Control Accounts for Small Business Owners

One of the most important parts of the double entry accounting method is the control accounts. The account is a cornerstone of bookkeeping. Outsourced bookkeeping service providers use the accounting method for preparing error-free financial reports.

In this blog post, you will know what exactly a control account is. In addition, you will know about the types and examples of the control account.

Understanding Control Accounts in Bookkeeping

A control account gives a snapshot of the company’s financial position. The account shows the aggregated information of individual transactions in the ledger. This account is used by accountants to check the accuracy of the individual accounts in the ledge.

Experienced certified public accountants (CPAs) use the control accounts for different types of ledger accounts. The accounts are used for all ledger accounts with a large number of transactions. They are not part of the general ledger but a part of the subsidiary ledgers that provide a summary of the main ledger accounts. Some of the ledger accounts for which control accounts are made include the following.

• Accounts Payable
• Accounts Receivable
• Fixed Assets
• Inventory
• Payroll

The balance of the control accounts must be equal to the individual accounts. In case the balance is different, there might be some error that needs further investigation.

Outsourced bookkeeping service providers generally use accounting software that automatically creates control accounts as well as the associated sub-ledgers. It saves time for the accountant in segmenting and creating separate control accounts.

Accounting software already has control accounts for different ledger accounts. You can select them for any general account that must be maintained by the software.

Benefits of Control Accounts for Businesses

Control accounts offer various advantages to businesses. Below are some of the benefits of using them for companies.

1. Identify Mistakes

The foremost reason for using control accounts is to identify mistakes in the main ledger accounts. The balance of the control and ledger accounts should always be the same. In case of an error, the CPA professional will analyze the accounts to find out and correct the error.

Control accounts show if there is any error in the accounts and the detection of errors can be localized using them. It shows the accountants if there are any discrepancies in the account balance. Maintaining control accounts help save time in resolving mistakes in the books.

2. Simplify Clutter

Another benefit of a control account is that it helps accountants and business owners to focus on the main figures. They can more easily analyze the balances of the individual accounts to find out discrepancies.

The control accounts don’t display a large list of transactions. The transactions are recorded in detail in the ledger but the aggregate balance is listed in the subsidiary ledgers. Accountants can easily pull data from these accounts to make financial reports.

3. Prevent Accounting Fraud

Control accounts also help in preventing accounting fraud. If you have another accountant maintain them, there will be fewer chances of an accountant misusing the funds.

You can have a trusted individual or yourself for the control account. This will provide a high level of protection against misuse of company resources.

Control accounts are generally overseen by the supervisor. The accountants prepare these accounts that are reviewed by the accounting manager. The distribution of roles reduces the chances of dishonest dealings that harm the financial position of the company.

4. Helps in Decision Making

Business owners and managers look at accounting information for making sound business decisions. Control accounts provide a snapshot or summary of the financial statements. The summarized information lets the decision makers know about the financial health of a company.

Decision makers can make accounting policies and make decisions to secure financing based on the accounting information. The policy formulation helps the company owners to make decisions to ensure the financial stability of the company.

5. Check and Balance

A control account also serves as a check and balance for the financial assets of a company. These accounts can be used to determine the accuracy of the recorded data. It serves like the check bit that is attached to the end of data submitted online.

With the use of control accounts, the accounting personnel can carry out an internal audit without investing a lot of money. The account can be used to find out discrepancies and fraud in the accounting statement. The account serves as an internal check to determine the integrity of the accounts.

6. Simplify General Ledger Account

Accountants can reduce the clutter in the general ledger account by creating a control account. The control account records the aggregate information. This makes it easier for accountants to inspect individual accounts.

Control accounts result in a division of work among accountants. The account can be handled by another accountant that simplifies the task of maintaining accounting information.

7. Preparation of Financial Statements

Control accounts also simplify the preparation of financial statements in a manual accounting system. The accounts help the accountants to create a quick draft of the trial balance. Accountants can simply enter the information mentioned in the control accounts.

Decision makers can get a quick overview of the business performance due to the quick preparation of accounting statements. It helps them make timely financial decisions so that the company continues to operate without facing any type of issues.

Control accounts can also prove invaluable in making financial statements with a single accounting method. The accounts will help in plugging in missing information to prepare income and expense reports for the company owners.

8. Helps in the Management of Debtors and Creditors

Control accounts also help bookkeepers in managing information about creditors and debtors. The account summarizes information about all the creditors and debtors. This helps in performing accounts payable and accounts receivable analysis.

