HEXCO · Polytechnic · NC Accountancy
Business Accounting 2: Control Accounts
Learning Outcome 2 of 6
Free HEXCO NC Accountancy notes on Control Accounts, learning outcome 2 of 6 in Business Accounting 2. Correction of errors, control accounts, partnerships, incomplete records, manufacturing accounts and ratio analysis. Semester 2, module 310/22/M06.
Here we learn the purposes and advantages of control accounts, the sources of entries for the debtors and creditors control accounts, how to write them up, and how to reconcile them with the sales and purchases ledgers.
A business with hundreds of customers and suppliers cannot easily check every personal account, so it keeps a control account that summarises them all in one total.
2.1 Debtors and Creditors Control Accounts
A control account is a summary account in the general ledger whose balance should equal the total of all the individual balances in a subsidiary ledger.
The debtors (receivables) control account summarises the sales ledger, and the creditors (payables) control account summarises the purchases ledger.
Purposes of Control Accounts
Control accounts check the accuracy of the sales and purchases ledgers, because the total of the individual balances should agree with the control account. They locate errors quickly, by showing which ledger contains a mistake. They provide quick totals of receivables and payables for the trial balance and financial statements, without adding every account. They also help prevent fraud, because the control account is kept by a different person from the one who keeps the personal accounts.
Advantages of Control Accounts
The main advantages are that they speed up the preparation of the trial balance and monthly accounts; narrow down the search for errors to one ledger; allow division of work, since different clerks can keep different ledgers; discourage fraud, because a clerk who alters a personal account would also need to alter the control account kept by someone else; and give management an up-to-date total of what customers owe and what the business owes suppliers.
2.2 Writing Up the Debtors Control Account
The debtors control account is written up from the totals of the books of original entry, not from individual documents.
Its entries are on the same sides as they would be in an individual customer's account.
Sources of Entries
The table shows where each entry in the debtors control account comes from.
Worked Example
For March: opening debtors $8,400; credit sales $32,000; cheques received from debtors $28,600; discounts allowed $900; sales returns $1,200; bad debts written off $700; a dishonoured cheque $500; and a contra of $400, where a customer who is also a supplier set off the amount owed to them. The debit side totals 8,400 + 32,000 + 500 = $40,900, and the credits before the balance total 28,600 + 900 + 1,200 + 700 + 400 = $31,800, so the closing balance is 40,900 - 31,800 = $9,100.
2.3 Writing Up the Creditors Control Account
The creditors control account mirrors the debtors control account, summarising all suppliers' accounts.
Its entries are on the same sides as in an individual supplier's account.
Sources of Entries
The table shows where each entry in the creditors control account comes from.
Worked Example
For March: opening creditors $5,300; credit purchases $21,000; payments to creditors $19,500; discounts received $600; purchases returns $800; and the contra of $400. The credit side totals 5,300 + 21,000 = $26,300, and the debits before the balance total 19,500 + 600 + 800 + 400 = $21,300, so the closing balance is 26,300 - 21,300 = $5,000.
Items that Never Appear in Control Accounts
Cash sales and cash purchases never appear, because no debtor or creditor is involved. Provisions for bad debts and provisions for discounts are kept in separate accounts, so they do not appear either. Only transactions that change what customers owe or what is owed to suppliers are entered.
2.4 Reconciling Control Accounts with the Ledgers
At the end of each month, the control account balance is compared with the total of the list of individual balances.
If they differ, the errors are found and both records are corrected until they agree.
Identifying the Differences and their Effect
For each error, decide which record it affects. An error in a day book total or the cash book total affects the control account (and the nominal ledger account, such as sales), but not the personal accounts, because those are posted from individual entries. An error in posting to a customer's own account, or in listing the balances, affects only the personal ledger or the list. The control account is then corrected, the nominal ledger updated, and the list of balances adjusted.
Worked Example
At 30 April, the debtors control account showed $9,100, but the list of sales ledger balances totalled $8,950. These errors were found:
The sales day book was overcast by $200
This affects the control account and the sales account, not the personal accounts. Reduce the control account by $200, and debit sales with $200 to correct the nominal ledger.
Discounts allowed of $100 were not posted to the control account
The discounts were posted to the customers' accounts correctly, so only the control account is wrong. Credit the control account with $100.
A credit note for $150 was not posted to the customer's account
The returns day book total was correct, so only the personal ledger is wrong. Reduce the list of balances by $150.
The Reconciliation Statement
The reconciliation statement shows that after correction, the list of balances and the control account both stand at $8,800, so the records agree. The corrected figure of $8,800 is used for trade receivables in the statement of financial position. The same method is used for the creditors control account and the purchases ledger.
All Business Accounting 2 learning outcomes
- Learning Outcome 1: Correction of Errors
- Learning Outcome 2: Control Accounts
- Learning Outcome 3: Partnership Financial Statements
- Learning Outcome 4: Incomplete Records
- Learning Outcome 5: Manufacturing Accounts
- Learning Outcome 6: Accounting Ratios