Control accounts

A control account keeps a total record of a number of individual items. It is an impersonal account
which is part of the double entry system.
A control account is an account in the nominal ledger in which a record is kept of the total value of a
number of similar but individual items. 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.

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 first important idea to
remember, however, 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 trade receivables).
A control account is an (impersonal) ledger account which will appear in the nominal ledger.

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.

Discounts

Discounts can be defined as follows.

 A trade discount is a reduction in the list price of goods, given by a wholesaler or manufacturer to a
retailer. It is often given in return for bulk purchase orders.
 A cash (or settlement) discount is a reduction in the amount payable in return for payment in cash,
or within an agreed period.

Types of discount
A discount is a reduction in the price of goods below the amount at which those goods would normally
be sold to other customers. There are two types of discount.
 Trade discount
 Cash or settlement discount
A trade discount is a reduction in the cost of goods owing to the nature of the trading transaction. It
usually results from buying goods in bulk.

Examples of trade discount

(a) A customer is quoted a price of $1 per unit for a particular item, but a lower price of 95 cents per
unit if the item is bought in quantities of 100 units or more at a time.
(b) An important customer or a regular customer is offered a discount on all the goods the customer
buys, regardless of the size of each individual order, because the total volume of the customer's
purchases over time is so large.
A cash discount (or settlement discount) is a reduction in the amount payable to the supplier, in return
for immediate payment in cash, or for payment within an agreed period.

For example, a supplier charges $1,000 for goods, but offers a discount of 5% if the goods are paid for
immediately in cash. Alternatively, a supplier charges $2,000 to a credit customer for goods purchased,
but offers a discount of 10% for payment within so many days of the invoice date.

Accounting for discounts

Trade discounts received are deducted from the cost of purchases. Cash/settlement discounts received
are included as 'other income' of the period. Trade discounts allowed are deducted from the gross sales
price, and the net amount is then invoiced to the customer.
If a customer is expected to take up a cash/settlement discount allowed, the discount is deducted from
the invoiced amount when recording the revenue for the sale. If the customer subsequently does not take
up the discount, the discount is then recorded as revenue.
If the customer is not expected to take up the discount, the full invoiced amount is recognised as revenue
when recording the sale. If the customer subsequently does take up the discount, revenue is then
reduced by the discount.

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

Cash/settlement discounts received

When a business is given the opportunity to take advantage of a cash discount or a settlement discount
for prompt payment, the decision whether or not to take the discount is a matter of financing policy, not
of trading policy.
For example, A buys goods from B, on the understanding that A will be allowed a period of credit before
having to pay for the goods. The terms of the transaction are as follows.
(a) Date of sale: 1 July 20X6
(b) Credit period allowed: 30 days
(c) Invoice price of the goods: $2,000
(d) Settlement discount offered: 4% discount for prompt payment
A has the following choices.
(a) Holding on to its money for 30 days and then paying the full $2,000
(b) Paying $2,000 less 4% – ie $1,920 now
This is a financing decision about whether it is worthwhile for A to save $80 by paying its debts sooner, or
whether it can employ its cash more usefully for 30 days, and pay the debt at the latest acceptable
moment.
If A decides to take the settlement discount, it will pay $1,920, instead of the invoiced amount of
$2,000. The settlement discount received ($80) will be accounted for in the books of A as follows.
(a) In the purchases account, the cost of purchases will be at the invoiced price (or 'full trade' price)
of $2,000. When the invoice for $2,000 is received by A, it will be recorded in A's books of
account at that price, and the subsequent financing decision about accepting the settlement
discount is ignored.
(b) In the statement of profit or loss, the settlement discount received is shown as income received.
There is no expense in the statement of profit or loss from which the settlement discount can be
deducted, and so there is no alternative other than to show the discount received as 'other
income'.

QUESTION Discounts
Soft Supplies Co recently purchased from Hard Imports Co 10 printers originally priced at $200 each. A
10% trade discount was negotiated together with a 5% settlement discount if payment was made within
14 days.
Calculate the following.
A The total of the trade discount
B The total of the cash discount
ANSWER
A $200 ($200 * 10 * 10%)
B $90 ($200 * 10 * 90% * 5%)

If a business expects a customer to take up a cash discount or settlement discount allowed on a sale,
revenue should be recognised net of the discount when recording the sale.

If it transpires that the customer does not take up the discount when they make payment, then the
amount of the discount is subsequently recognised as revenue.
Conversely, if the customer is not expected to take up the discount, the full invoiced amount with no
discount is recognised as revenue when recording the sale.
If it transpires that the customer does take up the discount when they make payment, then revenue is
subsequently reduced by the amount of the discount.
Example: Settlement discounts allowed
Chippies sells goods to Table Tops at a price of $7,600 including delivery. Table Tops is allowed 60
days' credit before payment, but is also offered a discount of 5% for payment within 10 days of the
invoice date. Chippies issues the following invoice to Table Tops.

