Control Accounts

                                CONTROL ACCOUNTS

Control accounts are so called because they control a section of the ledgers.  By control we mean that the total on the control accounts should be the SAME as the totals on the ledger accounts.  Control account is the account where entries of all accounts belonging to a given account group are made. It is an impersonal account which is part of the double-entry system. They help summarise information in the subsidiary ledgers so as to incorporate them in the general ledger. If for instance there are 1,000 debtor accounts, and 800 creditor accounts, imagine what size of the general ledger would be if it was to include each and every of these personal accounts. If you open ledger accounts for each of the individual debtors and creditors, the general ledger would have nearly 1,800 accounts not forgetting the other accounts of the general ledger like expenses account. The subsidiary accounts are drawn to decongest the general ledger. Only the total of each of these two ledgers will be reflected in the general ledger through the control accounts. In large business organisations with huge volumes of credit sales and purchases, the entry and management of the subsidiary ledgers may be delegated to the receivables or payables accountant who balances the debit and credit entries in the individual ledgers accounts and compiles a list of the balances at the end of the period. These balances must agree with the sales or purchases ledgers control accounts in the general ledger.

There are two main types of control accounts:

       (i)            Sales ledger (Receivables) control Account – also called total debtors. It is a control account which summarizes the entries and balance of all the individual accounts of customers in the sales ledger. 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. The balance carried down on receivables control account should be the same as the total of the balances in the receivables ledger.

When a company transfers the daily total of the sales book into the general ledger, the double entry is:

Dr. Receivable’s ledger control account

Cr. Sales revenue a/c

     (ii)            Purchases Ledger (payables) Control Account – also called total creditors. It is a control account which summarizes the entries and balance of all the individual accounts of suppliers in the purchases ledger. The balance on this account at any time will be the total amount owed by the business at that time to its payables. The balance carried down (BAL C/D) on the payables Control Account should be the same as the total of the balances in the payables ledger.

When a business transfers the total of the purchase day book into general ledger, the double-entry is:

Dr. Purchases A/c

Cr. Payables ledger control A/c

N/B: most businesses maintain control accounts as well as memorandum balances – A separate list of individual receivable and payable amounts due from each customer and to each supplier, respectively. This simple ‘list of balances’ is used as a record so that companies know how much each customer is due to pay and how much they are due to pay each supplier. This assists with credit control and cash flow management.

Although control accounts are used mainly in accounting for receivables and payables, they can also be kept for other items, such as inventories, wages and salaries, and cash. The bottom line is that a control account is an account which keeps a total record for a collective item (eg receivables), which in reality consists of many individual items (eg individual customers).

                                               

Purpose of Control Accounts

1.        Provide for arithmetical check on the postings made in the individual accounts (either in the sales ledger or purchases ledger.)

2.        To provide for a quick total of the balances to be shown in the trial balance as debtors and creditors.

3.        To detect and prevent errors and frauds in the customers and suppliers account.

4.        To facilitate delegation of duties among the debtors and creditors clerks.

5.        Speeds up the preparation of final accounts. Control accounts provide totals that will be used to draw the financial statements. A single balance in the control accounts is more easily extracted than aggregate of balances from the subsidiary ledgers.

 SALES LEDGER (RECEIVABLES) CONTROL ACCOUNT

The sales ledger control account records the total transactions with credit customers and reflects the amount owed by all the debtors obtained from the individual balances in the sales ledger accounts. Other elements in the sales ledger control account include:

i)                     Return inwards/ Sales returns

ii)                   Bad debts/ Irrecoverable debts

iii)                  Dishonoured cheques

iv)                  Discounts allowed

v)                   Inter-account settlements with suppliers (contra)

Inter-account settlement or transfers occur where a customer is a supplier at the same time. The debts receivable from that account is set-off against the debt payable to that person. This is known as contra entry. It is recorded as:

Dr. Purchases ledger control account

Cr. Sales ledger control account.

Some of the individual accounts may have credit balances. This may be as a result of such factors as overpayment of account or errors.

FORMAT

        Debit                                                               Sales Ledger Control a/c                                                         Credit

1.        Balance b/d of the total debit balances from previous period	1.        Total credit balances of the sales ledger brought forward
2.        Total credit sales for the period (from the sales journal)	2.        Total cash received from credit customers/debtors (from cash book)
3.        Refunds to customers (from cashbook)	3.        Total cheques received from credit customers/debtors (from cash book)
4.        Dishonored cheques (from cashbook)	4.        Total returns-inwards (returns-inwards journal)
5.        Bad debts recovered (from general journal)	5.        Total cash discount allowed to customers (from cash book)
6.        Interest charged on overdue accounts	7.        Bad debtors written-off (from general journal)
	8.        Cash received from bad debtors recovered (cash book)
	9.        Purchases Ledger contra
	10.     Allowances to customers (price reduction in excess to discounts allowed)
6.        Total credit balances of the sales Ledger carried forward	11.     Total debit balance carried down to the next period – to be derived after posting all those transactions

Refunds to Customers

Sometimes a firm can refund some cash on the customers account.  This takes place when there is a credit balance on the debtor’s a/c.

The entry will be:

Dr. Debtor’s a/c

Cr. Cashbook

Example:

                                   Dr.                                        Debtor A/c                                                             Cr.

	Ksh		Ksh
Sales	100,000	Cashbook	95,000
Refunds - C/B	10,000	Discounts	5,000
(Bal c/f)		Returns	10,000
	110,000		110,000

If the firm has not paid this amount owed to the customer, then it’s carried forward to the next period then is a credit balance in the customer’s a/c.  Therefore, if a firm has several customers, this information will be shown in the control a/c as total balance C/F (credit side).

