Chapter 14 Control accounts
What are control accounts?
Discounts
The operation of control accounts
The purpose of control accounts
What are control accounts?
A control account is an account in the
nominal ledger in which a record is kept of
the total value of a number of similar but
individual items. Control accounts are used
chiefly for trade receivables and payables.
What are control accounts?
A receivables control account is an account in which
records are kept of transactions involving all
receivables in total. The balance on the receivables
control account at any time will be the total amount
due to the business at that time from its receivables.
A payables control account is an account in which
records are kept of transactions involving all payables
in total. The balance on the payables control account
at any time will be the total amount owed by the
business at that time to its payables.
What are control accounts?
A control account is an (impersonal) ledger
account which will appear in the nominal
ledger.
A control account is part of the double entry
system. A control account is also part of
general ledger.
What are control accounts?
A control account is an account which keeps a
total record for a collective item (e.g.
receivables), which in reality consists of many
individual items (e.g. individual trade accounts
receivable). A trial balance includes the
balances on control accounts, but excludes the
balances on the personal accounts in the
receivables ledger and payables ledger.
Control accounts and personal accounts
The personal accounts of individual
customers of the business are kept in the
receivables ledger, and the amount owed
by each receivable will be a balance on his
personal account.
Control accounts and personal accounts
The amount owed by all the receivables
together (i.e. all the trade account
receivables) will be a balance on the
receivables control account.
At any time the balance on the receivables
control account should be equal to the sum of
the individual balances on the personal
accounts in the receivables ledger.
Discounts
A trade discount is a reduction in the cost of
goods to the nature of the trading transaction. It
usually results from buying goods in bulk.
Trade discounts: given at time of sale/ purchase
bulk buying
A cash discount is a reduction in the amount
payable to the supplier, in return for immediate
payment in cash, rather than purchase on
credit.
Discounts
A settlement discount is similar to cash
discount. It is a discount on the price of the
goods purchased for credit customers who
pay their debts promptly.
Cash discount/Settlement discount:
offered as an incentive for early payment
for example, 5% if settled within 14 days
may or may not be taken
Accounting for discounts
Discounts allowed
Offered to customers
Sales are recorded after trade discounts but
before settlement discounts
Discounts received
Received from the business’ suppliers
Purchases are recorded after trade discounts but
before settlement discounts
Sales tax and discounts
Sales tax is calculated on the amount
after all discounts regardless of whether
the discount is taken or not
Cash discounts received
When a business is given the opportunity to
take advantage of a cash discount or a
settlement discount for prompt payment, the
decision as to whether or not to take the
discount is a matter of financing policy, not of
trading policy.
Cash discounts received
2.2.2 Cash discounts received (p.236-237)
A buys goods from B, on the understanding that A will be
allowed a period of credit before having to pay for the
goods. The terms of the transaction are as follows:
(a) Date of sale: 1 July 2006
(b) Credit period allowed: 30 days
(c) Invoice price of the goods: $2,000
(d) Cash discount offered: 4% discount for prompt
payment
Cash discounts received
2.2.2 Cash discounts received (p.236-237)
A has the following choices:
(a) Holding on to his money for 30 days and then paying
the full $2000
(b) Paying $2,000 less 4% - i.e. $1,920 now.
This is a financing decision about whether it is
worthwhile for A to save $80 by paying its debts sooner,
or whether it can employ its cash more usefully for 30
days, and pay the debt at the latest acceptable moment.
Cash discounts received
If A decidesto take the cash discount, he will
pay $1,920, instead of the invoiced amount of
$2,000. The cash discount received ($80) will be
accounted for in the books of A as follows:
Cash discounts received
(a) In the purchase account, the cost of purchase
will be at the invoiced price (or ‘full trade’ price) of
$2,000. When the invoice for $2,000 is received by
A, it will be recorded in his books of account at that
price, and the subsequent financing decision about
accepting the cash discount is ignored.
Cash discounts received
(b) In the statement of profit or loss, the cash
discount received is shown as income received.
