Control Accounts

Control Accounts are the total accounts used for checking the arithmetical accuracy of each of ledger separately. A control account
contains the same information as the individual ledger accounts which it controls, but in total. Control accounts are used
chiefly for trade receivables and payables.

(a) A receivables control account is an account in which records are kept of transactions involving all
receivables in total. The balance on the receivables control account at any time will be the total amount due
to the business at that time from its receivables.

(b) A payables control account is an account in which records are kept of transactions involving all payables in
total. The balance on this account at any time will be the total amount owed by the business at that time to its
payables.

Control accounts and personal accounts

The personal accounts of individual customers of the business are kept in the receivables ledger, and the amount owed
by each receivable will be a balance on the receivable's personal account. The amount owed by all the receivables
together (ie all the trade receivables) will be a balance on the receivables control account.

At any time the balance on the receivables control account should be equal to the sum of the individual balances on
the personal accounts in the receivables ledger.

For example, a business has three trade accounts receivable: A Arnold owes $80, B Bagshaw owes $310 and C
Cloning owes $200. The debit balances on the various accounts would be:

Receivables ledger (personal accounts) $

A Arnold 80
B Bagshaw 310
C Cloning 200
590
Nominal ledger: receivables control account 590

What has happened here is that the three entries of $80, $310 and $200 were first entered into the sales day book.
They were also recorded in the three personal accounts of Arnold, Bagshaw and Cloning in the receivables ledger –
but remember that this is not part of the double entry system.

Later, the total of $590 is posted from the sales day book by a debit into the receivables (control) account and a credit
to sales. If you add up all the debit figures on the personal accounts, they also total $590, as shown above.

Accounting for discounts

Trade discounts received are deducted from the cost of purchases. Cash discounts received are included as 'other
income' of the period. Trade discounts allowed are deducted from sales and cash discounts allowed are shown as
expenses of the period.

Trade discounts

A trade discount is a reduction in the amount of money demanded from a customer.

(a) If a trade discount is received by a business for goods purchased from a supplier, the amount of money demanded
from the business by the supplier will be net of discount (ie it will be the normal sales value less the discount).
(b) Similarly, if a trade discount is given by a business for goods sold to a customer, the amount of money demanded
by the business will be after deduction of the discount.

Trade discounts should therefore be accounted for as follows.

(a) Trade discounts received should be deducted from the gross cost of purchases. In other words, the cost of
purchases in the trading account will be stated at gross cost minus discount (ie it will be stated at the invoiced amount).

For example, Company A purchases inventory on credit from Supplier B at a gross cost of $100, and receives a trade
discount of 5% from the supplier. The double entry for the purchase is as follows:

DEBIT Inventory $95

CREDIT Trade payables $95
(b)Trade discounts allowed should be deducted from the gross sales price, so that sales for the period will be reported
in the trading account at their invoice value.

For example, Company B sells inventory on credit to Customer A at a gross sale price of $100 and offers a trade
discount of 10% to the customer. The double entry for the sale is as follows:

DEBIT Income $90

CREDIT Trade receivables $90

Supplier statements

A supplier will usually send a monthly statement showing invoices issued, credit notes, payments received and
discounts given. It is vitally important that these statements are compared to the supplier's personal account in the
payables ledger. Any discrepancies need to be identified and any errors corrected.

A statement of account is reproduced below.

The statement is received on 1 June 20X1 and is passed to Linda Kelly who is the payables ledger clerk at Finstar Co.
Linda obtains a printout of the transactions with Pickett (Handling Equipment) Co from Finstar's payables ledger system.
(The reason why Linda has made ticks on the statement and on the printout which follows will be explained below.)
The payables ledger of Finstar shows a balance due to Pickett of $337.31, while Pickett's statement shows a balance
due of $847.86.

Supplier statement reconciliations

Linda wants to be sure that her payables ledger record for Pickett is correct and so she prepares a supplier statement
reconciliation. These are the steps to follow.

