CONTROL ACCOUNTS

After you have studied this unit, you should be able to:
• Define a control account.
• Explain the purpose of control accounts.
• Give the advantages of control accounts.
• Identify the sources of information for control accounts.
• Explain the principle used in preparing control accounts.
• Draw up control accounts for debtors and creditors
• Explain the accounting of a contra settlement between the sales ledger and
purchases ledger.
• Reconcile the control accounts balances with the total of balances on the
individual accounts.

Control accounts
A control account is a total account that checks the arithmetic accuracy of a
ledger. Control accounts are like a trial balance for each particular ledger. The
use of control accounts is technique used to quickly identify the section of the
accounting records that has errors. Therefore, only the ledger whose control
account fails to agree the individual balances will need to be checked to locate
the errors.

Two control accounts are normally prepared:

(a) A control account for the sales ledger, known as the sales ledger control
account or the total debtors account.

(b) A control account for the purchases ledger, known as the purchases
ledger control account or the total creditors account.

Advantages of control accounts

In addition to the advantage of locating errors quickly, control accounts also have
the following advantages:

(i) Control accounts are normally under the charge of the responsible official
and so fraud is made more difficult because transfers made (in an effort) to
disguise fraud will have to pass the scrutiny of this official .

(ii) For management control purpose, the balances on the control accounts
can always be taken to equal the debtors and creditors at any point.
Therefore, management control is aided by the quick information provided
from the control accounts.
Treatment of control accounts in the books of account.
Control accounts can be treated either as part of the double entry system or for
memorandum purposes only – merely proving the arithmetical accuracy of the
ledger accounts. Where control accounts are part of the double entry system,
then the ledgers are for memorandum purposes.

SOURCE OF INFORMATION FOR CONTROL ACCOUNTS

The source of information for preparing control accounts is from the journals and
the cash book is shown by the list below:

(a) Sales ledger control account

Item Source of the total

1. Opening balances List of the last period’s balances

2. Credit sales Total of Sales Journal/day book
3. sales Returns Total of sales returns Journal
4. Cash from customers Cash book: ,cash column on the debit side
5. Cheques from customers Cash book: Bank column on the debit side
6. Discount allowed Total of dis. allowed column in cash Book
7. Cash refunds to customers Cash book: cash column on the payment
side.
8. Dishonoured cheque Cash book: bank column
9. Bad debts Journal proper
10. Other transfers Journal proper
11. Closing balances Lists of debtors drawn at the end of the
period.

(b) Purchases ledger control account

Item Source of total

1. Opening balances List of last period’s balances

2. Credit purchases Total of purchases journal/Day book
3. Purchases Returns Total of purchases returns Journal
4. Cash paid to supplies Cash book: cash column of the credit side
5. Cheques paid to supplies Cash book: bank column of the credit side
6. Discount received Total of disc. received column in the cash book
7. Cash refund from suppliers Cash book: Cash the receipt side
8. Closing balances List of creditors at the end of the period.
PREPARING CONTROL ACCOUNTS
Control accounts are prepared based on the principle that if the opening balance
is known together with additions and deduction then the closing balance can be
computed.

The sales ledger control account is prepared using the same principles as that of
preparing a debtors account, whereas the purchases ledger control account was
the principle of preparing the creditors account.
Examples:

1. You are required to prepare the sales ledger control from the following
for the month of March 2005:

2005 K’000
March 1 Sales ledger balances 4 936
Totals for the month:
Sales journal 49 916
Returns inwards journal 1 139
Cheques and cash received from customers 46 490
Discount allowed 1 455
March 31 Sales ledger balances 5 768
Solution:

Sales ledger control account

___________________________________________________________
_____________
Date Details F Dr Cr
2005 K’000 K’000
March 1 Balance b/d 4 936
31 Credit Sales 49 916
31 Sales returns 1 139
31 Cheques and cash from customers 46 490
31 Discounts allowed 1 455
31 Balance c/d 5 768
54 852 54 852
April 1 Balance b/d 5 768

2. You are required to prepare a purchases ledger control account from the
following for the month of January 2005. The balance of the account is
to be taken as the amount of the creditors as on 31st January 2005.

2005 K’000
January 1 Purchases ledger balances 3 676
Totals for the month:
Purchases journal 42 257
Returns outwards journal 1 098
Cheques paid suppliers 38 765
Discount received from suppliers 887
January 31 Purchases ledger balances
?