There is no expense in the statement of profit or loss
from which the cash discount can be deducted, and
so there is no alternative other than to show the
discount received as ‘other income’.
Cash discounts allowed
The same principle is applied in accounting for cash
discounts or settlement discounts allowed to
customers. Goods are sold at a trade price, and the
offer of a discount on that price is a matter of financing
policy for the business and not a matter of trading
policy.
For example X sells goods to Y and a price of $5000.
Y is allowed 60 days’ credit before payment but is also
offered a discount of 2% for payment within 10 days of
the invoice date.
The operation of control accounts
3.1 Example: accounting for receivables (p.241-
243)
The Outer Business Company has three trade accounts
receivable:
A Arnold owes $100
B Bagshaw owes $150
C Cloning owes 250.
The three entries of $100, $150 and $250 were first
entered into the sales day book.
The operation of control accounts
SALES DAY BOOK
Date Name Ref. Total amount
20x2 Invoiced
July 3 A Arnold RL 4 Dr 100.00
11 B Bagshaw RL 9 Dr 150.00
15 C Cloning RL13 Dr 250.00
500.00
The operation of control accounts
3.1 Example: accounting for receivables
(p.241-244)
They were also recorded in the three personal accounts
of Arnold, Bagsaw and Cloning in the receivables ledger
which are not part of the double entry system.
The operation of control accounts
Receivables Ledger- Arnold
Sales 100
Receivables Ledger- Bagsaw
Sales 150
Receivables Ledger- Cloning
Sales 250
The operation of control accounts
3.1 Example: accounting for receivables
(p.241-244)
At the end of July, the total of $500 is posted from the
sales day book by a debit into the receivables (control)
account and credit to sales. All the debit figures on the
personal accounts, they also should total $500.
Dr. Receivables control account 500
Cr. Sales 500
The operation of control accounts
Receivables control account
Sales 500
Sales account
Receivables ctrl a/c 500
The operation of control accounts
3.1 Example: accounting for receivables (p.241-244)
Payments from A, B and C
A Arnold paid $90, taking a permitted discount of $10 for
early payment
B Bagshaw paid $72 in part settlement of $80 of his debt,
taking a permitted discount of $8 for early payment
C Cloning paid $120
The three entries of $90, $78 and $120 were first entered
into cash book.
The operation of control accounts
CASH BOOK EXTRACT
RECEIPTS – JULY 20X2
Date Name Ref. Total Discount Accounts
20X0 allowed receivable
July 10 A Arnold RL 4 Cr 90.00 10.00 100.00
18 B Bagshaw RL 9 Cr 72.00 8.00 80.00
28 C Cloning RL13 Cr 120.00 - 120.00
282.00 18.00 300.00
The operation of control accounts
3.1 Example: accounting for receivables
(p.241-244)
They were also recorded in the three personal
accounts of Arnold, Bagsaw and Cloning in the
receivables ledger which are not part of the
double entry system.
The operation of control accounts
Receivables Ledger- Arnold
Sales 100 Cash 90
Discount 10
Receivables Ledger- Bagsaw
Sales 150 Cash 72
Discount 8
Receivables Ledger- Cloning
Sales 250 Cash 120
The operation of control accounts
3.1 Example: accounting for receivables
(p.241-244)
At the end of July, the cash book is posted to the
nominal ledger.
