CONTROL ACCOUNTS

Benefits of Control Accounts

In any but the smallest business, the accounting information system is set
up so as to embed controls that help ensure that errors are minimised and
that nothing occurs that shouldn’t, such as the cashier embezzling funds.
One of the tasks undertaken by auditors is to check the various controls
that are in place to ensure they are working satisfactorily and one of the
things they will look out for is segregation of duties.
So, for example, the same person will not both invoice customers and act
as cashier when payment is received and, if someone claims
reimbursement of an expense, it will be authorised for payment by
someone else. Another form of control you’ve already learnt about
involves whether or not customers are allowed to purchase goods on
credit.
All these controls are ‘organisational’. That is, they do not
directly impose controls over the accounting data, nor do they
ensure that accounting entries are correct. When all the
accounts were kept in one ledger a trial balance could be
drawn up as a test of the arithmetical accuracy of the
accounts. If the trial balance totals disagree, the books of a
small business could easily and quickly be checked so as to
find the errors.
Of course, as you know, even when the totals do agree, certain
types of error may still have occurred, the nature of which
makes it impossible for them to be detected in this way.
Nevertheless, using a trial balance ensures that all the double
entries appear, at least, to have been recorded correctly.
When a business has grown and the accounting work has been
so divided up that there are several ledgers, any errors could be
very difficult to find if a trial balance was the only device used to
try to detect errors.
Every item in every ledger may need to be checked just to find
one error that caused the trial balance not to balance. What is
required is a type of trial balance for each ledger, and this
requirement is met by control accounts.
A control account is a summary account that enables you to see
at a glance 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.
Using control accounts means that it is only the ledgers whose
control accounts do not balance that need detailed checking to
 Principle of Control Account
The principle on which the control account is based is
simple and is as follows: if the opening balance of an
account is known, together with information of the
additions and deductions entered in the account, the
closing balance can be calculated.
Applying this to a complete ledger, the total of opening
balances together with the additions and deductions
during the period should give the total of closing
balances.
Because totals are used, control accounts are sometimes known as
‘total accounts’. Thus, a control account for a Sales Ledger could be
known as either a ‘sales ledger control account’ or as a ‘total debtors
account’.
Similarly, a control account for a Purchases Ledger could be known
either as a ‘purchases ledger control account’ or as a ‘total creditors
account’.
In larger organisations, the control accounts are often part of the double
entry system, with the individual personal accounts for debtors and
creditors being treated as being for memorandum purposes only. In
smaller businesses, the control account may be a memorandum entry in
the individual ledgers, resulting in a form of trial balance being held in
each ledger.
 Information for control accounts
SALES LEDGER CONTROL SOURCE

1 Opening debtors List of debtors’ balances drawn up at the end of the previous period

2 Credit sales Total from the Sales Day Book

3 Returns inwards Total of the Returns Inwards Day Book

4 Cheques received Cash Book: bank column on received side. List extracted or the total of a
special column for cheques which has been included in the Cash Book

5 Cash received Cash Book: cash column on received side. List extracted or the total of a
special column for cash which has been
included in the Cash Book
6 Discounts allowed Total of discounts allowed column in the Cash Book

7 Closing debtors List of debtors’ balances drawn up at the end of the period
 Information for control accounts
PURCHASES LEDGER SOURCE
CONTROL

1 Opening creditors List of creditors’ balances drawn up at the end of the

previous period

2 Credit purchases Total from the Purchases Day Book

3 Returns paid Total of the Returns outwards Day Book

4 Cheques paid Cash Book: bank column on payment side. List extracted or
the total of a special column for cheques which has been
included in the Cash Book
5 Cash paid Cash Book: cash column on payment side. List extracted or the
total of a special column for cash which has been
included in the Cash Book
6 Discounts received Total of discounts received column in the Cash Book

