3.4 Control Accounts

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Section 1: What Is a Control Account?

When a business sells goods on credit, it keeps a separate account for each credit customer in the sales ledger. When it buys goods on credit, it keeps a separate account for each credit supplier in the purchases ledger. As a business grows, there could be hundreds of these individual accounts.

A control account is a single account that summarises — that is, brings together in one place — all the transactions that appear across all those individual accounts. Instead of looking through dozens of accounts, a manager can look at one account and instantly see the total position.

There are two control accounts you need to know:

• The Sales Ledger Control Account (SLCA) — summarises all transactions with credit customers (people who owe the business money, also called trade receivables).
• The Purchases Ledger Control Account (PLCA) — summarises all transactions with credit suppliers (people the business owes money to, also called trade payables).

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Section 2: Purposes of Control Accounts

Control accounts serve several important purposes:

1. They provide a quick summary of what is owed. The SLCA shows the total amount owed to the business by all its credit customers in one figure. The PLCA shows the total amount the business owes to all its credit suppliers. This makes it easy to prepare the statement of financial position (the document that shows the financial position of the business), because you only need one figure for trade receivables and one for trade payables.

2. They help find errors. The balance on a control account is calculated using the books of prime entry (see Section 3). If this balance does not match the total of all the individual ledger accounts, there must be an error somewhere — either in the ledger accounts or in the books of prime entry. This makes it much easier to track down mistakes.

3. They help prevent and detect fraud. Control accounts and individual ledger accounts are usually prepared by different people. Because two separate people are working on related records, it becomes very hard for one person to commit fraud without it being noticed. Any tampering in the individual accounts would show up as a mismatch with the control account.

4. They prove arithmetical accuracy. If the control account balance matches the total of the individual ledger accounts, this confirms that the arithmetic across all those accounts is correct (though it cannot catch every type of error — see below).