Control Accounts

Just like a trial balance acts as a check on the arithmetical accuracy of all the ledger accounts, a control
account checks the arithmetical accuracy of credit transactions (relating to goods) recorded in the subsidiary
ledgers [i.e. sales (trade receivables) ledger and purchases (trade payables) ledger]

Credit transactions relating to goods are first recorded in books of prime entry from source documents and
posting is then made from these books of prime entry to the subsidiary ledgers.

Source documents Books of Prime Entry Recording Subsidiary ledgers

Sales invoice Sales Day Book Revenue (Sales) Dr Trade receivable
Credit note Sales Return Day book Returns Inwards a/c
Cheque Cash Book Amts received from customers, Cr Trade receivable
discounts allowed a/c
Journal Bad debts, contra settlement
interest charged on overdue a/cs Cr trade receivable a/c
Cr trade receivable a/c
Dr trade receivable a/c
Purchase invoice Purchases Day Book Purchases Cr trade payable a/c
Credit note received Purchases Return Book Returns Outwards Dr trade payable a/c
Cheque stub or Cash Book Amounts paid to suppliers, Dr trade payable a/c
receipt discounts received
Journal Contra settlement Dr trade payable a/c

Example:

Credit Credit Sales Receipt Discount Dis. Opening

customers sales ($) Returns from TR ($) Allwd. ($) Chq ($) Balance
($) ($)
Big 20 000 5 000 14 000 700 2 000 8 000
Fat 30 000 4 000 13 000 500 1 000 7 000
Giant 25 000 3 000 15 000 800 3 000 4 000

Required:
(i) Prepare the extract of Journal Opening Entries (JOE) and Cash Book
(ii) Sales Ledger
(iii) Sales Ledger Control Account

Note: It has been decided to write off Giant account as irrecoverable debts

Control accounts are usually maintained for the sales (trade receivables) and purchases (trade payables)
ledgers. The totals are from books of prime entry from which postings are made to the respective ledgers.

Control accounts are total accounts maintained in the General Ledger which is independent from the other
two ledgers and are commonly prepared by an officer other than the one maintaining the sales and purchases
ledgers. This is to reduce the risk of misstatement or possibility of fraud by staff members.

In businesses with a large volume of credit sales and purchase transactions, and many customer and supplier
accounts, there is a need to reconcile the balances on such accounts with total trade receivables and trade
payables. It is important that the entries posted to the personal accounts can be checked quickly and this can
be achieved with the use of control accounts.
The main purposes of control accounts include:

 Unnecessary detailed information is eliminated from the General Ledger. That means all individual
accounts receivable and accounts payable are now kept in the subsidiary ledgers. Control accounts
thus provide a concise summary of the accounts receivable and accounts payable. Therefore timely
information could be assessed.

 To provide a check on the accuracy of entries in the individual accounts;

 To provide a total of trade receivables and trade payables at any time in an accounting period. A trial
balance can then be prepared without referring to the subsidiary ledgers;

 To identify errors in the completion of the day books and in posting day book totals;

 To provide an internal check – where the system is being administered by several persons it is
important that internal controls exist and their work is checked. The control account should be
prepared by a person other than the one completing the day books.

Errors not revealed by Control Accounts:

Error of commission
Error of omission
Error of original entry
Compensating error
Complete reversal of entries

Limitations of Ccontrol Accounts:

 The above errors cannot be detected by Control Accounts.

