Welcome to “Control Accounts” topic. These accounts are also known as "Self Balancing Accounts", "Adjustment Accounts" and "Totals Accounts" in different parts of the world. Before we explore this part of accounting study material at Accounting-Daddy.com, let’s examine what Cambridge wants us to learn under this title at secondary and senior secondary education level:
As per the Cambridge syllabus specification for GCE and IGCSE O Levels, students should be able to:
In addition to the above students should be able to:
to cover the same topic in Cambridge International AS and A Level Accounting (9706).
So here all our resources/revision materials are limited to the boundaries of the above syllabuses.
The above definition sounds more like an explanation for a trial balance, though trial balance is not an account. To understand the meaning of these accounts in the true sense, one has to view it in a broader sense and understand the purpose of these accounts.
Let’s say; A sole trader runs a small business, and his transactions are limited to a few number. He maintains only one ledger (General Ledger) to keep all his accounts as his ledger accounts are not many. At the end of the accounting period, to test the arithmetical accuracy of these accounts, he prepares a trial balance. If the trial balance totals agree, we can presume that there are no errors in his ledger accounts. However, if his trial balance totals disagree, he needs to check all his accounts to locate the errors. Since his business transactions are not so many, when compared with bigger organisations, he can locate the errors in his business books without spending much time, labour and energy.
If he owns a bigger business, the scenario is entirely different. As there are so many transactions, he needs to maintain several ledgers to keep numerous ledger accounts. If there are any errors in these accounts, it is nearly impossible to locate these errors in a short period if the trial balance is the only controlling tool used to locate these errors.
Trial balance totals imbalance may occur due to one or a few errors. To locate these errors every posting in every account may need to be checked. It is a very time-consuming process, and many person-hours gets wasted for this process. That is where these accounts finds their purpose.
To speed up the error detecting process, we should have kind of a trial balance for each ledger. These Accounts play the trial balance role for each ledger. For Sales ledger (which contains trade receivables/debtors accounts) Sales Ledger Control Account and for Purchases ledger (which contains trade payables/creditors accounts) Purchases Ledger Control Account are prepared. Therefore, these accounts pin point the place of error without much waste of time, labour and energy.
Both Purchases and Sales Ledger Control Accounts check the arithmetical accuracy of the individual accounts in their respective ledgers. However, errors which do not affect the trial balance such as Errors of omission, Errors of commission, Errors of complete reversal etc can not be located by using these accounts.
1. These accounts can not detect all types of errors.
2. These accounts can not guarantee the arithmetical accuracy of the ledger.
3. These accounts cannot act as a deterrent against fraud unless internal checks can be carried out.
4. These accounts do not provide the details of the transactions, but it only provides a summary of each type of transaction.
5. These accounts can be implemented only in the businesses where the double entry system has been followed. However, the businesses which follow single entry system use control accounts to find the missing information.
6. Incorporation of these accounts into the double-entry system is useful only when there are a huge number of transactions in the business and when business maintains several ledgers in the accounting books. For smaller business organisations preparation of these accounts is not required.