CONTROL ACCOUNTS/ TOTAL ACCOUNTS/SUMMARY ACCOUNTS.

Chapter objectives.
1. Define a control account.
2. Discuss the benefits and limitations of control accounts.
3. Articulate the form of control accounts
4. Draw up the Sales Ledger Control account.
5. Draw up the Purchases ledger control account.
6. Discuss contra entries in control accounts.
7. Reconcile control account balances with ledger balances
8. Effects on financial statements of the correction of errors.
1. Introduction.
-control accounts are memorandum records which summarise transactions which have
been recorded in the Sales ledger and Purchases ledger books. The sales ledger book
contains accounts of credit customers (trade receivables) and the purchases ledger book
contains accounts of credit suppliers (trade payables).
-control accounts are primarily used to check the accuracy of the entries in the sales ledger
and purchases ledger books. They are prepared at the end of the month or financial year
using totals from the books of prime entry.
-the balance in the control account should be equal to the total of the balances of the ledger
it controls.

DIVISION OF THE LEDGER

THE LEDGER BOOK

PURCHASES CASH BOOK PETTY CASH GENERAL

SALES LEDGER
LEDGER BOOK LEDGER
L

SALES LEDGER PURCHASES

CONTROL LEDGER CONTROL

NB: Control accounts are normally drawn up for sales and purchases ledger books but they
can also be used in other parts of the accounting system.
2. Benefits/uses of control accounts.
(a) They provide the total of trade receivables and trade payables quickly and easily when
a trial balance and financial statements are prepared. It is possible to get the total of
trade receivables or trade payables by balancing the control accounts. This is quicker
and easier than balancing all the individual accounts.
(b) They act as an independent check on the arithmetical accuracy of the balances in the
personal ledgers that is the trade receivables and trade payables ledger books.
(c) They help to indicate the ledgers in which errors have been made. If a trial balance is
taken out and fails to agree the amount of checking is reduced if control accounts are
maintained. This is because the personal ledgers, which are many in numbers will have
their accuracy confirmed by control accounts. Thus, checking will be restricted to the
other books.
(d) They act as internal independent check, to discover errors and to deter fraud. Control
accounts are maintained by senior accountants and the personal ledgers are
maintained by junior clerks. This segregation of duties helps to deter and detect fraud
and embezzlement of cash in the business. In addition, control accounts are kept in the
general ledger and not in the ledgers they are controlling.
(e) They foster responsibility accounting in a large business. If the balances in the personal
ledgers do not agree with the control account balances, then the clerk in charge of that
personal ledger book is answerable for the discrepancy.

Limitations of using control accounts.

(a) Control accounts may themselves contain errors.
(b) They only verify the arithmetical accuracy of the ledgers which they control.
(c) They do not guarantee the accuracy of the personal customers and suppliers ledger
accounts.
(d) They may increase the costs of operating the business as they require a specialist
accountant to verify them.
(e) They do not identify errors of commission / omission / principle / original entry etc.

3. Form of control accounts.

-they contain in total form all the transactions which have recorded in the sales and
purchases ledger books. The periodic totals of each type of transaction are obtained from
the books of prime entry.
-control accounts are regarded as memorandum accounts because they are not part of the
main double entry system although they are drawn up using double entry principles.

4. SALES LEDGER CONTROL ACCOUNTS/ TOTAL TRADE RECEIVABLES ACCOUNT.

- A sales ledger control account is a summary of all transactions relating to credit sales. It
controls accounts in the sales ledger book.
- Transactions which increase trade receivables of the business are debited in the Sales
ledger control account.
- Transactions which reduce trade receivables of the business are credited in the sales
ledger control account.
- The balance brought down in the sales ledger control account is on the debit side
because it is an asset account.
- The debit balance in the sales ledger control account should be equal to the total of
individual credit customers balances in the sales ledger book.

Credit balance in the Sales ledger control account.

-Credit balances in the sales ledger control account are unusual and may occur due to the
following reasons:
(a) Overpayment in error of the amount due by a customer.
(b) A deposit made by a customer for goods not yet supplied/ payment of goods in
advance by a customer.
(c) The customer returned goods to the business after paying the full invoice amount.
(d) Cash discount was not deducted by the business when payment was made by the
customer.
-the credit balance should be entered as a balance carried down on the debit side above the
totals before the sales ledger control account is balanced. Double entry is completed with a
balance brought down on the credit side below the totals.