Solution:
Purchases ledger control account
 ___________________________________________________________
_____________
Date Details F Dr Cr
2005 K’000 K’000
Jan. 1 Balance b/d 3 676
31 Credit Purchases 42 257
31 Purchases returns 1 139
31 Cheques paid to suppliers 38 765
31 Discounts received 887
31 Balance c/d 5 183 _____
45 933 45 933
Feb 1 Balance b/d 5 183

CONTRA SETTLEMENTS
A contra is a transfer between the ledger accounts for the same person. It may
happen that a customer in the sales ledger is also a supplier in the purchases
ledger. Normally the parties involved settle their accounts in full, but it is also
possible to set off the balances, and for the party with a greater balance to pay the
difference.

Example:
The account of Zulu appeared both in the purchases ledger and sales ledger with
balances of K2 000 000 and K1 400 000 respectively. Show the accounts of
Zulu as they would appear in the ledgers if the two balances are set off.

Solution:
Sales Ledger
Zulu account
___________________________________________________________
_____________
Date Details F Dr Cr
2005 K’000 K’000
Balance b/d 1 400
Purchases ledger contra 1 400
1 400 1 400

Purchases ledger
Zulu account
___________________________________________________________
_____________
Date Details F Dr Cr
2005 K’000 K’000
Balance b/d 2 000
Sales ledger contra 1 400
Balance c/d 600 ____
2 000 1 400
Balance b/d 600

Note: Contra settlements appear in both the sales ledger control account and the
purchases ledger control account. They are debited in the purchases
ledger control account and credited in the sales ledger control A/c.

Credit balances in the sales ledger

Credit balances in the sales ledger can arise where a customer has over paid us or
made a payment in advance for goods for which an invoice has not yet been
issued.

Debit balances in the purchases ledger

Debit balances in the purchases ledger can arise where we have over paid a
supplier or made an advance payment for goods for which our supplier has not
yet invoiced us.

Example:
From the following details prepare the sales ledger and purchases ledger control
account as they would appear in the general ledger of Minor Ltd for the month of
April 2005.

Sales Ledger: K’000

Debit balances on 1st April 2005 50 432
Credit balances on 1st April 2005 260
Credit balances on 30th April 2005 425

Purchases ledger:
Credit balances on 1st April 2005 48 652
Debit balances on 1st April 2005 185
Debit balances on 30th April 2005 225

Transactions for the month:

Credit sales 88 360
Credit purchases 40 030
Discounts allowed 4 855
Purchases returns 1 645
Allowances to customers 464
Discounts received 2 809
Sales returns 1 817
Bad debts written off 109
Contra settlements 7 891
Payments to suppliers 38 123
Customers’ cheques dishonored 607
Receipts from customers 76 945
Allowances from suppliers 464

Solution:
 Sales ledger control account
___________________________________________________________
_____________
Date Details F Dr Cr
2005 K’000 K’000
April 1 Balances b/d 50 432 260
30 Sales 88 360
30 Sales returns 1 817
30 Bad debts 109
30 Receipts from customers 76 945
30 Discounts allowed 4 855
30 Allowances to customers 464
30 Contra settlements 7 891
30 Dishonored cheques 607
30 Balances c/d 425 47 483
139 824 139 824
May 1 Balances b/d 47 483 425

Purchases ledger control account

___________________________________________________________
_____________
Date Details F Dr Cr
2005 K’000 K’000
April 1 Balances b/d 185 48 652
30 Purchases 40 030
30 Purchases returns 1 645
30 Payments to suppliers 38 123
30 Discounts received 2 809
30 Contra settlements 7 891
30 Allowances from suppliers 464
30 Balances c/d 37 790 __225
88 907 88 907
May 1 Balances b/d 225 37 790
Exercise

The financial year of the Better Now Trading Company ended on 30 November 2019. You
have been asked to prepare a Total Accounts Receivables account and a Total Accounts
Payable Account in order to produce end-of year figures for Accounts Receivables and
Accounts payable for the draft final account.

You have obtained the following information for the financial year from the books of original
entry:

Sales – cash 689,780

– credit 536,374
Purchases – cash 28,880
– credit 993,200
Total receipts 1,201,140
Total Payments 1,007,940
Discount allowed 11,040
Discount received 7,020
Refunds to cash customers 10,140
Balance in the sale ledger set off against the
140
balance in the purchases ledger
Irrecoverable debts written off 1,560
Increase in the allowance for doubtful debts 180
Credit notes issued to credit customers 8,280
Credit notes issued to credit supplier 2,960

According to the audited financial statement for the previous year accounts receivable and
payables as at 1 December 2018 were K53, 110 and K86, 900 respectively.

Required:

(a) Prepare the Trade receivables control account for the year ended 30 November 2019. (9
marks)
(b) Prepare the Trade payables Control Account for the year ended 30 November 2019.
(8 marks)
(c) Explain three (3) reasons why Accounting Systems are designed with a payable ledger
control account and payables ledger account