Maintaining these accounts allows accountants to know about the net balance of creditors and debtors. They can use accounting formulas to find out if the company is facing a problem in maintaining receivable and payable accounts.

What are the Limitations of Control Accounts?

Control accounts provide many benefits in bookkeeping. But there are also certain limitations as well that you should be aware of regarding the account.

1. Control accounts cannot detect all accounting errors

Control accounts can help identify problems in the accounts. But you should not think that maintaining these accounts will help in identifying all types of errors.

Accountants cannot detect omissions with these accounts. In addition, the errors related to compensation also cannot be detected using these accounts.

These accounts also cannot help in identifying the ledger account that may contain an error. You need to carry out further investigation to find out why the balances are not the same.

2. Errors in Control Account

Another important thing to remember is that the control accounts will be useful only if the balances are correctly entered. Accountants may make a mistake when entering information into the account.

The information entered in the control account must be thoroughly analyzed. Any error in the account will mislead accountants when they are auditing accounts.

3. Lack of Detailed Insights

Control accounts only provide a summary of the accounts. The information in this account alone should not be used to make a financial decision. It is important to analyze details of the individual’s accounts in the ledger when making a decision.

Control Accounts Types

Control accounts are of different types. The three main types of control accounts that are generally maintained by most bookkeepers include account receivable, accounts payable, and stock control accounts.

Let’s take a look at the different types of control accounts with examples.

Accounts Receivable Control Account

The accounts receivable control account contains information about the debtors. The control account helps in decluttering information in the main ledger of a large organization.

Suppose that a company has over 5000 debtors. It will be difficult for managers to go through the entire information. In such a situation, a subsidiary ledger for the debtors can be created.

The control account for the debtors will display the following information.

• The total amount that has been paid by debtors
• The total credit amount

The following table shows the accounts receivable control account.

Accounts Payable Control Account

Accounts payable control account contains information about the creditors. The control account helps in getting an overview of the total amount payable to creditors.  

The control account will display the following information.

• The total amount that has been paid to debtors
• The total debt amount

The following table shows the accounts payable control account.

As you can see in the tables above, the accounts receivable and payable accounts have equal debit and credit balances. Any differences in the total indicate a problem that must be investigated further.

Stock Control Account

Stock control account follows the same principles as the accounts receivable and payable control accounts. This type of control account summarizes information related to the stock and inventory.

The control account does not contain information about individual inventory. The account summarizes the inventory level during a period. You must tally the debit and credit balances to find out if they are the same. Again, any differences in the account balance must be investigated further.

Examples of Control Accounts

When a transaction occurs, professional CPAs at the outsourced bookkeeping service firm make an entry in the books. The control account aggregates information about the transaction in a single account. The details of the individual transactions are contained in the subsidiary ledger.

Various types of subsidiary transactions are entered into the control account balance. For instance, the accounts receivable control account will only contain the balance. The subsidiary ledger will contain the details such as the following.

• Products Returns
• Refunds
• Customer payments
• Credit memos
• Bad debts

An example will help in understanding the control accounts. The accounts summarize the information in the individual ledger accounts.

Suppose that Tom owns a store where customers owe him $4000. He receives payment from the customers amounting to $1000. If the store owner is using a control account, he will debit $4000 which will increase the accounts receivable balance, and credit $1000 which will decrease the accounts receivable account.

Tom posts the totals on the control account. The details of the transactions are recorded in the subsidiary ledger. He only has to post the total amount for each.

In case some customers return the product, they will have to make entries in the control account to ensure that the subsidiary and the control accounts are equal.

At this point, it is important to emphasize that the amount posted on the two accounts should be the same. You will have difficulty pointing out the difference in case different amounts were posted when recording the transactions.

Other Types of Control Accounts

Account receivable, payable, and stock control accounts are the most common types of control accounts. But some organizations also maintain control accounts for different transactions including cash, salaries, and prepayments.

Business owners can also create a control account. The control account will contain information about capital contributions and withdrawals. It will help owners to keep a tally of the net capital invested in the business.

Control accounts can be made of any type of ledger account. The account keeps a record of the total amount. The details of the individual accounts are kept in the ledger. For instance, an owner will know the total amount receivable from customers by looking at the control account balance. But the control account will not contain information about the individual creditors.

At any given point in time, the balance of the control account and the individual balances must be equal. In other words, the sum of the individual balance of creditors or debtors must be equal to the net balance shown in the control account.

