Control Accounts

A trial balance tests the arithmetical accuracy of the accounts.  If the trial balance does not agree, it may require a great deal of effort to locate the error/s.  To reduce the amount of time spent searching for errors, a type of trial balance, known as a CONTROL ACCOUNT, is prepared for each of the Sales and Purchases Ledgers.

Thus only the ledgers whose control accounts do not balance need detailed checking to find errors.  This could mean 2 books instead of 4 to be checked which reduces the effort needed!  The balance of the control account should be equal to all the individual debtors/creditors added together.  This is how it verifies the accounts accuracy.

A sales ledger control account is shown below

                                +                                                                                           -

                                -                                                                                       +

A simple solution is to remember to put a plus and minus on top of each account as has been done above

Notes to remember

There may be contra entries in the control accounts where the same business (person) is both a supplier and a customer, and inter-indebtedness has been netted (“set-off”).

This reduces the amount and goes on the minus side of each control account!

Cancelled and Dishonoured cheques increase the amount owing – so you put them on the plus side

Benefits of using control accounts

• Fraud detection.
• The provision of timely relevant information on Debtors (Trade Receivables) and Creditors (Trade Payables) which can be used on Balance Sheets as either Current Assets or Current Liabilities.

Limitations of control accounts

It does not tell you which account has the error (i.e. locate it)
Some errors still apply  

• C             Commission
• O             Omission
• C             Compensating
• O.           Original Entry

Control accounts are therefore useful at verifying the accuracy of the accounts but not foolproof!