F3 Financial accounting

Chapter 14 • What are control accounts? Syllabus learning outcomes 1

• The operation of control accounts

Control accounts • The purpose of control accounts • Understand the purpose of control accounts for accounts
receivable and accounts payable.
• Understand how control accounts relate to the double
entry system.
• Prepare ledger control accounts from given information.

BPP LEARNING MEDIA BPP LEARNING MEDIA

496 497

Syllabus learning outcomes 2 Overview

Reconciliations
• Perform control account reconciliations for accounts
receivable and accounts payable and identify errors which
Receivables ledger control account Receivables ledger
would be highlighted by performing them. Payables ledger control account Payables ledger

• Identify and correct errors in control accounts and ledger

accounts. Control accounts

• Account for contras between trade receivables and trade

payables. Returns, credit notes,
Contra entries
Refunds and over payments

BPP LEARNING MEDIA BPP LEARNING MEDIA

498 500

Titor: Filatova Ekaterina, FCCA 1

F3 Financial accounting

What are control accounts? 1 What are control accounts? 2

What are control accounts? Most businesses operate control accounts for trade
A control account is a total account. receivables and payables, but such accounts may be
useful in other areas too, eg sales tax, payroll taxes.
• Its balance represents an asset or a liability which is the
grand total of many individual assets or liabilities.
• These individual assets/liabilities must be separately
detailed in subsidiary accounting records, but their total is
conveniently available in the control account ready for
immediate use.

BPP LEARNING MEDIA BPP LEARNING MEDIA

501 502

What are control accounts? 2 What are control accounts? 2

Terminology Terminology
In the nominal ledger: Memorandum ledgers:
• Receivables Ledger Control Account (trade receivables) • Receivables ledger – balance owed by each individual
– total owed by all credit customers. credit customer.
• Payables Ledger Control Account (trade payables) – • Payables ledger – balance owed to each individual credit
total owed to all credit suppliers. supplier.

BPP LEARNING MEDIA BPP LEARNING MEDIA

503 504

Titor: Filatova Ekaterina, FCCA 2

F3 Financial accounting

What are control accounts? 3 The operation of control accounts 1

With regard to the double entry relating to receivables The invoices in the sales day book are totalled periodically
and payables, note the following: and the total amount is posted as follows:
• The accounts of individuals are maintained for
memorandum purposes only. DEBIT Receivables control account
• Entering a sales invoice, say, in the account of an CREDIT Sales account
individual receivable is not part of the double entry
process.

BPP LEARNING MEDIA BPP LEARNING MEDIA

505 506

The operation of control accounts 2 The operation of control accounts 3

Similarly, the total of cash receipts from receivables is In the same way, the payables control account is credited
posted from the cash book to the credit side of the with the total purchase invoices logged in the purchase day
receivables control account. book and debited with the total of cash payments to
suppliers.
DEBIT Cash account
CREDIT Receivables control account DEBIT Purchases account
CREDIT Payables control account

DEBIT Payables control account

CREDIT Cash account

BPP LEARNING MEDIA BPP LEARNING MEDIA

507 508

Titor: Filatova Ekaterina, FCCA 3

F3 Financial accounting

The purpose of control accounts 1 The purpose of control accounts 2

Reasons for maintaining control accounts • Proforma of receivables control account

• Check on the accuracy of the personal accounts in the
receivables ledger.
• The control accounts provide a convenient total which can
be used immediately in extracting a trial balance or
preparing accounts.
• A reconciliation between the control account total and the
receivables ledger will help to detect errors, thus providing
an important control.

BPP LEARNING MEDIA BPP LEARNING MEDIA

509 510

The purpose of control accounts 3 The purpose of control accounts 4

• Proforma of payables control account
Reconciling control a/cs with memorandum ledgers
• Step 1 – correct the total of the balances from the
memorandum ledger
• Step 2 – correct the control a/c balance
• Step 3 – the balances should now agree

Note. The corrected control a/c balance appears in the

final accounts.

