Topic 10 – Control Account – Book Keeping Form 3

Topic 10 – CONTROL ACCOUNT – Book Keeping Form 3

Control Account from Subsidiary Records
Construct control account from subsidiary records
Definition: A control account is a summary-level account in the general ledger. This account contains aggregated totals for transactions that are individually stored in subsidiary-level ledger accounts. Control accounts are most commonly used to summarize accounts receivable and accounts payable, since these areas contain a large volume of transactions, and so need to be separated into subsidiary ledgers, rather than cluttering up the general ledger with too much detailed information. The balance in a control account should match the total for the related subsidiary ledger. If the balance does not match, it is possible that a journal entry was made to the control account that was not also made in the subsidiary ledger.
The typical level of activity in a control account is on a daily basis. For example, all payables entered during one day will be aggregated from the subsidiary ledger and posted as a single summary-level number into the accounts payable control account. Posting into all control accounts must be completed before the books can be closed at the end of a reporting period; otherwise, transactions may be stranded in a subsidiary ledger.
If anyone wants to see detailed transactional information for accounts payable, they can review the detail located in the subsidiary ledger, since it is not located in the general ledger.
Control accounts are most commonly used by large organizations, since their transaction volume is very high. A small organization can typically store all of its transactions in the general ledger, and so does not need a subsidiary ledger that is linked to a control account
Preparation of Control Accounts from Account Balance
Prepare control accounts from account balance
Whilst maintaining control accounts most businesses will maintain what is referred to as a ‘memorandum.’ This is a separate list of individual receivable and payable amounts due from each customer and to each supplier, respectively. This simple ‘list of balances’ is used as a record so that companies know how much each customer is due to pay and how much they are due to pay each supplier. This assists with credit control and cash flow management.
A key control operated by a business is to compare the total balance on the control account at the end of the accounting period with the total of all the separate memorandum balances. In theory they should be identical. This is referred to as acontrol account reconciliation.
Balance b/f X Balance b/f X
Credit sales (SDB) X Sales returns (SRDB) X
Bank (CB) X
Bank (CB) dishonoured cheques X Irrecoverable debts (journal) X
Bank (CB) refunds of credit balances X Discounts allowed X
Interest charged X Contra X
Balance c/f X Balance c/f X
____ ____
X X
____ ____
Balance b/f X Balance b/f X
Balance b/f X Balance b/f X
Bank (CB) X Credit purchases (PDB) X
Purchases returns (PRDB) X Bank (CB) refunds of debit balances X
Discounts received X
Contra X
Balance c/f X Balance c/f X
____ ____
X X
____ ____
Balance b/f X Balance b/f X
How a Control Ledger and its Subsidiary Ledger Operate
Explain how a control ledger and its subsidiary ledger operate
Two of the most common Control Accounts are Sales Ledger Control Accounts and Purchases Ledger Control Accounts. After posting all transactions the balance of the Control Account and the sum of the detailed records in the Subsidiary Ledger should always be the same. In other words, a control account deals with summarized information while a subsidiary ledger deals with detailed information. Because the control accounts contain summarized information they are also called total accounts. Therefore a control account for a Sales Ledger can be called a Sales ledger Control accounts or Total Debtors Account. A control account for a Purchases Ledger can be called a Purchases Ledger Control account or a Total Creditors Account.
The Rule for Posting to a Subsidiary Ledger and its Controlling Account
Give the rule for posting to a subsidiary ledger and its controlling account
The closing balances on the sales ledger control accounts should be equal to the sum total of the closing balances on the individual debtor accounts in the sales ledger. It follow as well that the closing balances on the purchases ledger control accounts should be equal to the sum total of the closing balances on the individual creditor accounts in the purchases ledger. If the respective balances are not in agreement then it would suggest some form of irregularity in the records which would need investigation.
Example 1
The information for constructing each control accounts are taken from both the personal accounts of debtors and creditors, as well as information form the main daybooks (e.g. sales daybook for total of credit sales). The main sources of information are found in the following locations:
Information for sales ledger control account
Information needed: Information located:
Opening balance of debtors Debtor accounts in sales ledger
Credit sales Sales daybook
Returns inwards Returns inwards daybook
Money received from customers Cashbook
Discounts allowed General ledger or cashbook (3rd column)
Closing balance of debtors Debtor accounts n sales ledger
Information for purchases ledger control account
Information needed: Information located:
Opening balance of creditors Creditor accounts in purchases ledger
Credit purchases Sales daybook
Returns outwards Returns outwards daybook
Money received from customers Cashbook
Discounts received General ledger or cashbook (3rd column)
Closing balance of creditors Creditor accounts in purchases ledger
A control account will appear as if it is a personal account – with amounts relating topurchases and sales, returns, discounts as well as payments made and received. The examples below are to remind you of what a debtor and what a creditor account looks like:
Debtor accounts
Balance owing to us at start Cash/cheques received
Credit sales made during period Returns inwards
– Discounts allowed
– Balance owing to us at end (*1)
(*1 this is a debit balance but it is initially carried down from the credit side when the account is balanced off)
Creditor accounts
Cash/Cheques paid Balance owing by us at start
Returns outwards Credit purchases made during period
Discounts received –
Balance owing to by at end (*2) –
(*2 this is a credit balance but it is initially carried down from the debit side when the account is balanced off)
Recording Corrections in the Control and Suspense Accounts
