What is The Purpose of Having Control Accounts?

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A control account is a general ledger account designed for the purpose of documenting and summarizing bulk transactions of the same kind. This account holds totals for transactions that are maintained separately in subsidiary-level ledger accounts. Control accounts are used mostly to summarize accounts receivable and payable because these sections include a significant number of transactions and so need to be divided into subsidiary ledgers rather than clogging up the main ledger with too much particular information. It is the most recent balance of a certain account at a given point in time.

For instance, consider accounts receivable. With current accounts receivable balances, a corporation can have hundreds or thousands of clients. All of these balances are kept in their own accounts receivable subsidiary accounts. All of these accounts' totals are carried forward to the accounts receivable control account, which reflects in the GL and financial statements. A control account's final balance should match the linked subsidiary ledger's ending total. It's highly likely that a journal entry was made to the control account but not to the subsidiary ledger if the balances don't match.

The fundamental purpose of a control account is to aid in the detection of mistakes in subsidiary ledgers. However, they also provide additional benefits to a company, such as the ability to extract a single trial balance from the general ledger. Only the accounts whose control account does not reconcile need to be examined for mistakes if the trial balance does not balance.

Control accounts also shorten the time it takes to produce management account data since the control account balance may be utilized instead of waiting for individual balances to be reconciled and extracted. Because of their enormous transaction volume, control accounts are most often used by large businesses. A small business may generally record all of its transactions in the general ledger, eliminating the requirement for a control account-linked subsidiary ledger.

Uses Of Control Account

  • The balances of debtors and creditors can be extracted from a single account using these accounts. It is not necessary to extract the amount from the vendor and debtor accounts separately since the balance is extracted from the control accounts.

  • It can detect errors in personal or individual accounts.

  • It can verify the arithmetical correctness of accounts that have been entered into the ledger.

  • It has the ability to set off a debtor's account against a creditor's account. In this scenario, entries impacting the personal account must also affect the control account.

Limitations of Control Accounts:

  • Unless internal checks can be performed, these accounts will not function as a deterrent to fraud.

  • It does not guarantee accuracy, therefore, financial statements may be affected due to an error in control accounts.

  • These accounts don't provide you the specifics of the transactions; instead, they give you a summary of each one.

  • These accounts can only be used in firms that use the double-entry accounting method.

  • Control accounts are not capable of detecting all sorts of errors.

The control ledger is a summary account that keeps track of the individual accounts in the ledger and ensures that they are clarified and re-verified. Following this method assists management in establishing a control over ledger posting, therefore reducing the risk of misrepresentation and fraud.