Control Accounts

Functions of control accounts The control accounts help us to locate errors. The control accounts provide a summary. The total balances of the debtors and creditors can be derived quickly and easily. The control accounts are prepared by a different person than the one who prepares the sales and purchases ledgers, which also make fraud more difficult.

Form of control accounts It is usual to final 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.

Sales ledger control account Sales ledger control account = Total debtors account

Sales Ledger Control Account 1996 $ Dec 1 Balance b/f a 31 Sales b 31 Cash / Bank c 31 Bank d 31 Bills receivable e 31 Interest received f 31 Bad debts recovered g 31 Balance c/f h x 1996 $ Dec 1 Balance b/f i 31 Returns Inwards j 31 Cash / Bank k 31 Bills receivable l 31 Set-off m 31 Discount allowed n 31 Bad debts o 31 Balance c/f p

Items Sources a. Total of opening debit balance of debtors Sales ledger b. Total credit sales Sales journal c.Cash refund to a customer who has overpaid his account Cash book d. Dishonoured cheques e. Dishonoured bills Journal f. Interest charged by us on overdue debts g. Bad debts recovered h. Total of closing credit balances of debtors

i. Total of opening credit balances of debtors Sales ledger j. Returns inwards Returns inwards journal k. Cash or cheques received from debtors Cash book l. Bills receivable from debtors Journal m. Balances in sales ledger set off against credit balances in purchases ledger n. Discounts allowed o. Bad debts written off (not provision for bad debts) p. Total of closing debit balances of debtors

Purchases ledger control account Purchases ledger control account = Total creditors account

Purchases Ledger Control Account $ Dec 1 Balance b/f a 31 Returns Outward b 31 Cash / Bank c 31 Bills Payable d 31 Set-off e 31 Discounts Received f 31 Balance c/f h x Dec 1 Balance b/f h 31 Purchases i 31 Cash / Bank j 31 Bank k 31 Bills Payable l 31 Interest Expenses m 31 Balance c/f n

Items Sources a. Total of opening debit balances of creditors Purchases ledger b. Returns outwards Returns outwards journal c. Cash or cheques paid to creditors Cash book d. Bills payable to creditors Journal e. Balances in purchases ledger set off against debit balances in sales ledger f. Discounts received g. Total of closing credit balances of creditors

h. Total of opening credit balances of creditors Purchases ledger i. Total credit purchase Purchases journal j. Cash refund from suppliers who have overcharged us Cash book k. Dishonoured cheques returned from creditors l. Dishonoured bills returned from creditors Journal m. Interest payable on overdue debts n. Total of closing debit balances of creditors

Types of Minority balances Temporary debit balances in total creditors account Temporary credit balances in total debtors account

Reasons for the occurrence of minority balances Returns after settlement of the accounts Claims for shortages of goods or for invoices overcharged after settlement the accounts

Minority balances on the balance sheet Debtors (debit balance of sales ledger + debit balance of purchases ledger) X 八 Less: provision for bad debt (debit balance of sales ledger x percentage) X X Creditors (credit balances of purchases ledger + credit balances of sales ledger) X

Contra item If the same firm is both a supplier (creditor) and a customer (debtor), inter-indebtedness is set-off Contra items(set-off) are shown on the credit side of the sales ledger control account and will appear on the debit side of the purchases ledger control account

The following information was extracted from the books of Lewell Ltd The following information was extracted from the books of Lewell Ltd. On 1 March 1996: Purchases ledger control account 28,500 Sales ledger control account 67,300 During the month: Cash sales 12,000 Credit sales 20,000 Cash purchases 8,800 Credit purchases 14,000

Discounts received from suppliers 5,400 Discounts allowed to customers 4,200 Returns Inwards 900 Cash received from customers 25,000 Cash payment to suppliers 30,000 Returns Outwards 700 Bad debts written off 100 Bills receivable from customers 11,000 Dishonoured cheques returned to customers 500 Balances in sales ledger set off against credit Balances in purchases ledger 2,600

Example 1

Total creditors account 31/3 discount received 5400 31/3 bal b/f 28500 Returns outwards 700 31/3 purchases 14000 Set-off 2600 Cash 30000 Bal c/f 3800 42500 42500 Total debtor accounts 31/3 discount allowed 4200 31/3 Bal b/f 67300 Returns inwards 900 Sales 20000 Bad debts 100 Bank 500 Cash 25000 Bill receivable 11000 Set-off 2600 Bal c/f 44000 87800 87800

Comparing Sectional Balancing and Self-balancing system

Self-Balancing system In larger organizations, control accounts are part of the double entry system, The sales ledger and purchases ledger (debtors and creditor accounts) are kept only on a memorandum purposes .

