When it comes to keeping your business financial information streamlined, you can come across several confusing and seemingly similar terms. With that in mind, today we offer a detailed explanation of the differences between accounts receivable and a control account.
Accounts Receivable vs Control Account: What Is the Difference?
The fundamental difference between accounts receivable and a control account is that the term accounts receivable refers to the money owed to a company by its debtors, while a control account is a summary account that contains information about subsidiary ledgers such as accounts receivable, among others.
Let’s take a closer look to unpack all this information and understand what it means for your business.
What Is a Control Account?
In accounting, a control account (also known as master account) is an account that contains only summary amounts of a subsidiary ledger.
In other words, a control account only shows a single balance, making it easier to perform controls (that’s why they’re called control accounts!) and make decisions without being overwhelmed by the many details of hundreds of individual transactions.
But of course, details are necessary too. If you need to take a look at the single transactions that make up the total shown in a control account, you can always find those details in the subsidiary ledgers.
The control accounts a business has can vary depending on the size of the business and the industry. Some of the most common are:
- Accounts receivable
- Accounts payable
What Are Accounts Receivable?
As mentioned earlier, accounts receivable (or AR) refers to the amount of money owed to your company by your clients.
Accounts receivable are created when a business extends credit to its customers. In that case, the company performs a service or delivers goods, invoices the customer, and then the customer pays within the agreed-upon time frame (usually 30 to 90 days).
While this process is advantageous for customers, it can put a strain on a company’s cash flow. To prevent this, companies can use factoring of accounts receivable.
Factoring of accounts receivable, or receivables factoring, is a form of financing where a business sells it’s unpaid receivables to a factoring company (known as “Factor”).
The factor pays upfront for the receivables and then collects them from the original debtor in exchange for a small fee. This saves companies the need to wait 30 to 90 days to get capital, preserving their cash flow and allowing them to meet their obligations on time or seize new business opportunities.
Accounts Receivable and Control Accounts
To summarize: accounts receivable is the money owed to your business, while control accounts are an accounting instrument for staying on top of your business’s financial information.
For example, a company that extends credit to its customers will usually have an accounts receivable control account as well as an accounts receivable subsidiary ledger.
The accounts receivable control account shows a single accounts receivable balance, while the accounts receivable subsidiary ledger contains a detailed history of all the transactions that make up the total in the accounts receivable control account.
To learn more about accounts receivable and receivables factoring check out our previous posts, “What Are Accounts Receivable? Definitions and Example,” “Are Accounts Receivable Assets of Liabilities?” and “What Is Non-Recourse Factoring?”
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