Control Accounts: Don’t Let Them Control YOU!

control accountsAlso known as an adjustment account, control accounts are those found in general ledgers where there are subsidiary ledgers created that correspond. Subsidiary ledgers allow for transactions to be tracked in more detail within the control accounts. On both the corresponding subsidiary account and the control accounts, individual transactions are posted. The totals for both are compared when preparing trial balances for ensuring accuracy. Here is a course entitled Introduction to Financial Accounting that shows you concepts in a way that is easy to understand.

For instance, the controlling account for the Accounts Receivable Subsidiary Ledger is Accounts Receivable. In other words, each customer of credit has his own account with its own corresponding balance in the subsidiary ledger. So when the balance of Accounts Receivables report how much you owe the company, the subsidiary ledger of Accounts Receivables can report how much each credit customer owes. Control accounts and their subsidiary ledger also include equipment and accounts payable. Thus, you would have an equipment subsidiary ledger and an accounts payable subsidiary ledger. Here is a course entitled SAP Accounting that takes you through various financial accounting drills and important concepts.

In Ideal Circumstances..

Under ideal circumstances, control accounts are the ones that balance to zero. For instance, the account for inventory control will be holding the amount of balance between the value of stock on hand multiplied by its cost per unit and the stock transaction on the balance sheet. The thing is, sometimes, discrepancies crop up such as those due to stock gains and losses. The differences are measured by the control account and provide control of these values and financial visibility. If there is a significant discrepancy, then this can trigger actions like counting stocks so that stock is validated and the balance sheet is corrected to clear the control account. A non-invoiced Goods Received account would be another example.

Sometimes, control accounts would be called general ledger control accounts. In essence, these summarize a subsidiary, related account. Contained in the general ledger is an overview of specific accounts with the account content details kept in a subsidiary ledger. All the customers that pay their balance and that owe money are listed on the subsidiary ledger. Both the control and the subsidiary lists are updated at the same time when customers pay.

When Do You Use Control Accounts?

In the general ledger, an account for account receivable carries one balance comprised of the bills of many customers. To keep track of all these customers, a separate ledger will be maintained. Let’s say, customer A owes Company Z $10,000 and customer B owes the same company $5,000. Generally, the company ledger will only show the owed amount, which is $15,000. Naturally, in the general ledger, the subsidiary ledger’s total should always match the control account’s total.

 Control Accounts for Notes Receivable

Just like the control account for accounts receivable, separate ledgers containing all the money borrowers need to be kept separately from the general ledger. For notes receivable, this subsidiary ledger needs to contain all written notes and is totaled into a general ledger account.

Control Accounts for Accounts Receivable

In the general ledger, the accounts receivable control account contains the total receivable amount from all its clients. On the other hand, you will also need to keep the details of what makes up the account receivables. This is what a subsidiary ledger is for. The details of each account are kept in subsidiary ledgers for the same control account. It is in the subsidiary ledger that you will find all the balances of the account with all the total receivables from every client recorded in the general ledger.

Other Receivables

When there is any other type of cash that borrowers owe to a business, other receivables make up a miscellaneous category. This might include interest receivables and loans to employees. These receivables could be either long term or short term assets and would be included as a control account in the general ledger. Again, a subsidiary separate ledger that contains all the individual borrowers’ details will also be kept.

And What Good Will All This Do?

One control account benefit is that there are potentials for increase in duties of segregation when you create them. This is useful in helping limit fraud and error. A lot of times, people that need to get data tracked in subsidiary ledgers are not the same people accumulating the data which is financial. Because of this, when the company starts to create financial statements, there needs to be a reconciliation conducted between the subsidiary and control account to ensure that the right balance for a particular item line is reported. Ultimately, you get quicker and easier financial data accumulation for departments of accounting when you do control accounts. Here is an article you might like that talks about accounting basics and crunching numbers.

Updated…When?

You update control accounts when the ledger subsidiaries transfer information to the general ledger systematically. There are various factors that affect the control accounts’ timing of updates. These factors include the scheduling of closing accounting activities of the month’s end, the corporation size, and exactly how complex are the systems involved. In companies which are larger, the system using general ledgers will usually be an independent system of software, separate from the tracking transactions of the subsidiary ledgers for items such as inventory or accounts receivables. In situations such as this one the control account may not be updated throughout the month since the transfer of information schedule between the general ledger and the subsidiary ledger is not in real time. Issues like this one are something that smaller companies may not have since the subsidiary and the general ledgers are usually included in one package of software. Here is a course called Introduction to Bookkeeping that gives you an in-depth introduction to accounting principles and also happens to be one of the most comprehensive courses in Bookkeeping around!

Hope this helps! For more information about the basics of accounting, here is a course entitled Introductory Financial Accounting that includes inventory, receivables, depreciation and the accounting cycle.