7 Closing creditors List of creditors’ balances drawn up at the end of the period
 Form of control accounts
Control accounts kept in the General Ledger are normally prepared in the
same form as an account, with the totals of the debit entries in the
ledger on the left-hand side of the control account, and the totals of the
various credit entries in the ledger on the right-hand side.
Take the Sales Ledger as an example.
1. Individual amounts received from debtors are transferred from the
Cash Book into the personal accounts in the Sales Ledger. (The
double entry is completed automatically in the normal way, because
the Cash Book is, in itself, a ledger account.)
2. Individual invoice amounts are transferred from the Sales Day Book
into the personal accounts in the Sales Ledger. (You would complete
the double entry in the normal way, by crediting the Sales Account.)
3. The Sales Ledger Control Account would open each period with the
total of the debtor balances at the start of the period.
4. Then, post the total of the Returns Inwards Day Book to the credit side
of the Sales Ledger Control Account.
5. At the end of the period, you post the totals of all the payments from
debtors received during the period from the Cash Book to the credit side
of the Sales Ledger Control Account.
6. This is followed by posting to the debit side of the Sales Ledger
Control Account the totals of all new sales during the period shown in
the Sales Day Book.
7. Balance off the control account.
8. Check whether the balance on the control account is equal to the total
of all the balances in the Sales Ledger.
If the balance is not the same as the total of all the balances in the Sales
Ledger, there is an error either in the totals entered in the control
account from the books of original entry or, more likely, somewhere in
the Sales Ledger.
NB: You do not enter the total of the balances from the Sales Ledger in
the Control Account.
Instead, you balance off the control account and check whether the
balance c/d is the same as the total of all the individual balances in the
Sales Ledger.
 Example 1
Sales Ledger Control Account data: GHS
Debit balances on 1 January 20X6 1,894
Total credit sales for the month 10,290
Cheques received from customers in the month 7,284
Cash received from customers in the month 1,236
Returns inwards from customers during the month 296
Debit balances on 31 January as extracted from the Sales Ledger 3,368
 Solution
Sales Ledger Control Account

2006 GHS 2006 GHS

Jan-01 Bal c/d 1,894 Jan-31 Bank 7,284

Jan-31 Sales 10,290 Jan-31 Cash 1,236

Jan-31 Return Inwards 296

Jan-31 Balances c/d 3,368

12,184 12,184
 Example 2
Purchases Ledger Control Account data: GHS
Credit balances on 1 January 20X6 3,890
Cheques paid to suppliers during the month 3,620
Returns outwards to suppliers in the month 95
Bought from suppliers in the month 4,936
Credit balances on 31 January as extracted from the Purchases Ledger 5,151
 Solution
Purchases Ledger Control Account
2006 GHS 2006 GHS

