Chapter 31 Control accounts

Learning objectives After you have studied this chapter, you should be able to: Explain why control accounts can be useful Draw up sales ledger control accounts Draw up purchases ledger control accounts Reconcile the purchases ledger and the sales ledger with their respective control accounts

The benefit of accounting controls An accounting system should be set up to minimise errors and prevent fraud. Therefore controls should exist and duties should be segregated. For instance, the person who invoices a customer should not receive the payment and there should be authorisation of reimbursement of expenses. Control accounts are a type of control measure.

Control accounts The sales ledger control account can also be known as the debtors’ control account or the total accounts receivable account. The purchase ledger control account can also be known as the creditors’ control account or the total accounts payable account.

The principle of control accounts The principle of any control account is:

The sales ledger control account

Information for the sales ledger control account

Information for the purchase ledger control account

Sales ledger control account

Sales ledger control account (Continued)

Purchase ledger control account

Purchase ledger control account (Continued)

Other control account transactions Other transactions that will have to be recorded in the control accounts include: Bad debts that we have written-off. Contra entries, where we owe and are owed money to one business, and the net amount is paid over to or from that business.

Activity How should the following be recorded? The business has sold A Hughes £600 goods. Hughes has supplied the business with £880 goods. The £600 owing by Hughes is set off against £880 owing to him. This leaves £280 owing to Hughes.

Activity (Continued)

Reconciliation of control accounts Each control account must reconcile to its ledger, so the balance of the sales ledger control account must equal the total of the balances on the sales ledger and so on. Where a control account cannot be reconciled, the discrepancy must be investigated, identified and amended.

Learning outcomes You should have now learnt: How to prepare control accounts How to prepare a control account reconciliation That control accounts enable errors to be traced down to the ledger that does not balance. Thus, there will be no need to check all the books in full to find an error

Learning outcomes (Continued) That transfers between sales and purchases ledgers should be prepared in the journal and shown in the control accounts That control accounts for most businesses are outside the double entry system and are kept as memorandum accounts in the general ledger or in the individual ledgers

Learning outcomes (Continued) That control accounts of large organisations may be part of the double entry system, which means that the sales ledger and purchases ledger are treated as memorandum books outside the double entry system. The entries to such control accounts are the same as for control accounts that lie outside the double entry system That control accounts are normally only used in manual accounting systems