SALES LEDGER CONTROL ACCOUNTS/ TOTAL TRADE RECEIVABLES ACCOUNT- FORMAT

DEBIT SIDE CREDIT SIDE
Total debit balances brought down xx Total credit balances brought down xx
Credit sales for the period – (Sales J) xx Sales returns for the period- (sales returns J) xx
Refunds to customers – (cash book) xx Cash and cheques received from customers
- (Cash book) xx
Dishonoured cheques- (Cash book) xx Discount allowed- (Cash book) xx
Interest charged on overdue customer’s Irrecoverable debts – (General Journal) xx
Accounts- (General journal) xx Cash received in respect of irrecoverable debts
Irrecoverable debts recovered recovered (Cash book) xx
(General J) xx Sales ledger balances offset against balances
in the purchases ledger- (General journal) xx
Total credit balances carried down xx Total debit balances carried down xx
XX XX
Total debit balances brought down xx Total credit balances brought down xx

Notes
• Trade discount is not recorded in the Sales ledger control account.
• Cash sales are not recorded in the Sales ledger control account because this account
relates to credit sales transactions only.
• Provision for irrecoverable debts do not feature in the Sales ledger control account. A
separate provision for irrecoverable debts account is kept in the General ledger.
PURCHASES LEDGER CONTROL/TOTAL TRADE PAYABLES ACCOUNT
-The purchases ledger control account summarises transactions relating to all credit
purchases. It controls the individual suppliers accounts in the purchases ledger book.
-transactions which increase trade payables of the business are credited in the purchases
ledger control account. Transactions which reduce trade payables of the business are
debited in the purchases ledger control account.
-the normal balance in the purchases ledger control account is on the credit side because it
is a liability account.
-the balance in the purchases ledger control account should be equal to the total individual
credit suppliers account balances in the purchases ledger book.

Debit balance in the Purchases ledger control account.

In some cases, debit balances may occur in the purchases ledger control account due to the
following reasons:
(a) Overpayment in error of the amount due by the business to the supplier.
(b) A deposit made by the business to the supplier for goods not yet received.
(c) The business returned goods to the supplier after paying the full invoice amount.
(d) Cash discount was not deducted by the supplier when payment was made by the
business.
-the debit balance is entered as a balance carried down on the credit side above the totals
before the balancing the purchases ledger control account. Double entry is completed with
a balance brought down on the debit side below the totals.

5. PURCHASES LEDGER CONTROL/TOTAL TRADE PAYABLES ACCOUNT –FORMAT

DEBIT SIDE CREDIT SIDE
Total debit balance brought down xx Total credit balance brought down xx
Purchases returns – Credit purchases- (Purchases Journal xx
(Purchases returns journal) xx Cash refunds from Suppliers (cash book) xx
Payments to suppliers (cash book) xx Interest Charged by suppliers on
Discount received – (Cash book) xx overdue invoices (General Journal) xx
Purchases ledger balances offset xx
Balances in the sales ledger
- (General journal) xx
Total credit balances carried forward xx Total debit balances carried forward xx
XX XX
Total debit balance brought forward xx Total credit balances brought forward xx
Notes:
• Cash purchases are not recorded in the Purchases ledger control account.
• Trade discount is not recorded in the Purchases ledger control account. Only the net
purchases or purchases returns figures are recorded. Watch out for trade discount when
you see the phrase “list price/ marked price.

6. Contra entries in control accounts/ Set offs/ Inter-ledger transfers.

-Contra entries in control accounts happen when another firm is both a customer and a
supplier to the same business. In this case, two ledger accounts should be drawn up for that
firm, one as a customer in the Sales ledger book and the other one as a supplier in the
Purchases ledger book. The business would agree with the other firm to set one account off
against another and any remaining balance would be settled by one business by cheque,
bank transfer or cash. The contra amount is debited in the purchases ledger and credited in
the sales ledger.
-the contra is always the smaller account balance which should be transferred to the other
account with a larger account balance.

7. Reconciling control account balances with Sales and Purchases ledger

totals.
-control accounts help to locate the ledger books in which errors have been made if trial
balance totals fail to agree.
-when the balances in the control accounts disagrees with the total of individual credit
customers’ account balances or individual credit suppliers’ account balances in the ledger
books, the causes must be investigated. The necessary corrections should be made in the
control accounts and also in the personal ledger accounts.

The best approach when carrying out the reconciliation is to ask yourself the following
questions:
1. What entries, if any, were made in the books of accounts?
2. What are the correct entries for that transaction?
3. What entries are required to correct the error?
4. Does the error affect control accounts?
5. Does the error affect personal accounts in the Sales or Purchases ledger books?

Errors which affect control accounts.

The following errors affect control accounts:
1. Error of omission- a transaction has been completely omitted from the books of accounts.
2. Error of original entry- occurs if a wrong amount is recorded in the book of prime entry
and double entry is completed using a wrong amount in the ledger accounts.
3. Addition errors in the books of prime entry. E.g., the total of the purchases journal was
incorrectly added as $2 200 instead of $2 500.
Errors which affect personal accounts in the Sales and Purchases ledger books.
1. Error of omission- a transaction has been completely omitted from the books of accounts.
2. Error of original entry- occurs if a wrong amount is recorded in the book of prime entry
and double entry is completed using a wrong amount in the ledger accounts.
3. Posting a wrong figure from the book of original entry to the personal account in the sales
or purchases ledger books.
4. Incorrect balancing of a personal account in the sales ledger or purchases ledger books.

NB: The correction of errors which affect trade receivables and trade payables requires that:

• the correct total balances in the personal accounts are calculated,

• the balances in the control accounts matches with the total balances in the sales and
purchases ledger books,
• the correct profit for the year is calculated,
• An accurate figure for trade receivables and trade payables is recorded in the
statement of financial position.