Jan-31 Bank 3,620 Jan-01 Bal b/d 3,890

Jan-31 Returns outwards 95 Jan-31 Purchases 4,936

Jan-31 Bal c/d 5,151 Jan-31 Return Inwards

Jan-31 Balances c/d

8,866 8,826

NB: Providing all the totals transferred into the Purchases Ledger
Control Account from the books of original entry were correct, there is a
£40 difference between the debit and credit entries in the Purchases
Ledger.
 Other advantages of control accounts
Nowadays, control accounts are usually only maintained in a manual
accounting system. They are not normally maintained in a computerised
accounting system.
Control accounts have merits other than that of locating errors.
When used the control accounts are normally under the charge of a
responsible official, and fraud is made more difficult because transfers
made (in an effort) to disguise frauds will have to pass the scrutiny of
this person.
The balances on the control account can always be taken to equal
debtors and creditors without waiting for an extraction of individual
balances. Management control is thereby aided, for the speed at which
information is obtained is one of the prerequisites of efficient control.
 Example 4
2006 GHS
Aug 1 Sales ledger – debit balances 3,816
== 1 Sales ledger – credit balances 22
== 31 Transactions for the month:
Cash received 104
Cheques received 6,239
Sales 7,090
Bad debts written off 306
Discounts allowed 298
Returns inwards 664
Cash refunded to a customer who had overpaid his account 37
Dishonoured cheques 29
Interest charged by us on overdue debt 50
At the end of the month:
Sales ledger – debit balances 3,429
Sales ledger – credit balances 40
 Control accounts as part of double entry
In larger organisations, it would be normal to find that control accounts
are an integral part of the double entry system, the balances of the
control accounts being taken for the purpose of extracting a trial balance.
The control accounts are kept in the General Ledger. In this case, the
personal accounts are being used as subsidiary records and the Sales
and Purchases Ledgers are memorandum books lying outside the
double entry system.
In organisations where the control accounts are not part of the double
entry system, the control account is normally kept as a memorandum
entry in the individual ledgers. The same entries are made to them at the
end of the period as are made if they are part of the double entry system.
 Reconciliation of control accounts
Errors and omissions can occur when entering information
into the accounting records. These are identified and used to
reconcile differences between the bank account and the bank
statement balances. When a ledger control account is not in
balance, it indicates that something has gone wrong with the
entries made to the accounting records.
This leads to an investigation which (hopefully) reveals the
cause(s). Then, in order to verify whether the identified item(s)
caused the failure to balance the control account, a
reconciliation is carried out.
 Format of Purchase Ledger Control Account
Reconciliation
GHS
Original purchases ledger control account balance xxx
Add Invoice omitted from control account, but entered in Purchases Ledger xxx
Supplier balance excluded from Purchases Ledger total because the account had
been included in the Sales Ledger by mistake xxx
Credit sale posted in error to the debit of a Purchases Ledger account instead of
the debit of an account in the Sales Ledger xxx
Under-casting error in calculation of total end of period creditors’ balances xxx
xxx
Less Customer account with a credit balance included in the Purchases Ledger that
should have been included in the Sales Ledger (xxx)
Return inwards posted in error to the credit of a Purchases Ledger account instead
of the credit of an account in the Sales Ledger (xxx)
Credit note entered in error in the Returns Outwards Day Book as £223 instead
of £332 (xxx)
Revised purchases ledger control account balance obtained from revised source amounts xxx
Control accounts are mostly used in manual accounting systems. Most
computerised accounting systems automatically provide all the benefits
of using control accounts without the necessity of actually maintaining
them. This is because computerised accounting systems automatically
ensure that all double entries are completed, so ensuring that the
ledgers all balance. Of course, errors can still arise, such as a posting
made to the wrong ledger account, but not of the type that control
accounts can detect.
 COMPREHENSIVE EXAMPLE
• April Showers sells goods on credit to most of its customers. In
order to control its debtors collection system, the company
maintains a sales ledger control account. In preparing the
accounts for the year to 30th October 2003, the accountant
discovers that all the personal accounts balances of the sales
ledger adds up to Ghc12,802, whereas the sales ledger control
account balance discloses a balance of Ghc12,550.
• Upon investigations, the following errors were discovered.
1. Sales for the week ending 27 March 2003 amounting to Ghc850 had been omitted from the control
th

account.
2. The debtors account balance of Ghc300 had not been included in the list of balances.
3. Cash received of Ghc750 had been entered in the personal account as 570.
4. Discount allowed of Ghc100 had not been entered in the control account
5. A personal account balance had been undercast by Ghc200.
6. A contra item of Ghc400 with the purchases ledger had not been entered in the control account (set
off).
7. A bad debt of Ghc500 had not been entered in the control account.
8. Cash received of Ghc250 had been debited to a personal account.
9. Discount received of Ghc50 had been debited to the personal account.
10.Returns inwards valued at Ghc200 had not been included in the control account.
11.Cash received of Ghc80 had been credited to a personal account as Ghc8.
12.A cheque of Ghc300 received from a customer had been dishonored by the bank, but no adjustment
had been made in the control account.
• Prepare a corrected sales ledger control account, bringing down the amended balance as at 1s t

Novembers, 2003.
• Prepare a statement showing the adjustments that are necessary of the list of personal account balances
so that it reconciles with the amended sales ledger control account balance.