Control Accounts

CONTROL ACCOUNTS

The two most common examples of control accounts are the sales ledger control account and purchases ledger control account. These are sometimes known respectively as the trade receivables ledger and the trade payables ledger control accounts.

A control account (or total account) is debited and credited with the total amounts of all transactions which have been debited and credited in detail to individual ledger accounts. For example, a company has 100 credit sales transactions with its Trade Receivables in a particular period, the total of these transactions is debited to the Trade Receivables Control account and each individual transaction is debited to the individual debtor account. The Trade Receivables control in this instance acts as a control on the Sales ledger, since the balance on the Trade Receivables control account at any time should equal the sum of the balances of all individual Trade Receivables’ accounts within that ledger, and provides a check on the accuracy of such balance. The Trade Payables Control account and the Purchases Ledger operate in the same way.

The principle on which the control account is based is known, together with information of the additions and deductions entered in the account, the closing balance can be calculated.  Applying this to a complete personal ledger the total of opening balance together with the additions and deductions during the period should give the total of closing balances.

Format of Control Accounts    Sometimes considerable confusion arises over which side of the Control Accounts (i.e. Debit or Credit) should the different aspects of the transaction be included.  So it is important to emphasise at this point that control accounts are not necessarily a part of the double entry system.  They are merely arithmetical proofs performing the same function as a trial balance to a particular ledger.

 

(a)	Memorandum Accounts
	It is usual to find the control accounts in the same form as an account, with the totals of the debit entries in the ledger on the left hand side of the control account, and the totals of the various credit entries in the ledger on the right hand side of the control account.  Therefore, the control accounts are treated as an integral part of the double entry system, the balances of the control accounts being taken for the purpose of extracting a trial balance.  In this case the personal accounts are being used as memorandum records only, i.e. they do not form part of the double entry system.
(b)	Self-Balancing Ledger
	A self-balancing ledger is one whose balances, when extracted, form a complete trial balance.  It is obvious that the Trade Receivables and Trade Payables ledgers will not balance, because the balances they contain will be one sided.  Thus the creditor’s ledger will comprise all credit balances, the debtors’ ledger all debit balances.  The ledgers could be made self-balancing by means of a control or total account, which would be an extra account inserted at the back of the ledger to make it self-balancing.
	Items are posted to the individual ledger accounts in the usual way, but when the postings are complete, the total is posted to the opposite side of the control account.

Therefore, at the end of a period the balances on the control account will be equal and opposite to the sum of balances on the ledger accounts thus proving the ledger and allowing a trial balance to be extracted for each ledger.  The principle of check underlying the total account is that “the whole must be equal to the sum of all its parts”.

The remainder of this note is based on the assumption that the control accounts form an integral part of the double entry system while the individual balances on personal ledger accounts are being used for memorandum purposes only.

THE TRADE RECEIVABLES CONTROL ACCOUNT

This account is debited with the total of Trade Receivables brought forward from the previous period.  For the period in question the account is then debited with the total of all the items which have been debited in detail to individual personal accounts in the sales ledger, and credited with the total of all the items which have been credited to such accounts.  The balance of the Trade Receivables control account should therefore be equal to the total of all individual balances appearing in the sales ledgers at the end of the period.

It must be remembered that the sales ledger may contain a few accounts showing credit balances, and the balance of the Trade Receivables control account will only represent the differences between the total of the debit balances and the total of the credit balances (if any) in the sales ledger.  Therefore, an adjustment should be made to bring down balances on both sides of the Trade Receivables control account.