Chippies expects Table Tops to take advantage of the discount. Therefore the invoiced sales value less
the discount, ie, $7,220 ($7,600 less 5%) is recorded as revenue, with a corresponding amount in trade
receivables:
Accounting for the sale
DEBIT Trade receivables $7,220
CREDIT Sales $7,220
Accounting for payment received
Accounting for the payment depends on whether or not the customer takes up the discount, as shown
below.
Customer does not take the discount
Table Tops pays the full amount of $7,600:
DEBIT Bank $7,600
CREDIT Trade receivables $7,600
The discount not taken of $380 is then credited to revenue:
DEBIT Trade receivables $380
CREDIT Sales $380
Customer takes the discount
Table Tops pays $7,220 – 7 days later:
DEBIT Bank $7,220
CREDIT Trade receivables: $7,220

Example: Settlement discounts allowed

Using the same information from the previous example, let’s see how you would account for the sale if
Chippies did not expect Table Tops to take the discount.
In this scenario, the full invoiced sales value, ie, $7,600 is recorded as revenue, with a corresponding
amount in trade receivables:
Accounting for the sale
DEBIT Trade receivables $7,600
CREDIT Sales $7,600
Accounting for payment received
Again, accounting for the payment depends on whether or not the customer takes up the discount, as
shown below.
Customer does not take the discount
Table Tops pays the full amount of $7,600:
DEBIT Bank $7,600
CREDIT Trade receivables $7,600

Customer takes the discount

Table Tops pays $7,220 – 7 days later:
DEBIT Bank $7,220
CREDIT Trade receivables: $7,220
Revenue is then reduced to account for the discount taken of $380:
DEBIT Sales $380
CREDIT Trade receivables $380

QUESTION Discounts
You are required to prepare the statement of profit or loss of Seesaw Timber Merchants for the year
ended 31 March 20X6, given the following information.
$
Purchases at gross cost 120,000
Trade discounts received 4,000
Settlement discounts received 1,500
Cash sales 34,000
Credit sales at invoice price 150,000
Selling expenses 32,000
Administrative expenses 40,000
ANSWER
SEESAW TIMBER MERCHANTS
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MARCH 20X6
$ $
Revenue (Note 1) 184,000
Purchases (Note 2) 116,000
Gross profit 68,000
Discounts received 1,500
69,500
Expenses
Selling expenses 32,000
Administrative expenses 40,000
72,000
Loss for the year (transferred to statement of financial position) (2,500)
Notes
1 $(34,000 + 150,000)
2 $(120,000 – 4,000)
3 Drawings are not an expense, but an appropriation of profit

Contra entries

Sometimes the same business may be both a receivable and a payable. For example, C Cloning buys
hardware from you and you buy stationery from C Cloning. In the receivables ledger, C Cloning owes you
$130. However, you owe C Cloning $250. You may reach an agreement to offset the balances receivable
and payable. This is known as a 'contra'. The double entry is as follows.
DEBIT Payables control $130
CREDIT Receivables control $130
You will also need to make the appropriate entries in the memorandum receivables and payables ledger.
After this, C Cloning will owe you nothing and you will owe C Cloning $120 ($250 – $130).

QUESTION Payables control account

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
PAYABLES CONTROL
$ $
Bank payments 79,500 Balance b/f (balancing figure) 16,970
Discounts received 3,750 Purchases 83,200
Contra with receivables 4,000
Balance c/f 12,920
100,170 100,170

QUESTION Receivables control account

The total of the balances in a company's receivables ledger is $800 more than the debit balance on its
receivables control account. Which one of the following errors could by itself account for the discrepancy?
A The sales day book has been undercast by $800
B One receivables ledger account with a credit balance of $800 has been treated as a debit balance
C The cash receipts book has been undercast by $800
ANSWER
A The total of sales invoices in the day book is debited to the control account. If the total is
understated by $800, the debits in the control account will also be understated by $800. Option
C would have the opposite effect: credit entries in the control account would be understated.
Option B would lead to a discrepancy of 2 * $800 = $1,600.

Receivables control account

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 $750 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) A personal account balance had been undercast by $200.
(e) A contra item of $400 with the payables ledger had not been entered in the control account.
(f) An irrecoverable debt of $500 had not been entered in the control account.
(g) Cash received of $250 had been debited to a personal account.
(h) Discounts received of $50 had been debited to Bell's receivables ledger account.
(i) Returns inwards valued at $200 had not been included in the control account.
(j) Cash received of $80 had been credited to a personal account as $8.
(k) 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
(a) RECEIVABLES CONTROL ACCOUNT
$ $
Uncorrected balance b/d 12,550 Contra entry omitted (e) 400
Sales omitted (a) 750 Irrecoverable debt omitted (f) 500
Bank: cheque dishonoured (k) 300 Returns inwards omitted (i) 200
Amended balance c/d 12,500
13,600 13,600
Balance b/d 12,500

(b) STATEMENT OF ADJUSTMENTS TO LIST OF PERSONAL ACCOUNT BALANCES

$ $
Original total of list of balances 12,802
Add debit balance omitted (b) 300
debit balance understated (d) 200
500
13,302
Less transposition error (c): understatement of cash received 180
cash debited instead of credited (2 × $250) (g) 500
discounts received wrongly debited to Bell (h) 50
understatement of cash received (j) 72
802
12,500

QUESTION Payables control account

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
(a) PAYABLES CONTROL ACCOUNT
$ $
Contra entry omitted 750 Bal b/d 17,250
Payment omitted 3,000
Bal c/d 13,500
17,250 17,250
Bal b/d 13,500
(b) STATEMENT OF ADJUSTMENTS TO LIST OF PERSONAL ACCOUNT BALANCES
$
Original 14,500
Less debit balance entered as credit (2 * $500) 1,000
Amended total 13,500