Control Accounts

A sales ledger is used to record credit customers account (trade receivables) and a purchases ledger is used to record credit suppliers account (trade payables). Control accounts are prepared from books of prime entry to check the arithmetical accuracy of the sales ledger and purchases ledger. Control accounts may also be used to:

• Act as a deterrent against fraud.
• Locate errors made in the sales ledger and purchases ledger quickly and easily.
• Calculate total trade receivables and total trade payables quickly.
• Help in the preparation of trial balance.
• Calculate credit sales and credit purchases in case of incomplete records

There are two types of control accounts:

• Sales ledger control account (total trade receivables control account)
• Purchases ledger control account (total trade payables control account)

Contra entries:

A credit customer may also be a credit supplier in a business. Therefore we may set off the lowest amount between the customer and the supplier. The double entry to record the contra entry between the purchases ledger and the sales ledger is as follows:

Debit               Purchases ledger control account

Credit              Sales ledger control account

Credit balance in sales ledger

The main reasons for the sales ledger control account to have a credit balance are:

• Overpayment made by the customer.
• Advanced payment or deposit made by customer.
• Return inwards made by customer after effecting payments.

Debit balance in purchases ledger

The main reasons for a purchases ledger account to have a credit balance are:

• Overpayment made by the business (overpayment made to supplier).
• Advanced payment or deposit made by the business
• Return outwards made to the supplier after effecting payments.

Items not recorded in control account:

• Cash sales and cash purchases
• Provision for doubtful debts
• Return inwards made from cash sales
• Return outwards made from cash purchases

Worked Example 1

The following information was extracted from the books of William Noel for the year ended 30 April 2001.

a) Draw up the Purchase Ledger Control account for the year ended 30 April 2001

The total of the balances in William Noel’s purchase ledger amounts to $67 660, which does not agree with the closing balance in the Control account. The following errors were then discovered.

1. Discount received had been overstated by $1000.
2. A credit purchases invoice for $2040 had been completely omitted from the books.
3. A purchases ledger account had been understated by $100.
4. A credit balance of $850 in the purchases ledger had been set off against a contra entry in the sales ledger, but no entry had been made in either control account.
5. A payment of $1450 had been debited to the creditor’s account but was omitted from the bank account.
6. A credit balance of $3210 had been omitted from the list of creditors.

b) Extract the necessary information from the above list and draw up an amended Purchase Ledger Control account for the year ended 30 April 2001.

c) Beginning with the given total of $67 660, show the changes to be made in the Purchase Ledger to reconcile it with the new Control account balance.

Worked Example 2

The books of Mary Rose gave the following information for the month ended 31 May 2003. All sales and purchases were on credit.

The total of Mary Rose’s sales ledger balances is £9387, which differs from the closing balance in the sales ledger control account.

a) Extract the relevant information from above and prepare the sales ledger control account for the month ended 31 May 2003.

The following errors have been discovered since the sales ledger control account was prepared.

1. A sales invoice for $2001 had been completely omitted from the books.
2. A page of the sales day book with entries totalling $7820 had been omitted from total sales but the individual entries had been posted to the debtors’ accounts.
3. A debit balance of $4020 had been omitted from the list of debtors.
4. A sales ledger account had been understated by $220.
5. A purchases ledger account had been overstated by $350.
6. Discount allowed had been overstated by $620.
7. Discount received had been understated by $450.
8. An entry for $1620 in the sales day book had been omitted from the debtor’s account.
9. A contra entry had been made in the purchases ledger for a debit balance of $1412 in the sales ledger, but no entry had been made in the control accounts.
10. A receipt of $1210 was debited to bank but not posted to the debtor’s account.
11. A credit note for $720, sent to a debtor, had been entered in the sales day book and posted as a sale to both accounts.
12. A debtor owing $1820 was declared bankrupt during May 2003. The debt was written off in the control account but no entry had been made in the debtor’s account.

b) Prepare an amended sales ledger control account, extracting the relevant information from the list of errors given above.

c) Prepare a Statement altering the total of the sales ledger balance to agree with the new sales ledger control account balance.