Chapter 5: Trial • What are control

balance accounts?
• Discounts
5.1 Control • The operation of
control accounts
accounts
• The purpose of control
accounts
 Syllabus learning outcomes
• 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.
• Perform control account reconciliations for accounts receivable
and accounts payable and identify errors which would be
highlighted by performing them.
• Identify and correct errors in control accounts and ledger
accounts
 Syllabus learning outcomes
• Account for discounts allowed and discounts received.
• Account for contras between trade receivables and trade
payables.
 Overview
Reconciliations

Receivables ledger control account Receivables ledger

Payables ledger control account Payables ledger

Control accounts

Discounts Returns, credit notes,

Contra entries
allowed and received Refunds and over payments

Trade discounts Settlement discounts

Sales tax considerations

 What are control accounts? 1
What are control accounts?
A control account is a total account.
• 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.
 What are control accounts? 2
Most businesses operate control accounts for trade
receivables and payables, but such accounts may be
useful in other areas too, eg sales tax, payroll taxes.
 What are control accounts? 3
With regard to the double entry relating to receivables
and payables, note the following:
— The accounts of individuals are maintained for
memorandum purposes only.
— Entering a sales invoice, say, in the account of an
individual receivable is not part of the double entry
process.
 Discounts 1
Two types of discount
• Trade discount – reduction in cost of goods eg regular
customers, bulk discounts

Accounting treatment for trade discounts

• Discount received: deduct from purchases
• Discount allowed: deduct from sales
 Discounts 2
• Cash/settlement discount – reduction in amount payable,
eg for cash or prompt payment

Accounting treatment for cash/settlement discount

• Received: include as other income
• Allowed: include as expenses
 Tackling the exam
Exam focus point:

Students often get confused between cash and trade

discounts. Exam questions could easily contain both types of
discount so you must be able to distinguish between them
and account for them correctly.

Remember that only cash (settlement) discounts are

separately recorded in the books, sales and purchases are
recorded net of trade discounts.
 The operation of control accounts 1
The invoices in the sales day book are totalled periodically
and the total amount is posted as follows:

DEBIT Receivables control account

CREDIT Sales account
 The operation of control accounts 2
Similarly, the total of cash receipts from receivables is
posted from the cash book to the credit side of the
receivables control account.

DEBIT Cash account

CREDIT Receivables control account
 The operation of control accounts 3
In the same way, the payables control account is credited
with the total purchase invoices logged in the purchase day
book and debited with the total of cash payments to
suppliers.

DEBIT Purchases account

CREDIT Payables control account

DEBIT Payables control account

CREDIT Cash account
 The purpose of control accounts 1
Reasons for maintaining control accounts
• 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.
 The purpose of control accounts 2
• Proforma of receivables control account
 The purpose of control accounts 3
• Proforma of payables control account
 The purpose of control accounts 4
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

NB: The corrected control a/c balance appears in the

final accounts.
 The purpose of control accounts 5
Possible reasons for credit balances on receivables ledger
accounts, or for debit balances on payables ledger accounts
• Overpayment of amount owed
• Return of goods
• Payment in advance
• Posting errors
 Lecture example 1
A Co has the following information:
• 10 January 20X6
• Sells $150 of goods to customer A
• Sells $200 of goods to customer B
• 15 January 20X6
• 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.
 Lecture example 1 (cont'd)
Required
(1) Record the above transactions in the books of prime
entry and the memorandum ledgers.
(2) Post the totals from the BOPE to the nominal ledger.
(3) Balance off nominal ledger accounts.
(4) Reconcile the memorandum ledgers to the control
accounts.
Answer to lecture example 1
Answer to lecture example 1 (cont'd)
Answer to lecture example 1 (cont'd)
Answer to lecture example 1 (cont'd)
Answer to lecture example 1 (cont'd)
Answer to lecture example 1 (cont'd)
Answer to lecture example 1 (cont'd)
 Lecture example 2
(a) On 1 January 20X7 a business made a sale on credit for
$12,000. A trade discount of $2,000 was available with a
further 10% settlement discount if payment were made
within ten days.

Required
Record the initial sale.
 Lecture example 2 (cont'd)
(b) On 4.1.X7, the customer pays for the goods taking
advantage of the settlement discount. The discount will be
10% of sales value.

Required
Record the full settlement of the amount owed.
 Lecture example 2 (cont'd)
Required
(c) What would your answer be to part (b) if the settlement
discount were not taken?
Answer to lecture example 2
Answer to lecture example 2 (cont'd)
Answer to lecture example 2 (cont'd)
 Lecture example 3
Ryan Co purchases goods worth $5,000 from Austin Co. Ryan Co will
receive a 5% settlement discount if the goods are paid for within seven
days. Ryan Co has every intention of taking advantage of the settlement
discount.

Required
In the books of Ryan:
(a) Show the initial recording of the purchase.
(b) Record the payment for the goods assuming Ryan
pays within seven days.
(c) Record the payment for the goods if payment is made
after seven days.
Answer to lecture example 3
Answer to lecture example 3 (cont'd)
Answer to lecture example 3 (cont'd)
 Lecture example 4
Brick buys goods with a list price of $50,000 from Cement. Brick receives
a trade discount of 12% from Cement and a further discount of 4% if
payment is made within ten days. Sales tax is at 15%.

Required
What amount should Brick show in Cement's payables ledger to
record this purchase?
A $48,576
B $50,336
C $50,600
D $57,500

NB: VAT is calculated after ALL discounts.

Answer to lecture example 4
 Lecture example 5
(a) Required
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 $32,000
(5) Discounts allowed for prompt payment $3,400
(6) Contras against amounts due to suppliers in payables
ledger $8,650
 Lecture example 5 (cont'd)
(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 totaled.

Required
Reconcile the receivables ledger control account to the receivables
ledger list of balances.
Answer to lecture example 5
Answer to lecture example 5 (cont'd)
 Chapter summary 1
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.
 Chapter summary 2
2 The flow of information
 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).
 Chapter summary 3
3 Other entries
 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.
 Chapter summary 4
4 Discounts
 Sometimes a business may offer discounts to attract
custom. There are two types of discounts: trade
discounts and settlement discounts.
 Sales and purchases are recorded after trade discounts
but before settlement discounts.
 Sales tax is calculated on the amount after all discounts,
regardless of whether the discount is taken or not.
 Chapter summary 5
5 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.