Control Accounts and Trial Balance

The control accounts are a type of trial balance. Accountants prepare trial balances by listing the balance of different types of accounts. The trial balance is prepared to find out the accuracy of the accounting information. However, the trial balance is different from control accounts in that it contains a balance of all the ledger accounts.

In contrast, control accounts contain information about specific accounts such as accounts receivable, accounts payable, and others.

The process of reconciling the debit and credit balance of a trial balance is similar to reconciling the debit and credit balance of control accounts and subsidiary ledgers. Accountants must look at individual ledger entries in case of a difference in debit and credit balances.

Let’s take a look at the process of reconciling balance amounts with control accounts.

Reconciling Differences in Accounts

Accountants carry out an internal check when the balances in the control and ledger accounts are different. The balance may be different due to many reasons. The accountant’s task is to find out the reason for the discrepancies in the balance.

Incorrect Posting

The difference in balance can be caused due to incorrect posing in the control account. This can happen when the bookkeeper makes tallying amounts in the ledger. The accountant may also add the total invoice amount due to which the balance of the ledger balance may tally but the control account debit and credit balance will be different.

An accountant will have to make a journal entry in the leger to rectify the problem in the control account. This will result in the correct balance of the related debit or credit account.

Transposition Error

A common mistake identified when reconciling control accounts is transposition error. This type of error occurs when posting entries of a balance from the books to the memorandum ledger. The amount of $850 might be posted as $580 which is known as the transposition error.

The accountant will rectify the problem by correcting the individual account. No entry is made to correct the control account.

Oversight in Making Entries

Another mistake that can cause differences in the control account balance is when an accounting entry is not made in one of the accounts. An accountant may forget to make the entry of a ledger in the control account. It may also happen that the accountant makes an entry in the control account but forgets to make an entry in the general ledger.

Correcting the mistake requires that the accountant makes the entry in the account that has not been made.

Double Posting

The difference in debit and credit balances can also occur due to double posting. The accountant may post multiple entries in the control account or ledger. The error will result in a mismatch between debit and credit entries.

The accountant will correct the mistake of double entry by making two entries. One entry rectifies the double posting while the other will post the amount in the right account.

Commission Errors

Commission errors occur when the accountant has made two entries on the credit or debit side of the account. The mistake will also cause the balances of the control accounts to be different.

An accountant will correct the mistake by creating a credit entry if the entry is made on the debit side and a credit entry if the double entry is made on the credit side.

Contra Entries

Contra entries are made by the accountant when the company is both a customer and a supplier. Let’s suppose that company A purchases goods on credit from company B valued at $5000. Company B also sells some products valued at $2000 to company A on credit.

In the above example, each company is both the supplier and the customer. The accountant will make contra entries in such a situation. Company A will set off a $5000 account payable against a $2000 account receivable resulting in a net account payable of $3000.

In contrast, Company B will set off a $2000 account payable against a $5000 account receivable resulting in a net account receivable of $3000.

For company A, the $3,000 will appear on the debit side of the payables control account. In contrast, the same amount will appear on the credit side of the account receivable control account for company B.

Suspense Account

A suspense account is a type of control account that is created when reconciling differences in the account. Accountants create the account for when the credit and debit balances don’t tally. The temporary account will remain until the differences in the balances are reconciled.

Errors Not Showing in Contra Account Balance

You should remember that the correct balance in control accounts does not necessarily mean that there are no errors. It may be the case that the accountant made two errors that resulted in the debit and entry balance being equal. An example will let you understand this situation.

Suppose that Tom buys a good worth $10,000 on credit. The accountant enters $5000 into the account by mistake. Now, suppose that Tom buys goods from another vendor valued at $15,000. By mistake, the accountant enters $20,000. The accountant enters $5000 less when making the first entry and $5000 more when making the second entry. In this situation, the debit and credit balances of the accounts receivable will be the same. The error can only be rectified by close examination of the accounts.

Conclusion

Control accounts provide summary information about the general ledger. They facilitate the preparation of accurate financial reports. The balances of the control account must tally with the individual transactions of the subsidiary ledger. Any difference in the balance indicates that the wrong posting has been made.

Maintaining control accounts also helps business owners to get an overview of financial transactions. This allows them to make informed business decisions based on accurate data.

Outsourcing booking activities will help take off the load from your internal accountants. This will result in fewer errors in making entries in the books. Contact Maxim Liberty to keep accurate records of your financial information. You can reach us by dialing (703) 957-6938 today.