Purpose of a Control Account (Edexcel IGCSE Accounting)
Revision Note
Written by: Dan Finlay
Reviewed by: Lucy Kirkham
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 trade receivables ledger control account summarises all the transactions for trade receivables
A trade payables ledger control account summarises all the transactions for trade payables
The totals are found using the books of original entry rather than the ledger accounts
This is so that errors in the ledger accounts can be easily identified
The closing balance is found for the control account and compared to the sum of the closing balances in the receivables ledger accounts or the payables 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 trade receivables ledger control account gives a summary of all transactions with credit customers
A trade payables 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 trade receivables or trade payables 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 original entry
Errors of original entry
When a transaction is entered into the books of original 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 original 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.
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