Debtors and Creditors 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 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. 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. However, sometimes there can be no match between the closing balance in the control account https://www.bookstime.com/articles/receivables-turnover-ratio and the total of the party-wise accounts.

Advantages of Control Accounts

• A control account is a general ledger account created to record the bulk transaction of the same nature and then summarize the balance.
• The sales invoice acts as the original accounting source document for the transaction.
• You don’t want the person in control of your general accounts in control of the control accounts, as well.
• Control accounts are fundamental tools in accounting that consolidate and summarize detailed transactions from subsidiary ledgers.
• Work packages let for concurrent work to be performed on different components of a project that is parallel to several teams.

They still need to have the correct financial information needed to prepare the company’s financial statements. Control accounts are clean entries that match overall amounts in more detailed ledgers. Because control accounts summarize information in subsidiary ledgers, they should always remain in balance. If at any time the control account and the subsidiary ledger are not in balance, the subsidiary ledger will need to be reconciled to locate and correct the error. Used primarily in larger businesses that are still using manual ledger systems, general ledger control accounts are also used in accounting software applications and are created during the chart of accounts setup process. A common example of a control account is the general ledger control account example account entitled Accounts Receivable.

What is the Purpose of Control Accounts?

It is also called a controlling account because it enables us to perform reconciliation control on the ending balance. Likewise, the creditors control account is also known as the purchases ledger control account. Again, this name is used because it reflects the total of the individual purchases on credit (purchases from creditors), as reflected in the purchases ledger. A planning package is a work breakdown structure component below the control account and above the work package with known work content but without detailed schedule activities.

Accounts Receivable Control Account

This makes sense because the subsidiary accounts are not directly reported in the GL. They are summarized and posted to the control account that in turn appears in the GL. In this way, the controlling account really does dictate what appears in the GL and what is reported on the financial statements. It is necessary that the ending balance of the subsidiary account is same as the control account, otherwise it can be assumed that the required entries have not been made in both the places properly. 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.

• When using a control account for accounts receivable, a variety of subsidiary transactions will be included in the control account balance.
• The use of the receivables control account as described above is summarized for easy reference in the following diagram.
• In a small business the accounts can be kept in one accounting general ledger and a trial balance can be extracted from that ledger.
• The source documents are used to enter details into the book of prime entry which, for receipts transactions, is the cash book.
• Therefore they are separated into subsidiary ledgers rather than clutter up the general ledger with too much detailed information.

He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough https://x.com/BooksTimeInc University. 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. 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. Planning packages are typically used to define the work that will be performed during a specific phase of the project. A different person can maintain the control account as a preventive measure against fraud.

Control Account Posting Example

• If anyone wants to see detailed transactional information for accounts payable or accounts receivable, they can review the detail located in the subsidiary ledger, since it is not located in the general ledger.
• 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.
• If it doesn’t, then there could have been a mistake made during the calculations.
• Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.
• For example, Jim’s hardware store invoiced two customers for a total of $700.
• It should be noted that in the above example, the subsidiary ledger and the sales journal are independently completed from the source documents.

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.