Contra against the purchases ledger balances:

Some debtors may also be creditors in the same firm and therefore, if the amount due to them as creditors is less than what they owe as debtors, then the credit balance is transferred from their creditors a/c to their debtors a/c as a contra entry.

Example:

                Dr.           Debtor A/c              Cr.

	Ksh.		Ksh
Sales	200,000	Contra- purchases	100,000
		Bal c/d	100,000
	200,000		200000

                Dr.Creditor A/c       Cr.

	Ksh.		Ksh.
Contra - Debtor	100,000	Purchases	100,000

 

PURCHASES LEDGER (PAYABLES) CONTROL ACCOUNT

The purchases ledger control account (payables) records the total transactions with credit suppliers and reflects the amount owed to all the suppliers obtained from the individual balances in the purchase ledger. Other elements in the purchases ledger control account include:

i)                     Return outwards

ii)                   Discounts received

iii)                  Dishonoured cheques

iv)                  Inter-account settlements with customers (contra)

Like the case of sales ledger control account, inter-account settlements or transfers occur where a supplier is a customer at the same time. The debts payable to that account is set-off against the debt receivable from that person. It is recorded as:

Debit                                                            Purchases Ledger Control A/C                                                                    Credit

1.        Total debit balances from purchases ledger brought forward from previous period	1.        Total credit balance brought forward (of purchases ledger from the previous period)
2.        Total cash paid to creditors       (from cash book)	2.        Total credit purchases for the period (from purchases journal)
3.        Total cheques paid to creditors       (from cash book)	3.        Refunds from suppliers       (from cash book)
4.        Total cash discounts received       (from cash book)	5.        Interest charged by suppliers on overdue accounts
6.        Allowances by suppliers
7.        Sales ledger contra
8.        Total returns outwards       (from returns-outwards journal)
9.        Total credit balance       (to be derived after posting entries)	4.        Total debit balances (of the purchases ledger carried forward)

NOTES:

The following notes should be taken into consideration:

1)        CASH TRANSACTIONS (Sales and Purchases) should NOT be included in control accounts.

2)       Only cash discounts (allowable & receivables) should be included.  Trade discounts should NOT be included.

3)       ALLOWANCE FOR RECEIVABLES are NOT included in the Receivables (sales ledger) control a/c.  i.e. increase or decrease in allowance for doubtful debts will not affect this account.

4)       Interest due that is charged on over due customers’ account may also be shown on the debit side of the sales ledger control. However when trying to determine the turnover under incomplete records then it is wise to omit it.

 

Illustration 1.

You are required to prepare a purchases ledger control account from the following for the month of June.  The balance of the account is to be taken as the amount of creditors as on 30 June.

2010		sh
June 1	Purchases ledger balances (Credit)	3,676,000
	Totals for June:
	Purchases journal	42,257,000
	Returns outwards journal	1,098,000
	Cheques paid to suppliers	38,765,000
	Discounts received from suppliers	887,000
June 30	Purchase ledger balance (Debit) Purchases ledger balances (Credit)	40,000

Illustration 2

Prepare a sales ledger control account from the following:

2011		sh.
May 1	Debit balances	6,420,000
	Totals for May:
	Sales journal	12,800,000
	Cash and cheques received from debtors	10,370,000
	Discounts allowed	395,000
	Debit balances in the sales ledger set off against credit balances in the purchases ledger	145,000
May 31	Debit balances	?
	Credit balances	50,000

Illustration 3

(a)      Explain the purposes for which control accounts are prepared.               (3 marks)

(b)     The balances and transactions affecting the control accounts of Kopesha Ltd. for the month of November 2010 are listed below:-

	Sh.
Balances on 1 November 2010:
Sales ledger	9,123,000	(debit)
	211,000	(credit)
Purchases ledger	4,490,000	(credit)
	88,000	(debit)
Transactions during November 2011:
Purchases on credit	18,135,000
Allowances from suppliers	629,000
Receipts from customers by cheques	27,370,000
Sale on credit	36,755,000
Discount received	1,105,000
Payments to creditors by cheques	15,413,000
Contra settlements	3,046,000
Bills of exchange receivable	6,506,000
Allowances to customers	1,720,000
Customers cheques dishonored	489,000
Cash received from credit customers	4,201,000
Refunds to customers for overpayments	53,000
Discounts allowed	732,000
Balances on 30 November 2011
Sales ledger	136,000	(credit)
Purchases ledger	67,000	(debit)

Required:

The sales ledger and purchases ledger control accounts for the month of November 2011 and show the respective debit and credit closing balances on 30 November 2011.           

(17 marks)

(Total: 20 marks)

Illustration 4

Poesha Limited keeps sales and purchases control accounts in the General Ledger.  The transactions for the month ended 30 April 2010 were as follows:

		Sh
Credit balances on 1 April 2010	-Sales ledger	154,000
	-Purchases ledger	569,000
Debit balances on 1 April 2010	-Sales ledger	956,000
	-Purchases ledger	196,000
Credit balances on 30 April 2010	-Sales ledger	178,000
Debit balances on 30 April 2010	Purchases ledger	189,000
Credit purchases		2,450,000
Credit sales		4,563,000
Cheques received from debtors		3,140,000
Cash received from debtors		1,367,000
Cheque payments to creditors		1,994,000
Cash payments to creditors		352,000
Bad debts written off		68,000
Discounts received		104,000
Discounts allowed		169,000
Contra entry to sales ledger from purchases ledger		234,000
Refunds to debtors		62,000
Returns outwards		138,000
Returns inwards		231,000

Required: 

Sales ledger and purchases ledger control accounts for the month ended 30 April 2010.