Record corrections in the control and suspense accounts
A suspense account is a temporary resting place for an entry that will end up somewhere else once its final destination is determined. There are two reasons why a suspense account could be opened:
  1. a bookkeeper is unsure where to post an item and enters it to a suspense account pending instructions
  2. there is a difference in a trial balance and a suspense account is opened with the amount of the difference so that the trial balance agrees (pending the discovery and correction of the errors causing the difference). This is the only time an entry is made in the records without a corresponding entry elsewhere (apart from the correction of a trial balance error.
Types of error
Before we look at the operation of suspense accounts in error correction, we need to think about types of error – not all types affect the balancing of the records and hence the suspense account.
Types of error
Error type Suspense account involved?
1 Omission– a transaction is not recorded at all No
2 Error of commission– an item is entered to the correct side of the wrong account (there is a debit and a credit here, so the records balance) No
3 Error of principle– an item is posted to the correct side of the wrong type of account, as when cash paid for plant repairs (expense) is debited to plant account (asset)(errors of principle are really a special case of errors of commission, and once again there is a debit and a credit) No
4 Error of original entry– an incorrect figure is entered in the records and then posted to the correct accountExample: Cash $1,000 for plant repairs is entered as $100; plant repairs account is debited with $100 No
5 Reversal of entries– the amount is correct, the accounts used are correct, but the account that should have been debited is credited and vice versaExample: Factory employees are used for plant maintenance:Correct entry:Debit: Plant maintenanceCredit: Factory wagesEasily done the wrong way round No
6 Addition errors –figures are incorrectly added in a ledger account Yes
7 Posting errora an entry made in one record is not posted at allb an entry in one record is incorrectly posted to anotherExamples: cash $10,000 entered in the cash book for the purchase of a car is:a not posted at allb posted to Motor cars account as $1,000 Yes
8 Trial balance errors– a balance is omitted, or incorrectly extracted, in preparing the trial balance Yes
9 Compensating errors– two equal and opposite errors leave the trial balance balancing (this type of error is rare, and can be because a deliberate second error has been made to force the balancing of the records or to conceal a fraud) Yes, to correct each of the errors as discovered Yes, to correct each of the errors as discovered
Correcting errors
Errors 1 to 5, when discovered, will be corrected by means of a journal entry between the accounts affected. Errors 6 to 9 also require journal entries to correct them, but one side of the journal entry will be to the suspense account opened for the difference in the records. Type 8, trial balance errors, are different. As the suspense account records the difference, an entry to it is needed, because the error affects the difference. However, there is no ledger entry for the other side of the correction – the trial balance is simply amended.
Some hints on preparing suspense accounts
  • Does a correction involve the suspense account? The type of error determines this. Practice, and study of Table 1 should ensure that you see immediately which errors affect the balancing of the records and hence the suspense account.
  • Which side of the suspense account must an entry go? This is one of the most awkward problems in preparing suspense accounts. The best way of solving it is to ask yourself which side the entry needs to be on in the other account concerned. The suspense account entry is then obviously to the opposite side.
  • Look out for errors with two aspects. In the illustrative question earlier, error 1 is a case in point. An entry has been made to the wrong account, but also to the wrong side of the wrong account. Both errors must be corrected. It is very easy to fall into the trap of correcting only one of the errors, especially when working quickly under examination conditions.
Reconciling the Sales and Purchases Ledger Control Accounts with the Individual Balances
Reconcile the sales and purchases ledger control accounts with the individual balances
The reconciliation is a working to ensure that the entries in the sales and purchase ledgers(the memorandums, or list of individual balances) agree with the entries in thecontrol accounts. The totals in each should be exactly the same. If not it indicates an error in either the memorandum account or the control account. All discrepancies should be investigated and corrected.
The format of a control account reconciliation, in this case for receivables, is as follows:
Reconciliation of individual receivables balances with control account balance
Receivables ledger control account
$ $
Balance given by the examiner X Adjustments for errors X
Adjustments for errors X Revised balance c/f X
–– ––
X X
$
Balance as extracted from list of receivables X
Adjustments for errors X/(X)
–––––
Revised total agreeing with balance c/f on control account X
Illustration – Preparing a control account reconciliation
Alston’s payables ledger control account is an integral part of the double entry system. Individual ledger account balances are listed and totalled on a monthly basis, and reconciled to the control account balance. Information for the month of March is as follows:
  1. Individual ledger account balances at 31 March have been listed out and totalled $19,766.
  2. The payables ledger control account balance at 31 March is $21,832.
  3. On further examination the following errors are discovered:
  • The total of discount received for the month, amounting to $1,715, has not been entered in the control account but has been entered in the individual ledger accounts.
  • On listing-out, an individual credit balance of $205 has been incorrectly treated as a debit.
  • A petty cash payment to a supplier amounting to $63 has been correctly treated in the control account, but no entry has been made in the supplier’s individual ledger account.
  • The purchases day book total for March has been undercast (understated) by $2,000.
  • Contras (set-offs) with the receivables ledger, amounting in total to $2,004, have been correctly treated in the individual ledger accounts but no entry has been made in the control account.