The following is an illustration showing some of the items which will appear in the Trade Receivables control account:

Trade Receivables Control Account

	RWF				RWF
Opening Balance	i		Opening Credit Balance		i
Sales made during the period	ii		Cash      received      from Receivables	Trade	iv
Dishonoured bills and cheques	iii		Discounted allowed		vii
Cash refunded to Trade Receivables	ix		Returns inwards		viii
Transfers and other items	RWF		Bills receivable		v
Bad Debts Recovered	x		Bad debts written off		vi
Closing Credit Balances	xi		Bad debts recovered		x
			Transfers and other items		RWF
			Closing debit balance		xii

RWF                                          RWF

 

Notes to Illustration

• The opening balances will be brought down from the previous period, and will agree with the total of the last list of individual Trade Receivables balances.
• The total amount of credit sales for the period will be obtained from the sales day book, the totals of which should be posted monthly or at other regular intervals to the Trade Receivables control account.
• Dishonoured bills and cheques will be detailed in the bills receivable book, and bank statements respectively.
• The total amount of cash received from Trade Receivables which has been posted to the sales ledgers during the period will be obtained from the sales ledger column in the cash book and posted to the control account at monthly or other regular intervals.
• Bills receivable will be total of the bills receivable book.
• Bad debts written off will be obtained from an analysis from the journal.
• Discounts are totals of the discount column of the debit side of the cash book.
• Returns inwards will be obtained from the totals of the returns inwards day book.
• Cash refunded to Trade Receivables will be obtained from the credit side of the cash book.
• When a Bad debt is written off the balance on the receivable account is cleared to zero, the accounting entry are:

Dr Bad Debts

Cr Trade Receivables

To record the write off of the Bad debt.

If a trade receivable subsequently repays the bad debt we need to re-instate the debt and then record the subsequent repayment: Dr  Trade Receivable

Cr  Bad Debts Recovered

To record amount to be received from debtor previously written of

Then

Dr  Bank  / Cash

Cr  Trade Receivable

To record the receipt of payment.

• Closing credit balance appears on left hand side of ledger account (debit side) and is brought down as an opening credit balance on the right hand side of the account.
• Closing debit balance appears on right hand side of ledger account (credit side) and is brought down as an opening debit balance on the left hand side of the account.

THE TRADE PAYABLES CONTROL ACCOUNT

 

	RWF		RWF
Opening debit balances	i	Opening Credit Balances	i
Cash paid to Trade Payables	iii	Purchases during the period	ii
Discounts received	iv	Transfers and other items	vii
Bill payable accepted	v	Closing debit balances	xii
Returns Outwards	vi
Transfers and other items	viii
Closing credit balances	xii RWF		RWF

This account operates as a control account of the purchase ledgers and should disclose a balance equal to the total of all the individual balances in the creditor’s ledgers. Trade Payables Ledger Control Account

Notes to Illustration

• The opening balances will be brought down from the previous period, and will agree with the total of the last schedule of individual Trade Payables balances.
• The total amount of goods purchased during the period will be obtained from the payables ledger column in the cash book.
• The total amount of cash paid to Trade Payables during the period will be obtained from the payables ledger column in the cash book.
• Discounts received will be obtained from the totals of the Discount column on the credit side of the cash book, and from the cash discount column (if any) in the bills payable book. If no such column is provided in the bills payable book, and the items have not been passed through the discount column in the cash book, the total will be obtained from analysis of the journal.
• Bills payable will be obtainable from the totals of the bills payable book. (vi) Returns outwards will be obtained from the totals of the purchases returns book.

Advantages of Control Accounts

The advantages of control accounts are as follows:

• For management purposes the balances on the control account can always be taken to equal Trade Receivables and Trade Payables without waiting for an extraction of individual balances. Management control is thereby aided, for the speed at which information is obtained is one of the pre-requisites of efficient control.
• If kept under the control of a responsible official, and not made accessible to the ledger clerks whose duty it is to post to the Trade Receivables and Trade Payables ledgers, the control accounts operate as a control over those ledgers, and constitute a valuable feature of the system of internal check.
• Key control accounts such as Trade Receivables, Trade Payables, bank and stock can be agreed as an intermediate step before the extraction of a trial balance. As a result of this the time spent in agreeing the trial balance itself should be considerably reduced.