Lecture 24

Control Accounts

You should be able to:

draw up sales ledger control accounts
draw up purchases ledger control
accounts
know the source of information for
preparation of control accounts

Reasons for control accounts

When the firm has grown and the
accounting work has been so divided up
that there are several or many ledgers,
and errors could be very difficult to find.
Therefore, what is required is a type of
trial balance for each ledger, and this
requirement is met by the control
accounts.

Principle of control accounts

Total of opening balances together with the

additions and deductions during the period
should give the total of closing balances.
Example:
$
Total of opening balances 3 000
Add total of entries which have
increased the balances
9 500
12 500
Less total of entries which have
reduced the balances
8 000
Total of closing balances

4 500

Principles of control accounts

Because totals are used, the accounts
are often 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.
Control account for a Purchases Ledger
could be known as either a Purchases
Ledger Control Account or as a Total
Creditors Account.

Information for control accounts

Sales ledger control

Opening debtors

Credit sales

Returns inwards

Cheques and cash

received
Discount allowed
Closing debtors

Source
List of debtors balances
drawn up at the end of the
previous period
Total from Sales Journal
Total of Returns Inwards
Journal
Cash book
Cash Book
List of debtors balances
drawn up at the end of the
period

Information for control accounts

Source

Purchases ledger
control
Opening creditors
Credit purchases

Returns outwards

Cheques & cash paid

Discount received
Closing creditors

List of creditors balances

Total from purchases
journal
Total of returns outwards
journal
Cash book
Cash Book
List of creditors balances
drawn up at the end of the
period

Example of a Sales Ledger Control

Account
Sales ledger
Debit balances on 1 Jan. 2005
Total credit sales for the month
Cheques received from customers
in the month
Cash received from customers in Jan.
Returns inwards in Jan.
Debit balances on 31 Jan. as extracted
from the sales ledger

$
1 894
10 290
7 284
1 236
296
3 368

Sales Ledger Control Account

2005
Jan 1 Bal. b/d
31 Sales

$
1 894
10 290

12 184

2005
$
Jan 31 Bank
7284
Cash
1236
Returns
inwards
296
Bal c/d
3368
12 184

Example of a purchases ledger

control account
Purchases ledger
$
Credit bal. on 1 Jan. 2005
3 890
Cheques paid to suppliers in Jan. 3 620
Returns outward to suppliers in Jan. 95
Credit purchases in Jan.
4 976
Credit balances on 31 Jan. as
extracted from the purchases ledger 5 151

Purchases ledger control

2005
$
Jan 31 Bank
3 620
Returns
outwards
95
Bal.c/d
5 151
8 866

2005
$
Jan. 1 Bal. b/d
3 890
31 Purchases 4 976

8 866

Credit balances in the sales ledger

If the customer had made an overpayment

or was allowed additional cash or trade
discount after the account had been
settled.

Debit balances in the purchases

ledger

Debit balances would appear in the

purchase ledger if a trader:

- settled his account with a supplier then
returned faulty goods
- pays a fixed amount each month which
in total exceeds the amount of
purchases made
- was allowed additional discount after
settling his account
- had overpaid an outstanding balance

Treatment of minority balances

Any credit balances in the Sales Ledger
will be shown as credit balances in the
Sales Ledger control account
Any debit balances in the purchase ledger
will be shown as debit balances in the
purchase ledger control account

Minority balances in Balance Sheet

Any credit balances in the Sales Ledger
will be shown as credit balances in Sales
Ledger under Current Liabilities in the
Balance Sheet
Any debit balances in the Purchase
Ledger will be shown as debit balances in
Purchases Ledger under Current Assets
in the Balance Sheet
These balances are not to be net off
against the majority balances.

Contra entries ( or set-offs )

A business well be both a customer of and a

supplier to another business. The usual
procedure in cases like this is to transfer the
smaller amount from one ledger to the other.
Example: In Rodneys books, Ernie has a debit
balance of $100 in Rodneys sales ledger and a
credit balance of $30 in Rodneys purchase
ledger.
Show the contra entries as they would appear in
both Rodneys control accounts

Worked example
Dr. Rodney sales ledger control a/c
Transfer from
purchases ledger
Dr. Rodney purchases ledger control
Transfer to sales
ledger
$30

Cr
$30
Cr

Contra entries
It does not matter whether the debit or the
credit balance is greater. When showing
the contra in the control accounts:
the sales ledger control account is always
credited and
the purchases ledger control account is
always debited.

Control A/C as part of double entry

In larger organisation, control a/cs are often part

of the double entry system, which means that
the Sales Ledger and Purchases Ledger are
treated as memorandum books outside the
double entry system.

When control a/cs are outside the double entry

system, they are kept as memorandum accounts
in the individual ledgers. The entries to them are
the same as for control accounts that lie within
the double entry system.

Advantages of using control

accounts
To detect errors
To deter fraud
Total amounts owed by debtors and total
amounts owing to creditors can be
ascertained quickly.
Act as a check on the accuracy of all the
postings made to the personal ledgers and
this checks the reliability of the ledger
accounts

Worked example
2005
$
Aug 1 Sales ledger-debit balances 3 816
-credit balances
22
31 Transactions for the month:
Cash received
6 343
Sales
7 090
Bad debts written off
306
Cash sales
1 080
Discounts allowed
298
Returns inwards
664

$
Cash refunded to a customer who
had overpaid his account
37
Dishonoured cheque
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
Required;
Prepare the sales ledger control account