditor that is a debtor at the same time. It means a supplier is sending goods in the form of raw materials and purchasing them back from the organization in the form of finished goods. Contra entry is a balancing entry between SLCA and PLCA, it is done to simplify transactions and accounting records. 

For example, the same company-X owes $750 to one of its suppliers, whereas the supplier, who is also a customer of company-X, owes $500 to the company. In this case, a contra entry of $500 will be recorded, on the credit side of SLCA and debit of PLCA. And remaining $250 is still payable for company-X, to the supplier. The diagram below shows how a Contra entry of $500 will be made and how it can affect the closing balance in the same examples of SLCA and PLCA given above.

Advantages/Uses of Control Accounts
  • Control Accounts can detect any error that may have been made in individual accounts. As the sales amount mentioned in SLCA varies from total of individual receivable ledgers, it will show there’s an error.
  • It is a more time-efficient way to manage accounts and information.
  • It helps general ledger to be more presentable and brief, rather than clustered with extra details.
  • It also aids in monitoring some of the key performance indicators such as liquidity, profitability and efficiency.

Limitations

  • Control Accounts present an overall picture, so any frauds that are in the details will not be seen. Unless in-depth checks are made. 
  • The accuracy can also not be guaranteed in Control Accounts, there is a possibility that financial statements are adversely affected due to errors in control accounts.
  • They can be used only where the double-entry accounting method is used.
  • They show a very summarized version, so if anyone has to view details of transactions or specific transactions then it won’t be helpful.


FAQs (Frequently Asked Questions)

Q1) Are control accounts mandatory? or NOT ?

Ans) No, they are not mandatory, but highly recommended to simplify a large number of transactions.

Q2) How can control accounts help in monitoring key performance indicators of business, such as liquidity?

Ans) By showing the total amounts and balances of transactions that affect the cash flow of the business. The cash and cash equivalents, and their movement directly shows the liquidity position of a company.

Q3) What is the difference between a nominal and control account?

Ans) No, a nominal account is a temporary account used for business in a given period. Whereas, a control account is a permanent account which is carried forward to the next accounting period.

Q4) Are these the only two types of control accounts?

Ans)No, there are more, but mainly PLCA and SLCA are used. 

Written by: Mohammad Anas Khamisa Student at Mirchawala Hub of Accountancy

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