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

Q1. Let's suppose a firm has 100 debtors, and each of them owes exactly £50 at the start of June. What is the total amount owed by all debtors? (Type your answer without a £ sign or a comma)

Q2. Next we take a look in the SALES DAY BOOK (sales journal) and find that, during June, each debtor has bought a further £200 worth of goods on credit. What's the total debtors figure now (i.e. at the end of June, assuming no other transactions have taken place)? (Type your answer without a £ sign or a comma)

Q3. We then look in the CASH BOOK and discover that during June each debtor has paid-off exactly £100 on their account, either by cash or by cheque. What should the new (i.e. revised) total debtors figure be? Enter your answer without a £ sign or a comma. (Type your answer without a £ sign or a comma)

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

Date	Debits	£		Date	Credits	£
1 6	Balance b/d	5,000		30 6	Bank / Cash	10,000
30 6	Sales	20,000		30 6	Balance c/d	15,000
		25,000				25,000
1 7	Balance b/d	15,000

Q4. Compare the above with a typical debtors account by filling-in the gaps in the following. Your answer should be either credit or debit in each case (use lower case letters). (Type your answer)

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.

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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:

Q5. When customers send goods back to us we need to give them a credit note. This transaction is known as a: (Type your answer)

Q6. We sometimes allow the customer to deduct a certain amount (from the invoice value) for prompt payment. In doing so we are granting a: (Type your answer)

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):

Q7. Should 'Sales returns' appear on the debit side or the credit side? (Select one answer) (a) Debit (b) Credit

Q8. Should 'discounts allowed' appear on the debit side or the credit side? (Select one answer) (a) Debit (b) Credit

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

Q9. Should 'dishonoured cheques' appear on the debit side or the credit side? (Select one answer) (a) Debit (b) Credit

Q10. Should 'bad debts written-off' appear on the debit side or the credit side? (Select one answer) (a) Debit (b) Credit

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:

Q11. Should 'interest charged on overdue accounts' appear on the debit side or the credit side? (Select one answer) (a) Debit (b) Credit

Q12. Should 'contra-entries' appear on the debit side or the credit side? (if you don't know what a contra-entry is, click on the 'hint' button) (Select one answer) (a) Debit (b) Credit

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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:

Q13. When constructing creditors ledger control accounts, there are a couple of changes in terminology: Fill - in the gaps: (Type your answer)

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

Figure 2: Creditors ledger control account

Date	Debits	£		Date	Credits	£
	Cash / cheques paid	14,300			Balance b/d	9,600
	Discounts received	600			Purchases	16,700
	Contra to debtors ledger	400			Interest charged	100
	Returns out	1,400
	Balance c/d	9,700				______
		26,400				26,400
					Balance b/d	9,700

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!!

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Sources of information for compiling control accounts

Q14. For an example of the above point, let's return the debtors ledger. You might be able to work-out where to get the relevant information from by filling-in the gaps (use the list of possible answers shown in the box - note that some answers are used more than once). (Type your answer)

Q15. Let's try doing the same thing with the creditors ledger control account. The question has been changed a little - you need to type in what information would be generated by the relevant books of original entry. Fill-in the gaps (use the list of possible answers shown in the box - note that some answers are used more than once). (Type your answer)

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.

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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

Date	Debits	£		Date	Credits	£
1 6	Balance b/d	5,000		30 6	Bank / Cash	10,000
30 6	Sales	20,000		30 6	Balance c/d	15,000
		25,000				25,000
1 7	Balance b/d	15,000

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.

Q16. Using the above information, have a go at the following (fill-in the gaps, don't use commas in your answers): (Type your answer)

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

Date	Debits	£		Date	Credits	£
	Cash / cheques paid	14,300			Balance b/d	9,600
	Discounts received	600			Purchases	16,700
	Contra to debtors ledger	400			Interest charged	100
	Returns out	1,400
	Balance c/d	9,700				______
		26,400				26,400
					Balance b/d	9,700

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.

Q17. Using the above information, have a go at the following (fill-in the gaps, don't use commas in your answers): (Type your answer)

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