Example: supplier reconciliation Linda applies the above steps to Pickett's statement.
The reasons for reconciling items
Reconciling items may occur as a result of the following items.
Entries in Control Accounts

The Control Account at any time should be equal to the total of the subsidiary accounts. Any differences in the two
totals should be explained, and where the differences are due to errors, these must be corrected. Corrections will be
to either the control account or the subsidiary accounts. A Sales Ledger Control Account will typically be used to record
the following transactions:

A Purchase Ledger Control Account will typically be used to record the following transactions:

Practice Questions

Question # 1.

A payables control account contains the following entries. $ Bank 79,500 Credit purchases 83,200 Discounts received
3,750 Contra with receivables control account 4,000 Balance c/f at 31 December 20X8 12,920 There are no other
entries in the account. What was the opening balance brought forward at 1 January 20X8?

Answer:
Question # 2.

On examining the books of Exports Co, you ascertain that on 1 October 20X8 the receivables ledger balances were
$8,024 debit and $57 credit, and the payables ledger balances on the same date $6,235 credit and $105 debit. For the
year ended 30 September 20X9 the following particulars are available.

Sales 63,728
Purchases 39,974
Cash from trade accounts receivable 55,212
Cash to trade accounts payable 37,307
Discount received 1,475
Discount allowed 2,328
Returns inwards 1,002
Returns outwards 535
Irrecoverable debts written off 326
Cash received in respect of debit balances in payables ledger 105
Amount due from customer as shown by receivables ledger, offset
against amount due to the same firm as shown by
payables ledger (settlement by contra) 434
Allowances to customers on goods damaged in transit 212

On 30 September 20X9 there were no credit balances in the receivables ledger except those outstanding on 1
October 20X8, and no debit balances in the payables ledger.

Required:

Write up the following accounts recording the above transactions bringing down the balances as on 30 September
20X9.
(a) Receivables control account
(b) Payables control account

Answer:
Question # 3.

April Showers sells goods on credit to most of its customers. In order to control its receivables collection system, the
company maintains a receivables control account. In preparing the accounts for the year to 30 October 20X3 the
accountant discovers that the total of all the personal accounts in the receivables ledger amounts to $12,802, whereas
the balance on the receivables control account is $12,550.

Upon investigating the matter, the following errors were discovered.

(a) Sales for the week ending 27 March 20X3 amounting to $850 had been omitted from the control account.
(b) A customer's account balance of $300 had not been included in the list of balances.
(c) Cash received of $750 had been entered in a personal account as $570.
(d) Discounts allowed totalling $100 had not been entered in the control account.
(e) A personal account balance had been undercast by $200.
(f) A contra item of $400 with the payables ledger had not been entered in the control account.
(g) An irrecoverable debt of $500 had not been entered in the control account.
(h) Cash received of $250 had been debited to a personal account.
(i) Discounts received of $50 had been debited to Bell's receivables ledger account.
(j) Returns inwards valued at $200 had not been included in the control account.
(k) Cash received of $80 had been credited to a personal account as $8.
(l) A cheque for $300 received from a customer had been dishonoured by the bank, but no adjustment had been
made in the control account.

Required:

(a) Prepare a corrected receivables control account, bringing down the amended balance as at 1 November 20X3.
(b) Prepare a statement showing the adjustments that are necessary to the list of personal account balances so that it
reconciles with the amended receivables control account balance.

Answer:
Question # 4

XYZ has a payables control account balance of $17,250 at 31 December 20X9. However, the extract of balances
from the payables ledger totals $14,500. Investigation finds the following errors: a contra entry of $750 had been
omitted from the control account; an account with a balance of $500 debit had been included as $500 credit in the list
of balances; and payments totalling $3,000 had been posted to the individual accounts but the double entry postings
had not yet been made.

Required:

(a) Prepare a corrected payables control account, bringing down the amended balance as at 31 December 20X9.
(b) Prepare a statement showing the adjustments that are necessary to the list of personal account balances so that it
reconciles with the amended payables control account balance.

Answer: