A control account records a similar category's bulk transactions and summarizes the balances. The transactions are initially recorded in subsidiary accounts and then transferred to the control account, which is finally reflected in the financial statements.
What is a Control Account?
A control account is a type of account in the general ledger that exclusively reflects the balance of one or more related subsidiary accounts. Companies keep records of their transactions in subsidiary ledgers, consolidated and summarized into the corresponding control account.
The ending balance in a control account must agree with the total balance of the related subsidiary ledger. If the two balances do not match, it suggests the possibility of an entry being recorded in the control account but not in the subsidiary ledger.
Types of Control Accounts
The two most common control accounts are accounts receivable and accounts payable due to the double-entry accounting system. Other types of control accounts are
- Fixed Assets
Accounting software can assist in categorizing data and generating control accounts and sub-ledgers, which enables data segmentation and accurate accounting practices.
Usage of a Control Account
Control accounts are updated daily to reflect the activity level in a company's operations. It is important to complete the posting of all transactions into the control accounts before closing the books at the end of a reporting period. Otherwise, the transactions may remain unrecorded in the financial statements, resulting in discrepancies.
Large organizations typically use control accounts since their high transaction volume demands an organized and efficient way of managing their records. On the contrary, small organizations can usually manage to store all of their transactions in the general ledger and, therefore, do not require a subsidiary ledger linked to a control account.
Advantages of a Control Account
Since the general ledger cannot handle all the transactional details, a control account keeps everything neatly sorted. It is beneficial when the general ledger keeps track of several accounts.
How Control Accounts Work
Control accounts form the basis of the general ledger. They are an extremely vital element of the double-entry accounting system. They serve as a summarized report of the total balances for each sub-ledger, allowing for a simpler analysis of a company's balance sheet without including all the intricate details of every sub-ledger.
A large organization with several complex operations may have a general ledger that contains many control accounts, such as accounts receivable, based on various sub-ledgers. Each control account is linked to a summary balance in the general ledger, matching the numerous transactions in each sub-ledger.
For example, accounts receivable records every transaction, including customer information, sale particulars, returns, refunds, and payments in its sub-ledger. The sub-ledger is calculated for totals at each reporting period and makes up the accounts receivable control account balance. Therefore, the accounts receivable control account represents the total amount owed to the company, while the sub-ledger displays the amount each customer owes.
Control accounting is a way to produce clean financial reports while keeping checks and balances for precise settlement. The sub-ledgers' customer balances should match the control account for an accurate financial report. Any discrepancies indicate an error in the books that require correction.
An Example of a Control Account
A company has numerous customers with outstanding accounts receivable balances. The company maintains separate subsidiary accounts for each customer to record these balances.
At the end of the reporting period, all these individual accounts are transferred to the accounts receivable control account. This control account is then reflected in the general ledger and financial statements as a single accounts receivable balance. It eliminates the need to keep hundreds of individual accounts.
If the store wants detailed information, they can review the subsidiary accounts. The store can keep its ledger clean and organized by using control accounts, making it easier for its accountants to manage the finances effectively.
Difference Between Control and Suspense Account
These are the main differences between control and suspense accounts:
- A control account serves as a summarized version of the general ledger accounts and is used to monitor them. On the other hand, a suspense account is used for recording unexplained or doubtful entries in financial statements.
- A control account should match the subsidiary accounts since it is a summary. Suspense accounts are temporary holding accounts that store unexplained transactions before they are identified and transferred to the appropriate account.
- Control accounts primarily have accounts receivable and payable to or from subsidiary accounts, while suspense accounts contain the difference between the total debit and credit.
Control Account vs Work Package
Once the project scope is divided in the form of Work Breakdown Structure, work packages, and activity level, it is time to track whether a project is reaching its milestones. However, it is very difficult to track a project at a very high level or at the lowest level (the lowest level is the activity level).
So, in order to manage the project better, we make a point between the WBS and work package and call it the Control Account.
Control Account is a management control point where scope, cost, and schedule are integrated and compared to the earned value for performance measurement. Control Accounts are placed at selected management points in the WBS. Each Control Account is defined with a unique code or an accounting number which can be used to link to the performing account system.
The ‘Work Package’ is a deliverable which is obtained after decomposing the WBS. Work packages are further divided into activity levels. A Control Account usually has one or more work packages. The following figure explains the relations or the hierarchy in which each of the components is placed.
Cost Baseline vs Cost Budget (Budget)
During cost estimation, the Project Manager will come up with a figure and will add a contingency reserve which will become the Cost Baseline. On top of the cost baseline, a risk assessment management reserve will be added. This combined figure becomes the budget of the project. So the difference between the cost baseline and the budget is called the risk management reserve, or the unknown risk.
Earned Value Management (EVM)
Let’s catch up with some of the terms as well as the formula used to calculate the project progress in terms of earnings. The following table provides both the definition and the formula:
For example, let’s take a project worth $4M that needs to be completed over a span of 4 months. It is assumed that the estimated work roadmap is linearly distributed, in the sense that at the end of the 1st month, 25% of work should be completed at a cost of $1M, at the end of 2nd month 50% will be completed and the spending should be $2M and so on. Let’s take the progress data of this project at the end of the 3rd month. Assume the project is 60% completed at a cost $3.5M. What is the condition of the project?
From the above case, we can define the following values:
Actual Cost(AC)=$3.5M, Earned Value(EV) is 60% of $4M= $2.4M and Planned Value (PV) is 75% of 4$M=$3M.
Now the rest of the calculations are simple:
CV=EV-AC=2.4-3.5=-1.1, SV=EV-PV=2.4-3=-0.6, CPI=EV/AC=2.4/3.5=0.69 and SPI=EV/PV=2.4/3=0.8.
What is the Meaning of This?
The bottom line is that the project is in bad condition – because of negative values in case of variance and because the performance indices are below 1. The project is over budget, and behind the schedule by values of $1.1M and $0.6M respectively.
And for every $1 spent we are getting only 69 cents and the project is progressing at the rate of 80% originally planned.
This sample problem illustrates how to make EVM calculations.
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