Step 1: The total of discount received in the cash book should have been debited to the payables ledger control account and credited to discount received. Thus, if the posting has not been entered in either double entry account it clearly should be. As this has already been entered into the individual ledger accounts, no adjustment is required to the list of balances.

Step 2: Individual credit balances are extracted from the payables ledger. Here, this error affects the ledger accounts balance. No adjustment is required to the control account, only to the list of balances.
Step 3: The information clearly states that the error has been made in the individual ledger accounts. Amendments should be made to the list of balances. Again, no amendment is required to the control accounts.
Step 4: The total of the purchases day book is posted by debiting purchases and crediting payables ledger control account. If the total is understated, the following bookkeeping entry must be made, posting the $2,000 understatement: Dr Purchases; Cr Payables ledger control account
As the individual ledger accounts in the payables ledger are posted individually from the purchases day book, the total of the day book being understated will not affect the listing of the balances in the payables ledger.
Step 5: Here it is clear that the error affects the control account, not the payables ledger. Correction should be made by the bookkeeping entry: Dr Payables ledger control account; Cr Receivables ledger control account.

NOTES II: CONTROL ACCOUNT

Due to their small number of business transactions small firms can operate effectively with one ledger.

Large business firms have a large number of transactions and find it necessary to maintain separate ledgers for control purchases

In this case the ledger is divided into two main parts namely

Ø Personal ledger

Ø Impersonal ledger

The personal ledger

Consists of the amount of persons and the organization as a whole which have either supplied to receive goods or services from the firm on credit, these are;-

a) Debtors control accounts or sales ledger control a/c

b) Creditors control account or purchases ledger control a/c

ADVANTAGES

a) Errors can be traced to individuals

b) Being a summary: control accounts are a quick source of reference for amount owing to and by the firm

INFORMATION FOR THE CONTROL ACCOUNTS

1. SALES LEDGER CONTROL ACCOUNTS

a) Opening balance

-From list of debtors balance at the end of previous ledgers

b) Credit sales

– From sales day book

c) Returns inwards

-From return inward day book.

d) Cheques or cash received

-From the cash book

e) Closing balance

-List of debtors balance drawn up at the end of the trading period

CONSTRUCTING SALES LEDGER CONTROL A/C OR

DEBTORS CONTROL A/C

D Date
Details
Amount
Date
Details
Amount
Balance b/d
xxx
Returns inwards
xxx
Credit sales
xxx
Discount allowed
xxx
Bills received
xxx
Cash /bank received
xxx
Cheque dishonored
xxx
Bad debts w/o
xxx
Carriage charge
xxx
Bills receivable
xxx
Refund on over due
xxx
Set off [purchase ledger]
xxx
Balance c/d
xxx
xxxx
xxxx
Balance c/d
xxx

Example

You are required to prepare a sales ledger control a/c from the following details May 1st sales ledger balance 4,936

31 returns inwards journal…………………………1,139

Sales journal …………………………………………49,916

Cash and cheque received from customers …..46,490

Discount allowed ………………………………..1455

May 31 sales ledger balance C/D ………………. 5,768


Dr SALES LEDGER CONTROL A/C Cr

D Date
Details
Amount
Date
Details
Amount
1.5
Balance b/d
4,936
31.5
Returns inwards
1139
Credit sales
49,916
Discount allowed
1,455
Cash /bank received
46,490
Balance c/d
5,768
54,852
54,852
Balance b/d
5,768

EXERCISE

Prepare a sales ledger control a/c from the following information of July 1999, carrying down the balance at 31july.

