Peter Marshall Bsc (Econ) BA MBIM is a Fellow of the Society of Business Teachers, and an experienced educator in business subjects. He is also a prolific author and his books have been translated and sold worldwide. He lives in London, UK.
A control account is a sort of trial balance for just one ledger division. You write the account at the back of the ledger division concerned. The main idea of control accounts is to subdivide the task of the main trial balance. They also provide useful summaries of data for more effective financial management. For example the boss might want an up-to-date figure for total debtors, to help him monitor credit control in the firm. Control accounts are in fact sometimes called total accounts (for example, total creditors account).
Subdividing the work
In a small firm, where one book-keeper posts all the ledgers, control accounts might be unnecessary. But the double entry system can be quickly expanded if necessary by using control acounts. Individual specialist book-keepers, such as the bought ledger clerk or sales ledger clerk, could balance their own ledger division using a control total, i.e. a balancing item equal to the difference between all their own debit and credit balances. A head book-keeper could then build up an overall trial balance just by taking the control account totals. In large firms today, control accounts are vital to the smooth running of the accounting system. Without them, reaching a trial balance would really be a difficult, time-consuming and messy business.
Control accounts are summaries of ledger balances in a division of the ledger. For example, purchase ledger control accounts contain the sum totals of all VAT inclusive purchases, payments to suppliers and discounts received.
The postings go on the same side as they do in the individual ledger accounts. However, to avoid a duplication on one side of the dual posting either the control accounts, or the individual ledger accounts must be left out of the double entry system. If the individual ledger accounts are treated as double entry then the control accounts are not, in which case they are known as memorandum accounts. If, however, the control accounts are treated as part of double entry system then the individual ledger accounts which they summarise are known as subsidiary ledger accounts and are not part of the double entry system.
Though they are most commonly used for the sales and purchase ledger divisions, control accounts can be used for any ledger divisions, e.g. cash or petty cash. Furthermore, the layout is the same and they are administered in the same way, so once you know how they are used for one type of account you know how they are used for others.
Advantages of using control accounts
The principal advantage of using control accounts is to reduce the need to deal with many sales, or purchase ledger balances to a single sales, or purchase ledger balance. This way interim and final accounts can be drawn up more quickly.
A second advantage is that the control account balances can be used as a check on the accuracy of individual ledger account postings, especially if the control accounts are posted by a different book-keeper to the one who posts the individual sales and purchase ledger accounts. This is usually the case in large companies. It is unlikely that the same posting errors will be made by both clerks.
Thirdly, subdividing a ledger means errors are easier to find because each division is self-contained in double entry terms.
Fourthly, fraud is made more difficult. Illegal transfers of money are more likely to be noticed if a different clerk deals with each side of the dual postings.
Source documents for control accounts
The source documents you need for posting to control accounts are the books of prime entry. But you only need monthly (or other period) totals, not individual entries as with other postings. Each entry in the sales day book, for example, you post separately to a specific account in the sales ledger, but you only post the total of gross invoice values to the sales ledger control account.
The four day books for sales and purchases are well suited to control accounts; column totals are readily available. It may be a good idea to add a gross invoice total column if control accounts are going to be kept. The other day books are not quite so helpful in this respect, since they do not analyse totals of different classes. Take the cash book, for example. From here you take the total of payments to suppliers, but ‘purchases’ may be mixed up with ‘expenses’ such as drawings, wages, transfers to petty cash, and other types of payments, all of which must be totalled up for posting to control accounts. Still, while not being quite so easy as posting from the sales and purchase day books, it is not too difficult to use the cash book for control accounts.
The balance of A. Frazer’s sales ledger control account as at the end of September 200X was £20,263.60 Dr.
Total sales for the month of October 200X were £24,630.70.
Total payments received for the month were £22,840.90.
Total discounts allowed for the month were £250.80.
Total bad debts written off for the month were £420.50.
Total sales returns were £500.00.
Write up the sales ledger control account for October 200X.
The balance of A. Frazer’s purchase ledger control account as at 31 August 200X was £1,293.00 Cr.
Total purchases during September 200X amounted to £18,950.
Total payments to creditors were £9,800.00.
Total discounts received were £250.
Write up the purchase ledger control account for the month of September 200X.