BPP LEARNING MEDIA BPP LEARNING MEDIA

511 512

Titor: Filatova Ekaterina, FCCA 4

F3 Financial accounting

The purpose of control accounts 5 Lecture example 1

Possible reasons for credit balances on receivables ledger A Co has the following information:
accounts, or for debit balances on payables ledger accounts • 10 January 20X6
• Overpayment of amount owed • Sells $150 of goods to customer A
• Return of goods • Sells $200 of goods to customer B
• Payment in advance • 15 January 20X6
• Posting errors • A Co purchases $100 of goods from supplier Y
• A Co purchases $1,300 of goods from supplier Z
• 21 January 20X6
• A Co receives full payment from customer B and this
money is used to pay supplier Y

BPP LEARNING MEDIA BPP LEARNING MEDIA

513 514

Lecture example 1 (cont'd) Answer to lecture example 1

Required (1) Books of prime entry

(1) Record the above transactions in the books of prime Sales day book
entry and the memorandum ledgers. Date Customer Amount
(2) Post the totals from the BOPE to the nominal ledger. 10 Jan X6 Customer A 150
10 Jan X6 Customer B 200
(3) Balance off nominal ledger accounts.
350
(4) Reconcile the memorandum ledgers to the control
accounts. Purchase day book
Date Supplier Amount
15 Jan X6 Supplier Y 100
15 Jan X6 Supplier Z 1,300

1,400

BPP LEARNING MEDIA BPP LEARNING MEDIA

515 516

Titor: Filatova Ekaterina, FCCA 5

F3 Financial accounting

Answer to lecture example 1 (cont'd) Answer to lecture example 1 (cont'd)

Memorandum ledgers
Cash receipts book Receivables ledger
Date Narrative Total Sales Receivables Customer A
21 Jan X6 Customer B 200 200 $ $
10.1.X6 Sales 150
200 200 Bal c/d 150
Cash payment book 150 150
Bal b/d 150
Date Narrative Total Purchases Payables
Customer B
21 Jan X6 Supplier Y 100 100
$ $
100 100 10.1.X6 Sales 200 21.1.X6 Payment 200
received
200 200

BPP LEARNING MEDIA BPP LEARNING MEDIA

517 518

Answer to lecture example 1 (cont'd) Answer to lecture example 1 (cont'd)

Payables ledger (2) & (3) Nominal ledger

Receivables Ledger Control Account (RLCA) (SOFP)
Supplier Y
$ $
$ $
31.1.X6 Sales 350 31.1.X6 Bank 200
21.1.X6 Payment made 100 15.1.X6 Purchases 100 Bal c/d 150
350 350
100 100 Bal b/d 150
Supplier Z Payables Ledger Control Account (PLCA) (SOFP)
$ $ $ $
Bal c/d 1,300 15.1.X6 Purchases 1,300 31.1.X6 Bank 100 31.1.X6 Purchases 1,400
Bal c/d 1,300
1,300 1,300 1,400 1,400
Bal b/d 1,300

BPP LEARNING MEDIA BPP LEARNING MEDIA

519 520

Titor: Filatova Ekaterina, FCCA 6

F3 Financial accounting

Answer to lecture example 1 (cont'd) Answer to lecture example 1 (cont'd)

(2) & (3) Nominal ledger (4) Reconciliation

Balance per list of balances $
Bank (SOFP)
Receivables ledger
$ $ Customer A 150
31.1.X6 RLCA 200 31.1.X6 PLCA 100 Customer B –
Bal c/d 100 150
200 200 Balance per RLCA 150
Bal b/d 100
Sales (SPL) Purchases (SPL) Balance per list of balances $
$ $ $ $ Payables ledger
31.1.X6 350 31.1.X6 1,400 Supplier Y –
RLCA PLCA Supplier Z 1,300
SPL 350 SPL 1,400 1,300
350 350 1,400 1,400
Balance per PLCA 1,300