July 1 sales ledger balance 9,700

Sales journal 99,280

Bad debts written off 279

Cheque received from debtors 95,120

Discount allowed 1,285

Cheque dishonored 226

Returns inwards 3,170

Set off against balance in purchases ledger 400

Dr SALES LEDGER CONTROL A/C Cr

Date
Details
Amount
Date
Details
Amount
1.7
Balance b/d
9,700
31.7
Bad debts
279
Credit sales
99,280
Bank
95,120
Cheque dishonored
226
Discount allowed
1,285
Returns inwards
3,170
Set off
400
Balance c/d
8,952
109,206
109,206
1.8
Balance b/d
8,952

2. PURCHASES LEDGER CONTROL A/C

Opening balance

-List of creditors balance drawn

Credit purchases

-From purchases day book

Returns outwards

-From the returns outwards journal

Cash /cheque paid

-From the cash book

Closing balance

-List of creditors balances drawn up at the end of the trading period.

Dr PURCHASES LEDGER CONTROL A/C Cr

Date
Details
Amount
Date
Details
Amount
Returns outwards
xxx
Balance b/d
xxx
Discount received
xxx
Credit purchases
xxx
Cash /cheque paid
xxx
Set off
xxx
Bills payable
xxx
Balance c/d
xxx
xxx
xxx
Balance b/d
xxx

TRANSACTION WHICH ARE NEITHER RECORDED IN SALES LEDGER NOR PURCHASES LEDGER CONTROL ACCOUNTS.

I. Cash purchases during the year

II. Cash sales during the year

III. Provision for bad debts

IV. Cash allowance made to customer (allowance made to customer)

V. Discount on cash sales

VI. Discount on cash purchases

VII. Bills payable (honored/paid)

VIII. Bill receivable (received)

Example

You are required to prepare a purchase ledger control account for the following information

January 1

Purchases ledger balance 3,676

Purchases journal 42,257

Returns outward journal 1,098

Cheque paid to suppliers 3,875

Discount received 887

Dr PURCHASES LEDGER CONTROL A/C Cr

Date
Details
Amount
Date
Details
Amount
1.11
Returns outwards
1,098
31.11
Balance b/d
3,676
Discount received
887
Credit purchases
42,257
Cash /cheque paid
3,875
Balance c/d
40,073
45,933
45,933
Balance b/d
40,073

EXERCISE

1. You are required to prepare a sales ledger control a/c from the following information for the month of November 2010

November 1

Sales ledger balance 24,000

Total for November

Sales day book 14,000

Returns inwards day book 1,000

Cheque and cash received from customer 18,000

Discount allowed 500

Sales ledger balances 18,500

Dr SALES LEDGER CONTROL A/C Cr

Date
Details
Amount
Date
Details
Amount
1.11
Balance b/d
24,000
31.11
Returns inwards
1,000
Credit sales
14,000
Bank and cash
18,000
Discount allowed
500
Balance c/d
Also Read:

18,500
38000
38000
Balance b/d
18,500

2. You are required to prepare purchases ledger control a/c from the following information for April, the balance of account is to be taken as amount of account payable on 30th April 2011.

April 1

Purchases ledger balance 11,241

Total for April

Purchases day book 6,100

Returns outwards day book 246

Cheque paid to suppliers 8300

30 purchases ledger balance ?

