Introduction to Control Accounts • Trade receivables are reported as a current asset and trade payables are reported as current liability in the balance sheet at the end of an accounting period. • It is important, therefore, that a business taken steps to ensure the accuracy of these figures. • One such step is the preparation of Control account to confirm that the total of the sales ledger balances and the total of the purchases ledger balances are accurate
What is Control Account? • A control account is one which records the total of what may be a large number of individual ledger account balances. • For example, there may be numerous accounts, perhaps thousands, for individual debtors in the Trade Receivable Ledger, each reporting the amount receivable from particular debtors whereas a Trade Receivable Control account will have a single balance equaling the sum of all the individual debtors’ balances.
Control accounts may have different names • Control account maintained in respect of the credit customers might be known as Trade Receivable Control Account, Debtor Control Account and Sales Ledger Control Account • The corresponding one maintained for suppliers might be known as Trade payable Control account, Creditor Control Account and Purchase Ledger Control Account
The steps for writing up a Control Account Irdyna Illustration Let us assume that Irdyna wishes to write up a Trade Receivable Control Account starting on 1 May 2010. Irdyna will proceed as follows: Step 1: Obtain from the Trade Receivable Ledger clerk a list of amount receivable from every one of his credit customer as at 1 May 2010. Trade Receivable as at 1 May 2010 | | |RM | |Vivianz |1,000 | |Michael |1,250 | |Siti |5,200 | | |7,450 | Step 2 : Obtain from the Sales Day Book clerk the total credit sales made in the month of May 2010 Sales day book May 2010 | | |RM | |Vivianz |6,000 | |Michael |4,150 | |Siti |9,050 | | |19,200 | Step 3: Obtain from the cashier particulars of all amount received in May 2010from the credit customers. This information will be readily available if the Cash Book has analysis columns |Extract from the Cash book May 2010 | | |RM |Vivianz |900 | |Michael |1,250 | |Siti |3,000 | | |5,150 | Step 4 : Use the information obtained from each of the above three steps to prepare a Trade Receivable Control account. [pic] Note that each total has come from three members of staff who should be independent each other. Trade Receivable Ledger Control Account Trade Receivable Ledger Control account could contain entries for all of the transaction that normally occur with a customer. [pic] Note: 1. The first (marked #) indicates that a customer is in credit – this could occur for a number of reasons. E. g. ; there may have been over payment or a credit allowed for defective goods returned after the customer has paid in full. 2.
The second (marked ##) indicates that there has been a set off by contra – a business may possibly purchase goods from the same party to whom it also sells. For example, if we name that party Kyna and assume that Kyna is reported as a debtor ( in the Trade Receivable Ledger ) for RM 10,000 and a creditor (in the Trade Payable Ledger) for RM 4,000 it is likely that we would receive only the net amount of RM 6,000 from Kyna in full settlement. To account for the settlement we have to offset RM 4,000 remaining in the Trade Receivable Ledger against the corresponding credit balance in the Trade Payable Ledger. Trade Payable Ledger Control Account
In order to write up a Trade payable Ledger Control Account the following information is required: [pic] 1. The opening credit balance brought forward: This is obtained by extracting a list of balances, at commencement of the period, from the Trade Payable Ledger. 2. Any opening debit balance brought forward: This is also obtained by extracting a list of balances, at commencement of the period, from the Trade Payable Ledger 3. Credit purchases : from totals of Purchases Day Book 4. Purchase returns: from totals of the Return Outwards Day Book 5. Payment to supplier : by analyzing the payment side of the Cash Book 6. Discount received: from totals of the Discount column on the payment side of the Cash Book. Summary Control Account |Posted from |With |Agree with |Part of general ledger | | | | | |double entry | | |Sales day book |Total |Receivable ledger |v | | | | |balances in total | | |Receivable Control |Sales return day book |Total | | | |account | | | | | | |Cash book |Total | | | | | | | | | | | | | | |Payables |Purchase day book |Total |Payables ledger balances |v | | | | |in total | | | |Purchase returns day book|Total | | | | |Cash book |Total | | | Purposes of control accounts 1. They provide a check on the accuracy of entries made in the personal accounts in the receivables ledger and payables ledger.
