INTERNATIONAL ADVANCED LEVEL

ACCOUNTING

LECTURE NOTES
- CONTROL ACCOUNTS -

PRINCIPLE OF CONTROL ACCOUNTS

A control account is a summary account that enables you to see immediately whether
the General Ledger balance for the ledger to which that control account belongs agrees
with the total of all the individual accounts held within that ledger.

The principle is simple: if the opening balance of an account is known, together with
information of the additions and deduction enters in the account, the closing balance can
be calculated.

The following tables are summary of transactions/entries found in trade receivable

control account and trade payable control account:

Trade receivable control accounts

DR CR
Transaction Book of prime entry Transaction Book of prime
entry
Opening balance - Opening balance -
Receipts from trade
Credit sales Revenue day book Cash book
receivables

Dishonoured cheque Cash book Discount allowed Cash book

Interest charged to
General ledger Irrecoverable debts General journal
customers
Revenue returns
Credit sales returns
day book
Transfer of debit
balance in the trade
receivables account to General journal
trade payables account
(contra entry / set-off)

Total of balances in the trade

Balance on the Trade
= receivable accounts in the
receivable control account
trade receivable ledger

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Trade payable control account

DR CR
Transaction Book of prime entry Transaction Book of prime
entry
Opening balance - Opening balance -
Payment to trade
Cash book Credit purchases Purchase day book
payables
Dishonoured cheque to
Discount received Cash book Cash book
a supplier
Credit purchase Purchase return Interest charged by
General journal
returns day book supplier
Transfer of debit
balance in the trade
receivables account to General ledger
trade payables account
(contra entry / set-off)

One way to remember where the entries go is: the control accounts are essentially the
same as an individual account of a credit customer (trade receivable) and a credit
supplier (trade payable).

CONTRA ACCOUNTS (SET-OFFS)

This comes about when a business deals with another business both as a supplier and a
purchaser of goods.

A contra entry is recorded as follows:

DR Trade payable
CR Trade receivable

The entry is also posted to the trade receivables and trade payables control accounts:

DR Trade payable control account

CR Trade receivable control account

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BALANCE ON THE BOTH SIDE

There may be balances brought down on both sides of the ledger account, and hence:

Credit balance b/d in trade
receivable control account
Possible reasons
 Some trade receivables accounts are overpaid (so
it become a liability for a business)
 Goods returned after they paid their account
 A deposit payment is made by customer before the
sales have taken place
 Customer overcharged after s/he settled the a/c

Debit balance b/d in trade  Return of goods after the account is settled
payable control account  An overpayment of the account

BENEFITS AND LIMITATIONS OF CONTROL ACCOUNTS

Advantages
(1) Accuracy
It can be used to eliminate errors that
occur in posting entries in the personal
accounts (that is, arithmetical accuracy of
ledger account is proven)
(2) Faster decision making
A trial balance can be produced without
adding up each individual trade
receivables/payable accounts. A trade
receivable/payable account can be,
hence, provided immediately for
management to make decision
(3) Internal control
Protection against fraud is provided as
control accounts usually are prepared by
different employees, whilst it ensures all
payments made by trade receivables, or
payments to trade payables are
accounted for
Limitations
(1) Not all errors can be identified
There are errors cannot be revealed in a
trial balance, e.g. error of omission,
probably, due to poor internal control
system
(2) Cost
Additional time and effort are needed to
maintain the control accounts (i.e.,
additional expenses)
(3) Control account may contain error
Errors, such as transposition, can affect
the accuracy of control accounts

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ERRORS IN CONTROL ACCOUNT

If the balance on the control account does not agree with the list of balances extracted
from the trade receivable/payable ledger, then an error has been made, either in the
ledger itself or in the control account.

As is the case with the trial balance, some errors will be identified by the control
account, whilst some will not.

Errors that will be revealed in the
control account
(1) Additional error
This maybe in in one of the journals,
ledger accounts or in the control account
itself (i.e., overcast or undercast)
Errors that will NOT be revealed by
the control account
(1) Error of commission
Say, an invoice for Muji is incorrectly
posted to the account of Meiji

(2) Transposition error (2) Error of original entry

Two figures are transposed (e.g. £120 has
been posted as £102). This could have
happened when posting to ledger account
or control account
(3) Partial omission error
An entry has been made in the individual
ledger but has NOT been recorded in the
control account
An error is made transferring an amount
from source document (e.g., invoice) to
the book of prime entry
(3) Error of omission
A transaction is completely omitted from
the records

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PURCHASE OF NON-CURRENT ASSETS ON PART-EXCHANGE BASIS

Occasionally, a business may purchase new non-current asset and part exchange a
non-current asset that it wishes to dispose of, as part of the purchase price.

Record the transaction as:

Step 1: Open the old asset account with an opening balance

Step 2: Open the provision for depreciation account with an opening

balance for the old asset

Step 3: Transfer the cost of the old asset that is being part exchanged to
the disposal account

CR Non-current asset (cost) (original cost)

DR Disposal

Step 4: Transfer the part-exchange value of the old asset that is being of
the exchanged to the disposal account

DR Non-current asset (cost) (part-exchange value*)

CR Disposal

*part-exchange value = cost of new asset – amount settled with cheque/cash

Step 5: Transfer the accumulated depreciation on the old asset to the

disposal account

DR Provision for depreciation

CR Disposal

Step 6: Record the amount of the cheque/cash paid in the assets at cost
account and in the bank/cash account

DR Non-current asset (cost)

CR Bank or cash

Step 7: Transfer the balance on the disposal account (DR) to the P/L.

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DISPOSAL OF NON-CURRENT ASSETS

On the sale of a fixed asset, the following entries are needed:

Step 1: Transfer the cost price of the asset sold to an assets disposal
account

DR Disposal
CR Non-current asset (cost)

Step 2: Transfer the depreciation already charged to the assets disposal

account

DR Provision for depreciation

CR Non-current asset (cost)

Step 3: For the amount received on disposal

DR Bank or cash
CR Non-current asset (cost)

Step 4: Transfer the difference (i.e. the amount needed to balance the non-
current asset account) to the statement of profit and loss.

(i) if the disposal account shows a credit balance (i.e. if more

has been credited to the account than has been debited to
it), there is a profit on sale

DR Disposal
CR Statement of P/L

(ii) If the disposal account shows a debit balance, there is a

loss
on sale

DR Statement of P/L
CR Disposal

In many cases, the disposal of an asset will mean that we have sold it. This will not
always be the case. For example, a vehicle may be given up exchanged against the
purchases of a new vehicle, and hence, the disposal value is the exchange value. Say, if a
new vehicle costing £10 000 was to be paid for by £6 000 in cash and an allowance of £4
000 for the old vehicle, then the disposal value of the old vehicle if £4 000.

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Straight line method

VAN (COST)
2020 £ 2020 £
Jan 1 Bank X
Dec 31 Bal c/d X
X X
2021 2021
Jan 1 Bal b/d X
Dec 31 Bal c/d X
X X
2022 2022
Jan 1 Bal b/d X

PROVISION FOR DEPRECIATION - VAN

2020 £ 2020 £
Dec 31 Bal c/d X Dec 31 P/L X

VAN (COST)
2020 £ 2020 £
Jan 1 Bank X
Dec 31 Bal c/d X
X X
2021 2021
Jan 1 Bal b/d X
Dec 31 Bal c/d X
X X
2022 2022
Jan 1 Bal b/d X

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Depreciation
DR Depreciation (Statement of P/L)
CR Provision for depreciation

ASSET (COST)
2018 £ 2018 £
Jan 1 Bank X
Dec 31 Bal c/d X

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