BPP LEARNING MEDIA BPP LEARNING MEDIA

521 522

Lecture example 2 Lecture example 2 (cont'd)

(a) Post the following transactions to and balance off the receivables
ledger control account.
(1) Opening balance $614,000
(2) Credit sales made during the month $302,600
(3) Receipts from customers $311,000
(4) Irrecoverable debts were written off $35,400
(5) Contras against amounts due to suppliers in payables
ledger $8,650
(b) The receivables ledger list of balances totals to $563,900.
You have found the following errors:
(i) The total of the sales day book was undercast by $3,600.
(ii) A credit balance of $450 was included in the list of
balances as a debit.
(iii) A customer balance of $2,150 was left out when the
receivables ledger list of balances was totalled.
Required
Reconcile the receivables ledger control account to the receivables
ledger list of balances.

BPP LEARNING MEDIA BPP LEARNING MEDIA

523 524

Titor: Filatova Ekaterina, FCCA 7

F3 Financial accounting

Answer to lecture example 2 Answer to lecture example 2 (cont'd)

(b) Reconciliation
(a) RLCA RLCA
$ $ $ $
Balance b/d 614,000 Bank 311,000 Bal b/d (part (a)) 561,550
Sales 302,600 Contras(PLCA) 8,650 (i) Sales (SDB undercast) 3,600 Bal c/d 565,150
Irrecoverable debts 35,400 565,150 565,150
Bal c/d 561,550
$
916,600 916,600 Balance per list of balances 563,900
(ii) Credit balance included as a debit
(2 × $450) (900)
(iii) Customer balance omitted 2,150
1,250
565,150

BPP LEARNING MEDIA BPP LEARNING MEDIA

525 526

Sale and purchase returns Chapter summary 1

• Sometimes when a business has made a sale, the customer will return
the goods. Equally when the business has purchased some goods on
credit, it may return them to the supplier.
• Sales returns are credited to the receivables ledger control account
(using a credit note). The credit balance on the control account will
either be offset against future sales, or paid back to the customer in
the form of cash.
• Purchase returns are debited to the payables ledger control account
(also using a credit note). The debit balance will either be offset
against future purchases, or a refund can be requested.
1 Recap
§ The balance of the receivables ledger control account
and the payables ledger control account in the nominal
ledger show the total owed by all credit customers and
due to all credit suppliers.
§ The purpose of the memorandum ledgers is to show the
balance on each individual customer or supplier account.

BPP LEARNING MEDIA BPP LEARNING MEDIA

527 528

Titor: Filatova Ekaterina, FCCA 8

F3 Financial accounting

Chapter summary 2 Chapter summary 3

2 The flow of information 3 Other entries

§ Given that the nominal ledger and the memorandum
ledgers are updated from the same source
documentation, at any point in time the balance on the
control accounts should equal the total of all the
balances in the memorandum ledgers.
§ Where the two balances are not the same an error must
have arisen and a reconciliation should be performed to
identify the errors (Section 5).
§ If an entity has a customer is also a supplier the two
parties may choose to settle their accounts by making a
contra entry. The contra is always for the lower of the
two balances.
§ If a customer returns goods having paid for them or
overpays for goods then the entity will owe money back
to that customer and the customer will have a credit
balance on their account.
§ If a customer is late in settling their account the entity
may decide to charge them interest on the overdue
account. This will increase the balance owed.

BPP LEARNING MEDIA BPP LEARNING MEDIA

529 530

Chapter summary 4

4 Control account reconciliations

§ As illustrated in the chapter if the balance on the control
account does not agree to the total of all the balances on
the memorandum ledger then an error must have
occurred and a reconciliation will need to be carried out
to identify the differences.

BPP LEARNING MEDIA

531

Titor: Filatova Ekaterina, FCCA 9