Sectional Balancing System In small firms, debtors and creditors accounts are regarded part of the double-entry system The control accounts should be kept only for memorandum purposes

Sectional Balancing System Original documents Sales/Purchases Journals Sales Ledger control a/c Purchases ledger control a/c General ledger Sales and purchases a/c Sales/purchases ledgers Debtors/Creditors Trial Balance For memorandum purpose Double-entry system Note: posting extracting

Self-Balancing System Original documents Sales/Purchases Journals Sales/purchases ledgers Debtors/Creditors General ledger Sales and purchases a/c Sales Ledger control a/c Purchases ledger control a/c Trial Balance For memorandum purpose Double-entry system Note: posting extracting

Transaction recording

Seller’s book

Self-balancing System Sectional Balancing System Transactions Self-balancing System Sectional Balancing System A Credit sales Dr Sales Ledger Control Cr Sales Dr Debtors B Receipts from debtors Dr Cash / Bank Cr Sales Ledger Control Dr Cash/Bank Cr Debtors C Return inwards Dr Return Inwards Dr Return inwards D Discount allowed Dr Discount Allowed

Self-balancing System Sectional Balancing System Transactions Self-balancing System Sectional Balancing System E Bad debts written off Dr Bad debts Cr Sales Ledger Control Cr Debtors F Bad debt recovered Dr Sales Ledger Control Cr Bad debts recovered Dr Cash / Bank Dr Cash/Bank

Buyer’s book

Self-balancing System Sectional Balancing System Transactions Self-balancing System Sectional Balancing System A Credit purchases Dr Purchases Cr Purchases Ledger Control Cr Creditor B Payment to creditors Dr Purchases Ledger Control Cr Cash/ Bank Dr Creditors Cr Cash/Bank C Return outwards Cr Return Outwards D Discount received Cr Discount Received Dr Discount Allowed Cr Debtors

Correction of Errors

Self-balancing System Sectional Balancing System Errors Self-balancing System Sectional Balancing System a. Credit sales invoice omitted Dr Sales ledger Control Cr Sales (Increase the debtors ledger listing.) Dr Debtors (Debit the sales ledger control account.) b. Sales omitted in journal Dr Sales Ledger Control

c. Sales of $120 incorrectly entered in sales journal as $100 Dr sales Ledger Control Cr Sales (increase the debtors ledger listing.) Dr Debtors (Debit the sales ledger control account.) d. Sales journal undercast. Dr Sales ledger Control (The debtors ledger listing remains constant, because only the total figure is wrong. This does not affect the debtors accounts, the figures for which are entered individually.) Dr Suspense e. Sales of $120 incorrectly entered as $100 in sales account

f. Sales understated in sales ledger control account Dr Sales Ledger Control Cr Suspense No entry (Debit the sales ledger control account.) g. Sales of $120 incorrectly debited to debtor account as $100. (Increase the debtors ledger listing.) Dr Debtors h. Balance of sales has been incorrectly put to the wrong side of the trial balance. Dr Suspense i. Balance of debtors has been incorrectly put to the wrong side of the trial balance.

j. Balance of sales ledger control account has been incorrectly put to the wrong side of the trial balance. Cr. Suspense No entry

Example 2

John Chan The Journal Dr Cr Dec 31 Sales Ledger Control 530 Sales 530 1996 $ $ Dec 31 Sales Ledger Control 530 Sales 530 31 Suspense 1,050 Discount received 1,050 31 Returns Outwards 3,200 Purchase Ledger Control 3,200 31 Purchases Ledger Control 120 Sales Ledger Control 120 31 Bank 1,000 Sales Ledger Control 1,000 31 Bank 2,250 Suspense 2,250

Sales Ledger Control Account Suspense Account $ Balance b/f 1,200 Discounts received 1,050 2,250 Bank 2,250 _____ Sales Ledger Control Account $ Balance b/f 30,000 Sales 530 Balance c/d 2,950 33,480 Balance b/d 32,360 Bank 1,000 Purchase Ledger Control-set off 120 Balance c/d 32,360 Balance b/d 2,950

Statement showing the Revised Balance of Sales Ledger Listing $ Original Balance 32,000 Add Invoice understated 360 Revised Balance 32,360 Purchases Ledger Control Account $ Sales Ledger Control-set-off 120 Balance c/d 16,500 ______ 16,620 Balance c/d Balance b/d 12,000 Returns Outwards 3,200 Balance c/d 1,420 Balance b/d 16,500

Statement showing the Revised Balance of Purchases Ledger Listing $ Original Balance 17,135 Less Balance overstated 635 Revised Balance 16,500 Statement showing the Revised Net Profit for the year ended 31 Dec 1996 $ $ Net Profit as per accounts 11,200 Add Sales undercast 530 Discounts Received undercast 1,050 1,580 12,780 Less Returns Outwards overcast 3,200 Revised Net Profit 9,580

John Chan Balance Sheet as at 31 Dec 1996 Fixed Asset 12,000 $ $ Fixed Asset 12,000 Less Prov. For Depn. 5,000 7,000 Current Assets Stock 16,000 Debtors (32360+1420) 33,780 Bank (7000+1000+2250) 10,250 60,030 67,030 $ Capital Balance as at 1 Jan 96 38,000 Add Net Profit 9,580 47,580 Current Liabilities Creditors(16500+2950) 19,450 ______