Control accounts

For a small firm, the trial balance alone may prove sufficient in providing a check on the numerical accuracy of
the ledger accounts. Whilst still useful, the trial balance will not necessarily speed up the location of errors.

If a firm operates ledgers for sales, purchases and general accounts then control accounts can be used as a
further check on the accuracy of the ledgers. In effect, a control account is like a trial balance for each of the
sales and the purchases ledger. If the control account does not tally with the accounts in each ledger, then an
error will exist in that ledger.

Two control accounts

 Sales ledger control account (also known as the total accounts receivables account)
 Purchases ledger control account (also known as the total accounts payables account)

Each control is a summary total of the respective ledger. It has the totals for all balances and all entries as found
in the sales or the purchases ledger. It is easier to imagine them as an overall accounts receivable account (for
the sales ledger account) or an overall accounts payable account (for the purchases ledger account).

Construction of control accounts

The information for constructing each control accounts are taken from the books of prime entry, both the personal
accounts of accounts receivables and accounts payables, as well as information from the main daybooks (e.g.
sales daybook/sales journal for total of credit sales).

N.B. Do not include information for cash sales and purchases. The control accounts generally have information
on credit sales and purchases.

The main sources of information are found in the following locations:

Information for sales ledger control account

Information needed: Information located:

Opening balance of accounts receivables Accounts receivable accounts in sales ledger

Credit sales Sales journal /daybook

Returns inwards Returns inwards journal/ daybook

Money received from customers Cashbook

Discounts allowed General ledger or cashbook (3rd column)

Closing balance of accounts receivables Accounts receivable accounts in sales ledger

Information for purchases ledger control account

Information needed: Information located:

Opening balance of accounts payables Accounts payable accounts in purchases ledger

Credit purchases Sales daybook

Returns outwards Returns outwards daybook

Money received from customers Cashbook

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Discounts received General ledger or cashbook (3rd column)

Closing balance of accounts payables Accounts payable accounts in purchases ledger

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A control account will appear as if it is a personal account - with amounts relating to purchases and sales,
returns, discounts as well as payments made and received.

Sales Ledger Control Account

Balance owing to us at start (Balance

Cash/cheques received
b/d)

Credit sales made during period Returns inwards

Interest received Discounts allowed

Set off /credit balance c/d Debit balance owing to us at end (Balance c/d)*

Debit Balance b/d at end Credit Balance b/d at end

(* this is a debit balance but it is initially carried down from the credit side when the account is balanced off)

Purchases Ledger Control Account

Cash/Cheques paid Balance owing by us at start (Balance b/d)

Returns outwards Credit purchases made during period

Discounts received Interest paid

Set off

Balance owing to by at end (Balance c/d)** Refunds

(** this is a credit balance but it is initially carried down from the debit side when the account is balanced off)

Set-offs/inter ledger transfers/contra entries

Some firms may find that they have customers who are also suppliers. In this case, there will be an account for
this firm or person both in the sales ledger (as a customer) and in the purchases ledger (as a supplier). It could
appear to be common sense that rather than both parties send a cheque to each other, the amounts owing (both
to and by the firm) should be partly offset against each other. If you owe someone $5 who also owes you $10,
then it would be sensible for you to offset the debt and accept $5 in full settlement of both debts. This can also be
achieved with firms and are known as set-offs.

As a general rule, set-offs will appear in both control accounts and on the following sides:
 In the sales ledger control account - on the credit side
 In the purchases ledger control account - on the debit side

Balances on both sides of the control account

Sometimes the Sales Control Account will contain a balance on both sides. A credit balance in the Sales
Control Account represents an amount owing to a debtor. This may be because of:
 An overpayment by a debtor
 The debtor returning goods after paying the account
 The debtor paying in advance for the goods
 Cash discount not having been deducted before the payment was made.
It is normal to keep these credit balances distinct from the debit balances.
The reverse is true for the Purchases Control Account.

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Benefits of maintaining control accounts
If the control accounts are kept purely as memorandum records then they are not necessary for the double entry
system to function fully. However the control accounts will still have some uses for the firm and these are as
follows:
 Check on arithmetic accuracy and location of errors - If the control accounts do not balance then it
is obvious that a mistake has taken place in the respective ledger. This will save time in the locating of
the error. If we relied on the trial balance alone then we would have to check all the three main ledgers
as well as the cashbook.
 Division of duties and prevention of fraud - Control accounts can be kept by a person who is not the
same person who maintains the personal accounts of accounts receivables and accounts payables. In
this case, fraud is less likely to occur (unless both the ledger clerks and the person maintaining the
control accounts are in collaboration together!).
 Speedy preparation of draft final accounts - The accounts receivables and accounts payable figures
can be ascertained more speedily for construction of the trial balance, than having to balance off each
individual personal account in the sales and purchases ledgers.
 Summary of transactions – The transactions affecting accounts receivables and accounts payables
are summarised for each financial period.

Examples:

Sales Ledger Control account

2010 2010
1-Jan Balance b/d 1825 31 Dec Sales returns 210
31-Dec Credit sales 4910 Bank 4788
Interest receivable 10 Discount allowed 12
Balance c/d 115 Balance c/d 1850
6860 6860
2011 2011
1-Jan Balance b/d 1850 1-Jan Balance b/d 115

Purchases Ledger Control account

2010 2010
31-Dec Bank 3900 1-Jan Balance b/d 1880
Purchases returns 180 31 Dec Purchases 4230
Discount received 104 Bank (refunds) 100
Interest payable 12
Balance c/d 2153 Balance c/d (set off) 115
6337 6337
2011 2011
1-Jan Balance b/d 115 1-Jan Balance b/d 2038