Financial Accounting
ACC 101
Course Module
Topic 6
Control Accounts
WEEK 6
Learning Objectives
Students should be
able to:
Record sale and purchase transactions in ledger accounts and in
1 day books
Explain the purpose of control accounts for the accounts
2 receivable and accounts payable ledgers
3 Prepare ledger control accounts from given information
Perform control account reconciliations for accounts receivable
4 and accounts payable
1
What are control accounts?
A control account is an account in the nominal/general ledger in
which a record is kept of the total value of a number of similar but
individual items.
It is an impersonal account which is part of the double entry
system
2
Control Accounts
Control accounts are used chiefly for trade receivables and
payables.
Receivables control account - is an account in which records
are kept of transactions involving all receivables in total. Also known as
sales ledger control account.
The balance on the receivable control account at any time will be
the total amount due to the business at that time from its receivable
Payables control account - is an account in which records are kept of
transactions involving all payables in total at that time to its payables.
Also known as purchase ledger control account.
The balance on this account at any time will be the total amount owed
by the business at that time to its payables
Knowledge from Lecture 2
3
Remember!
Source Documents – Invoices, Receipts etc…
Book of prime entries – Sales day book, purchase day book,
cash book etc…
Ledgers – General Ledger, Sales Ledger, Purchase Ledger etc….
Knowledge from Lecture 2
4
Refreshing our memories
5
Overview
6
Control accounts &
Personal accounts
The personal accounts of individual customers of the business
are kept in the sales ledger, and the amount owed by each
receivable will be a balance on the receivable’s personal account.
The amount owed by all the receivables together will be a balance
on the receivables control account in the general ledger.
Control accounts should be balanced regularly and the balance
on the account agreed with the sum of individual debtors or
suppliers balances.
7
Errors in Balancing and Agreeing control
accounts with receivables and payables ledgers
The balances may not agree, for one or more of the following
errors:
An incorrect amount may be posted to the control account because of a
miscast of the total in the book of original entry
A journal entry must be made in the nominal ledger to correct control
account and the corresponding sales or expense account
A transposition error may occur in posting an individual’s balance from
the book of prime entry to the memorandum ledger.
Eg: $250 might be posted as $520.
No accounting entry is required, except to alter the figure in the
personal account
8
Errors in Balancing and Agreeing control
accounts with receivables and payables
ledgers
A transaction may be recorded in the control account and not in the
memorandum ledger or vice versa.
This requires an entry in the ledger that has been missed out.
The sum of the balances extracted from the memorandum ledger may be
incorrectly extracted or miscast
This involve simply correcting the total of the balances
9
Contra Entries
Sometimes the same business may be both a receivable and a payable
Example: C Cloning buys hardware from you and you buy stationery from
C Cloning. C Cloning owes you $130. You owe C cloning $250.
The double entry is as follows:
Debit Payables control account $130
Credit Receivables Control account $130
Appropriate entries should also be done in memorandum sales and
purchase ledger.
After the entry, C Cloning will owe you nothing and you will owe C Cloning
$120 ($250 - $130)
10
Discounts
A trade discount is a reduction in the list price of an article,
given by a wholesaler or manufacturer to a retailer.
It is often given in return for bulk purchase orders
A cash (or settlement) discount is a reduction in the amount
payable in return for payment in cash, or within an agreed
period.
11
Accounting for discounts
Discounts Received
Trade discounts received are deducted from the cost of
purchases.
Cash discounts received are included as ‘other income’ of
the period.
Discounts Allowed
Trade discounts allowed are deducted from sales.
Cash discounts allowed are shown as ‘expenses’ of the
period.
12
Example
Soft Supplies Co recently purchased from Hard Imports
Co 10 printers originally priced at $200 each. A 10%
trade discount was negotiated together with a 5% cash
discount if payment was made within 14 days.
Required:
Calculate the payable amount of the payment was made
within 14 days of the purchase?
13
Answer
The total of the trade discount is $200 ($200 x10 x10%)
Therefore amount payable would be ($2000 - $200) $1800
The total of the cash discount is $90 ($200 x10 x90% x5%)
Therefore amount payable if payment was done within 14
days would be ($1800 - $90) $1710.
14
The nature of sales tax
Sales tax is an indirect tax levied on the sales of goods
and services
It is usually administered by the local tax authorities
Output and Input sales tax
A registered business
Charge output tax on sales, and
Suffer input sales tax on purchases
If output tax
Exceeds input sales tax – business pays difference to tax
authority
Is less than input sales tax – tax authority will refund the
difference
15
How is sales tax collected?
Sales tax is a cumulative tax, collected at various stages
of a product’s life.
Example:
If a manufacturer of television buys materials and components
and then
sells the television to a wholesaler,
who in turn sells it a retailer,
who then sells it to a customer.
It is assumed that the rate for sales is 15% on all items.
16
Example (Contd.)
Price net of Sales tax Total
sales tax 15% Price
$ $ $
Manufacturer purchases raw materials 40 6 46
Manufacturer sells completed television 200 30 230
Manufacturer hands over to tax authority 24
Wholesaler purchases television 200 30 230
Wholesaler sells television to retailer 320 48 368
Wholesaler hands over to tax authority 18
Retailer purchases television 320 48 368
Retailer sells television 480 72 552
Retailer hands over to tax authority 24
Customer purchases television 480 72 552
17
Example (Contd.)
The total tax of $72 is borne by the ultimate consumer but is
collected on behalf of tax authorities at the different stages in the
product’s life.
The tax authorities would collect the sales tax as follows:
$
Suppliers of materials 6
Manufacturer 24
Wholesaler 18
Retailer 24
Total sales tax paid 72
18
Accounting for sales tax
Sales tax charged on sales is collected by the business on behalf
of the tax authorities.
It does not form part of the revenue of the business
Example:
If business sells goods for $600 + sales tax $90
Debit Cash or trade receivables 690
Credit Sales 600
Credit Sales tax control account 90
If business purchases goods on credit for $400 + sales tax $60.
Debit Purchases 400
Debit Sales tax control account 60
Credit Trade payables 460
19
Supplier statements
A supplier will usually send a monthly statement showing
invoices issued, credit notes, payments received and
discounts given.
It is vitally important that these statements are compared to
the supplier's personal account in the payables ledger.
Any discrepancies need to be identified and any errors
corrected.
20
Example
21
The reasons for reconciling items
22
Typical entries in Receivables Control Account
Note. Opening credit balances are unusual in the receivables control account. They represent
customers to whom the business owes money, probably as a result of the overpayment of debts or
for advance payments of debts for which no invoices have yet been sent.
23
Typical entries in Payables Control Account
Note. Opening debit balances in the payables control account would represent suppliers
who owe the business money, perhaps because the business has overpaid or because a
credit note is awaited for returned goods.
24
Reasons for having control
accounts
They provide a check on the accuracy of entries made in the
personal accounts in the receivables ledger and payables ledger.
The control accounts also assist in the location of errors, where
postings to the control accounts are made daily or weekly, or even
monthly.
Where there is a separation of clerical (bookkeeping) duties, the
control account provides an internal check.
To provide total receivables and payables balances more quickly for
producing a trial balance or statement of financial position.
Thank you