Discount received from suppliers 749

 

Dr PURCHASES LEDGER CONTROL A/C Cr

Date
Details
Amount
Date
Details
Amount
31.4
Returns outwards
246
1.4
Balance b/d
11,241
Bank
8,300
31.4
Credit purchases
6,100
Discount allowed
749
Balance c/d
8,046
17,341
17,341
1.5
Balance b/d
8,046

EXAMPLE

The following figures were taken from the books of gold company limited 1st January 1990

Balance on sales ledger Dr 112,320

Balance on sales ledger Cr 1,470

Balance on purchases ledger Dr 1,180

Balances on purchases ledger CR 72,280

Transaction up 31st December 1990

Sales to customers on credit 108,450

Cash sales during the year 20,000

Purchases on credit for supplier 63,250

Cash purchase 30,000

Allowances made to customers 1,870

Goods returned to suppliers 1,230

Cash received from customer 96,450

Bad debts [written off] 850

Discount allowed to customer 4,960

Discounted allowed by supplier 4,120

Cash paid to the supplier 61,420

Cash paid to customer 250

Transfer from sales ledger to purchases ledger 5,980

Transfer from purchases ledger to sale ledger 2,140

Legal and other expenses charged to customers 350

Balance on sales ledger Cr 1100

Balance on purchases DR 890

Required

Prepare sales ledger control a/c and Purchases ledger control A/C.

Dr SALES LEDGER CONTROL A/C Cr

Date
Details
Amount
Date
Details
Amount
1.1.90
Balance b/d
112,320
1.1.90
Balance b/d
1,470
Credit sales
108,450
Allowance
1,870
Cash repaid
250
Cash receivable
96,450
Legal cost and expenses
350
Bad debts
850
Balance c/d
1100
Discount allowed
4,960
To purchases ledger
5,980
From purchases ledger
2,140
Balance c/d
107,650
221,370
221,370
1.1.91
Balance b/d
107,650
1.1.91
Balance b/d
1,100
Dr PURCHASES LEDGER CONTROL A/C Cr
Date
Details
Amount
Date
Details
Amount
1.1.90
Balance b/d
1,180
1.1.90
Balance b/d
72,280
31.1.90
Returns outward
1,230
31.12.90
Credit purchases
63,250
Discount received
4,120
Balance c/d
890
Cash paid
61,420
From Sales ledger
5,980
To Sales ledger
2,140
Balance c/d
60,350
136,420
136,420
1.191
Balance b/d
890
1.1.91
Balance b/d
60,350

EXERCISE

You are required to prepare a purchases ledger control a/c from the following information for the month April 2011.

April 1

Purchases ledger balance 11,241

Total for April

Purchases day book 6,100

Returns outward day book 246

Cheque paid to the supplier 8300

Discount received from supplier 249

30 purchases balance
?

Dr PURCHASES LEDGER CONTROL A/C Cr

Date
Details
Amount
Date
Details
Amount
Returns outwards
246
1.4
Balance b/d
11,241
Cheque paid
8,300
Credit purchases
6100
Discount received
749
30.4
Balance c/d
8,046
17,341
17,341
1.5
Balance b/d
8,046

EXERCISE 2.

Prepare a sales ledger a/c from the following information 2012.

March 1

Debt balance 12,000

Total information

Cash and cheque received from bank 9,000

Discount allowed 11,000

Debit balance in the sales ledger set off against credit balance in the purchases ledger 100

31 debit balance ?

Credit balance 50

Dr SALES LEDGER CONTROL A/C Cr

Date
Details
Amount
Date
Details
Amount
1.3
Balance b/d
12,000
Cash and bank
11,000
Credit sales
9,000
Discount allowed
1,000
31.12
Balance c/d
50
Set off
100
Balance c/d
8,950
21050
21050
1.4
Balance b/d
8,950
Balance b/d
50

EXERCISE 3

You are required to prepare control a/c from the following;-

Jan 1

Purchases ledger balance 11,874

Sales ledger balance 19,744

Total for the year

Purchases journal 154,562

Sales journal 199,662

Returns outwards journal 2,648

Returns inwards journal 4,556

Cheque paid to the supplier 146,100

Petty cash paid to the supplier 78

Cheque and cash received from customer 185,960

Discount allowed 5830

Discount received 213

 

Dr PURCHASED LEDGER CONTROL A/C Cr

Date
Details
Amount
Date
Details
Amount
Returns outwards
2,648
1.1
Balance b/d
11,874
Cheque paid
146,100
Credit purchases
154,562
Cash paid
78
Discount received
2,134
31.12
Balance c/d
15,476
166,436
166,436
1.2
15,476
Dr SALES LEDGER CONTROL A/C Cr

Date
Details
Amount
Date
Details
Amount
1.01
Balance b/d
147,44
Returns inwards
4,556
Credit sales
199,662
Cash and cheque
185,960
Discount allowed
5,430
Balance c/d
23,060
219,406
219,406
1.02
Balance b/d
23,060
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