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Interactive work - Sheet on Control Accounts

by Ken Delaney-Moore

Aims:

This worksheet deals with:

1. The principle of control accounts
2. The format of debtors ledger (sales ledger) control accounts
3. The format of creditors ledger (purchases ledger) control accounts
4. Sources of information for compiling control accounts
5. Reconciling control account totals

After having completed the work - sheet you should have a greater understanding of these issues.

Having finished this work - sheet you should also be prepared for the objective assessment on control accounts.

The principle of control accounts

If these were the only transactions involving our debtors then the debtors ledger control account would appear as in figure 1:

Figure 1: Debtors ledger control account

You should have noted from the above exercise that there are strong similarities in the layout of a debtors ledger control account and that of an individual debtors' account. In fact, another name for this control account is "total debtors" account. It is not difficult to see why. If we were to examine the accounts of each debtor we should find that the total of the sales (on each account) is the same as the total sales figure on the control account. In a similar way, the total receipts from each debtor should agree with the control account figure. It follows that:

The total of all the balances on the debtors' accounts should equal the balance on the debtors control account.

The format of debtors ledger (sales ledger) control accounts

Credit sales and the subsequent payments received from customers are not the only reasons for entries in individual debtors a/c's. Below you will find clues to the other types of entries; try to complete the sentences:

In each of the following questions try to decide on which side of a debtors ledger control account the transaction should appear (to help you, remember that reasons for increasing the amount owed (by customers) appear as debits, and reasons for reducing the amount owed appear as credits):

Before you go any further, here's a reminder of the rule for debtors accounts, and for debtors control accounts:

Reasons for increasing the amount owed (by customers) appear as debits and reasons for reducing the amount owed appear as credits

Before you go any further, here's another reminder of the rule for debtors accounts, and for debtors control accounts:

Reasons for increasing the amount owed appear as debits and reasons for reducing the amount owed appear as credits

Ok, let's try two more questions:

The format of creditors ledger (purchases ledger) control accounts

The creditors ledger control account appears to be the exact mirror-image of a debtors ledger control account. So we can reverse to rule we have been using so far to obtain the following:

Reasons for increasing the amount owed (to creditors) appear as credits and reasons for reducing the amount owed appear as debits. However:

The typical creditors ledger control account might appear as follows (the figures have been invented):

Figure 2: Creditors ledger control account

The closing balance (b/d) in the creditors control account (above) represents the total amount owed to all creditors as at the end of the period. This should equal the total of all the balances on individual creditors accounts.

If the total of all the balances on individual creditors accounts came to only (say) £9,200, then we know a mistake has been made somewhere within the creditors ledger (one of the advantages of using control accounts is that they can help locate errors). It is quite possible for differences to occur because:

The control accounts are compiled from the totals of the books of original entry.

This is a very important point!!

Sources of information for compiling control accounts

Now the 'important point' referred to earlier is going to be repeated, to refresh your memory:

The control accounts are compiled from the totals of the books of original entry.

It follows that:

If there are errors in the books of original entry then it is very likely that these errors will be carried forward into the control account.

Reconciling control account totals

We have seen that it is possible for there to be differences between:

The balanced-off control account; and
The total of the balances from the individual accounts.

Let's use the debtors' ledger to illustrate the point. Look at the following debtors' ledger control account (it is 'figure 1' from above):

Figure 1: Debtors ledger control account

Suppose also that we totalled the closing balance on each debtors account and arrived at a figure of £16,800. It is clear that at least one error exists somewhere.

After examining the records more carefully discover two errors:

1. One page of the sales day book had been totalled to £800 instead of £2,800.
2. Payment for (value £200) by a debtor had been correctly entered in their account, but had been omitted from the cash book.

Notice that only those errors involving the books of original entry will cause the control account to be wrong. This point can be illustrated by the following:

We will use figure 2 (from above) for further practice using a 'creditors ledger' scenario:

Figure 2: Creditors ledger control account

When we look at our records we find that the actual creditors account balances, when totalled, is not £9,700, but £9,850 instead. Further examination of the records revealed the following:

1. A return of goods to the supplier, value £100, had been entered in the purchases returns day book twice. The suppliers' account was correct in respect of this transaction.
2. One of the individual suppliers' accounts (in the creditors' ledger) showed an entry of £550 for credit purchases, instead of the correct amount, £500. The 'purchases day book' showed the correct entry for this transaction.

You should now be able to attempt the: Objective test on control accounts

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