 If there is collusion among staff, fraud can still be committed. This will not be revealed by Control
Accounts

EXAMPLE:

The books of original entry for James and Daniel Ltd, showed the following for month ended 31 March 2009.
$
Opening balances (1 March 2009):
Trade receivables 120 750
Trade payables 86 140

Cash Book:
Discount allowed 7 300
Cash and cheques received from customers 294 100
Discount received 3 150
Cash and cheques paid to suppliers 249 200

Journal:
Bad debts written off 1 500

Subsidiary books:
Purchase day book 253 200
Sales day book 316 250
Returns inward 5 100
Returns outward 4 710

Required: Prepare a trade receivables and trade payables control accounts

Treatment of some items:

 Cash sales and provision for bad debts do not appear in control accounts.
Entries for:
cash sales: Dr Cash Cr Sales
PFBD: Dr Income Statement Cr PFBD

 Contra settlement: This is an off-set between a trade receivable’s and a trade payable’s account. It
can be done when a business is both a customer of and supplier to another business. So, both a trade
receivable’s account (in the sales ledger) and a trade payable’s account (in the purchases ledger) will
exist in the books of the business.

The entries are:

Dr Trade payable a/c Purchases Ledger Control A/C
Cr Trade receivable a/c Sales Ledger Control A/C

 Dishonoured cheques: These are cheques that could not be cleared by the bank because of lack of
funds from the payee’s bank account. It is in fact an amount that has not been received by the trade
receivable. Therefore, the reverse entry has to be made

Dr Trade receivable a/c

Cr Bank a/c

 Interest charged on overdue accounts: This is an amount charged to trade receivables for having
exceeded the credit period allowed to them. So it increases the amount due by trade receivables

Entries : Dr Trade receivable

Cr Interest receivable

 Minority balances (credit balances) in Trade receivables a/c: This can happen when:
-There is an overpayment by a trade receivable; or

-There is a return of goods after they have been paid for, for which a refund has not yet been effected;
or

-Deposit is received from a trade receivable for goods not yet supplied (Dr Bank Cr Trade receivable)

Minority balances also exist in Trade payables a/c. They are usually of smaller amounts as compared
to the main balances and are disclosed on the opposite side of the main balances.

 Bad debts recovered: These are bad debts previously written off as bad and which are now
recovered from trade receivables

1. From the following list of balances, prepare Jordan’s Sales Ledger Control Account at 30 September 2016:

$
Debit balance at 1 October 2015 24,280
Credit sales 88,730
Credit sales returns 5,640
Receipt from trade receivables banked 73,220
Discount Allowed 6,740
Bad debts 3,900
Provision for bad debts 1,350
Dishonoured cheques 3,210
Interest charged on trade receivables’ overdue 760
accounts
Contra settlement 2,170
[10 marks]
2. Balances and transactions relating to the Control accounts of Axe Limited for the month of September
are as follows:

$
Balances, 1 September:
Trade payables control account 5 680 (CR)
Trade payables control account 75 (DR)
Trade receivables control account 12 660 (DR)
Trade receivables control account 120 (CR)

Transactions for the month:

Credit sales 31 200
Discount received 715
Credit purchases 24 900
Cheques from credit customers 21 790
Cash refund to customer 200
Bad debts written off 750
Contra settlements 2 600
Allowances to customers 450
Cash from credit customers 2 730
Allowances from suppliers 660
Sales returns 880
Discount allowed 520
Cheques from customers dishonoured 350
Payments to suppliers 17 610

Balances at 30 September:
Trade payables control account 105 (DR)
Trade receivables control account 60 (CR)

REQUIRED:
(a) Write up the trade payables and trade receivables control accounts for the month of
September and derive the closing balances at the end of the month.
(b) Which book keeping errors are not revealed by control accounts?

3. The following was available in the books of Shirley. Prepare the SLC and PLC accounts.

$
Balances at 1st January 2022:
Sales Ledger Control A/c Dr. 13 425
Cr. 450
Purchase Ledger Control A/c Dr. 390
Cr. 15 270
Sales for the year 12 600
Purchases for the year 13 950
Total of Sales Return Book 1 850
Total of Purchases Return Book 1 700
Discount Allowed 1 600
Discount Received 1 950
Bad Debts written off 850
Dishonoured cheques 800
Contra Settlement 755
Interest charged to overdue accounts 620
Receipt from trade receivables 10 350
Payment to trade payables 11 280
Increase in Provision for bad debts 260