It is very easy to make a mistake in posting entries, because there might be hundreds of entries to make. Figures might get transposed. Some entries might be omitted altogether, so that an invoice or a payment transaction does not appear in a personal account as it should. i. Compare the total balance on the receivables control account with the total of individual balances on the personal accounts in the receivables ledger. ii. Compare the total balance on the payables control account with the total of individual balances on the personal accounts in the payables ledger. 2. The control account could also assist in the location of errors, where postings to the control accounts are made daily or weekly, or even monthly.
If a clerk fails to record an invoice or a payment in a personal account, or makes a transposition error, it would be a formidable task to locate the error or errors at the end of a year, say, given the hundreds or thousands of transactions during the year. By using the control accounts, a comparison with the individual balances in the receivables or payables ledger can be made for every week or day of the month, and the error found much more quickly than if control accounts did not exist. 3. Where there is a separation of clerical (bookkeeping) duties, the control account provides an internal check. The person posting entries to the control accounts will act as a check on a different person whose job it is to post entries to the receivables and payables ledger accounts. 4. To provide receivables and payables’ balances more quickly for producing a trial balance or balance sheet.
A single balance on a control account is obviously extracted more simply and quickly than many individual balances in the receivables or payables ledger. This means also that the number of accounts in the double entry bookkeeping system can be kept down to a manageable size, since the personal accounts are memorandum accounts only and the control accounts instead provide the accounts required for a double entry system. CONTROL ACCOUNT RECONCILIATIONS 1. The control accounts should be balanced regularly (at least monthly), and the balance on the account agreed with the sum of the individual receivables’ or payables’ balances extracted from the receivables or payables ledgers respectively. 2.
It is one of the sad facts of an accountant’s life that more often than not the balance on the control account does not agree tith the sum of balances extracted, for one or more of the following reasons. i. An incorrect amount may be posted to the control account because of a miscast of the total in the book of prime entry (i. e. adding up incorrectly the total value of invoices or payments). ii. A transposition error may occur in posting an individual’s balance from the book of prime entry to the memorandum ledger, example the sale to Marina of RM250 might be posted to her account as RM520. iii. A transaction may be recorded in the control account and not in the memorandum ledger, or vice versa.
This requires an entry in the ledger that has been missed out which means a double posting of the control account has to be corrected, and a single posting if it is the individual’s balance in the memorandum ledger that is at fault. iv. The sum of balances extracted from the memorandum ledger may be incorrectly extracted or miscast. This would involve simply correcting the total of the balances Example for control account reconciliation. The balance on the trade accounts payable control account of Hashim Enterprise as at 31 December 2009 was RM110,000. A review of the individual trade accounts payable revealed the following: Total on list of credit balances106,280 In the accounts payable ledger List of debit balances In accounts payable ledger – Ahmad account 3,000 Total balance of payable ledger103,280 1.
The purchase day book has been added incorrectly overstating the total by RM600. 2. Purchases of RM3,800 had not been posted to Ahmad’s personal account in the payable ledger. 3. Discount received of RM1,340 had been posted to the personal account concerned but not to the control account. 4. A bad debt of RM980 written off Jimmy’s account in the receivables ledger had been incorrectly posted to the payables control account. Required a. Make the necessary corrections to the payable control account. b. Make the necessary corrections to the payables ledger, ensuring that the revised control account balances agrees with the adjusted list of balances in the payables ledger. Solution a. Payable Control Account | |Purchases (overstated) |600 |Bal b/d (before adjustment) |110,000 | |Discount received |1,340 | | | |Bad Debt(incorrectly posted) |980 | | | |Balance c/d |107,080 | | | | |110,000 | |110,000 | b. Reconciliation of control account Balance as per list of balances from payable ledger103,280 (before adjustment) Add:Purchases not recorded in Ahmad’s account 3,800 Balance as per control account as at 31 December 2009107,080