Purpose of a Control Account (Cambridge International IGCSE Accounting)

Purpose of a control account

What is a control account?

• A control account is a summary of all balances and transactions for trade receivables or for trade payables

  • A sales ledger control account summarises all the transactions for trade receivables
  • A purchases ledger control account summarises all the transactions for trade payables

• The totals are found using the books of prime entry rather than the ledger accounts

  • This is so that errors in the ledger accounts can be easily identified
  • This also helps to reveal fraud

• The closing balance is found for the control account and compared to the sum of the closing balances in the sales ledger accounts or the purchases ledger accounts

  • If there are no errors, these figures will be equal

What is the purpose of a control account?

• To provide a summary of transactions for that type of account

  • A sales ledger control account gives a summary of all transactions with credit customers
  • A purchases ledger control account gives a summary of all transactions with credit suppliers

What are the advantages of using a control account?

• Control accounts can be used to assist in the location of errors

  • Errors are present if the balance on the control account does not match the total from the relevant ledger accounts

• The total figure for trade receivables or trade payables is shown

  • This enables the statement of financial position to be prepared quickly

• Control accounts help to reduce and prevent fraud

  • Different people prepare control accounts and ledger accounts
  • Therefore, any discrepancies will be spotted

• Control accounts can prove the arithmetical accuracy of the sales or purchases ledger

  • If the balance on the control account matches matches the total of the ledger accounts then there are no arithmetic errors
  • However, there still could be other errors

Do control accounts identify all errors?

• Control accounts do not identify all errors

  • This is similar to the trial balance

• The following errors are not identified

  • *Errors of commission

  • Errors of omission

    • When a transaction is not entered into the books of prime entry

  • Errors of original entry

    • When a transaction is entered into the books of prime entry with an incorrect amount

  • Compensating errors*

What are contra entries?

• A person or business may be both a credit customer and a credit supplier

• If a business owes some money to a person but is also owed money by that person then they can agree to offset the common balance

  • This is known as a contra entry

• The offset is done without any exchange of money

• The book of prime entry for contra entries is the general journal

  • Journal entries will be made with a narrative

  • Entries will then be made to the ledger accounts:

    • Debit the trade payables account
    • Credit the trade receivables account

Case Study Aadam owes Brie $500. Brie owes Aadam $300.

Instead of paying each other $300, they agree to offset Brie's balance against Aadam's. This means they each reduce their balance by $300 without exchanging any money.

Aadam now owes Brie $200. Brie now does not owe any money to Aadam.