Dr. Cash at bank 282
Discount allowed 18
Cr. Receivables control account 300
The operation of control accounts
Receivables control account
Sales 500 Cash 282
Discount allowed 18
Cash control account
Receivables ctrl a/c 282
Discount allowed
Receivables ctrl a/c 18
Credit sales cycle Memorandum Receivables Ledger
Invoice A Invoice B Invoice C A
$100 $150 $250 Sales 100
Sales Day Book B
$
Sales 150
Invoice A 100
Invoice B 150 C
Invoice C 250 Sales 250
Total 500
Total 500 Dr
List of balances
Nominal Ledger Rec A 100
RLCA (Receivables) Sales Rec B 150
Rec C 250
Sales 500 RLCA 500 500
RECONCILE
Cash receipts Memorandum Receivables Ledger
Cash Cash Cash
Receipt A Receipt B Receipt C A
$90 $72 120 Sales 100 Cash 90
Discount 10
Cash Book Receipts B
Total Discount Accounts Sales 150 Cash 72
allowed receivables Discount 8
Cash A 90 10 100
Cash B 72 8 80 C
Cash C 120 120 Sales 250 Cash 120
Total 282 18 300
Total 200 Dr
Nominal Ledger
Cash RLCA (Receivables) Discount allowed
RLCA 282 Sales 500 Cash 282 RLCA 18
Discount 18
bal c/d 200
500 500
The operation of control accounts
Accounting for payables
Thishas similar procedure with the
accounting treatment for receivables
Entries in control accounts
Receivables control account
Bal b/d X Bal b/d X
Cash receipts from X
Credit sales (1) X
credit customers (2)
Cash refund to customer (4) X Irrecoverable debts X
Dishonored bill/check X Contras X
Interest on overdue a/c X Sales return (3) X
Customer overpayments X
Discounts allowed X
Entries in control accounts
Payables control account
Bal b/d X Bal b/d X
Purchase return (3) X Credit purchases (1) X
Cash payments to X Interest paid on X
credit suppliers (2) overdue accounts
Cash refund from X
Discount received X
suppliers (4)
Contras X
Overpayment to X
suppliers
Balancing and agreeing control accounts with
receivables and payables ledgers
The control accounts should be balanced
regularly, and the balance on the account
agreed with the sum of the individual debtors'
or suppliers balance extracted from the
receivables or payables ledgers respectively.
Balancing and agreeing control accounts with
receivables and payables ledgers
Reasons for balance not agree
Incorrect amount posted
Transposition error
Recorded in the control account and not in the
memorandum ledger, or vice versa
Incorrectly extracted or miscast
Question: Receivables and payables control
accounts
Question: Receivables control account (p.250-251)
April Showers sells goods on credit to most of its
customers. In order to control its receivables collection
system, the company maintains a receivables control
account. In preparing the accounts for the year to 30
October 20X3 the accountant discovers that the total of all
the personal accounts in the receivables ledger amounts to
$12,802, whereas the balance on the receivables control
account is $12,550.
Question: Receivables and payables control
accounts
Upon investigating the matter, the following errors were
discovered.
(a) Sales for the week ending 27 March 20X3 amounting to
$850 had been omitted from the control account.
(b) A customers account balance of $300 had not been
included in the list of balances.
(c) Cash received of $750 had been entered in a personal
account as $570.
(d) Discounts allowed totalling $100 had not been entered
in the control account.
Question: Receivables and payables control
accounts
(e) A personal account balance had been undercast by
$200
(f) A contra item of $400 with the payables ledger had not
been entered in the control account.
(g) An irrecoverable debt of $500 had not been entered in
the control account.
(h) Cash received of $250 had been debited to a personal
account.
(i) Discounts received of $50 had been debited to Bell's
receivables ledger account.
Question: Receivables and payables control
accounts
(j) Returns inwards valued at $200 had not been included
in the control account.
(k) Cash received of $80 had been credited to a personal
account as $8.
(l) A cheque for $300 received from a customer had been
dishonored by the bank, but no adjustment had been made
in the control account.
Question: Receivables and payables control
accounts
Required
(a) Prepare a corrected receivables control account,
bringing down the amended balance as at 1 November
20X3.
(b) Prepare a statement showing the adjustments that are
necessary to the list of personal account balances so that it
reconciles with the amended receivables control account
balance.
Question: Receivables and payables control
accounts
Answer (a): Receivables control account
$ $
Unrecorded balance b/d 12,550 Discounts omitted (d) 100
Sales omitted (a) 850 Contra entry omitted (f) 400
Bank: cheque dishonored (l) 300 Irrecoverable debt omitted (g) 500
Return inwards omitted (j) 200
Amended balance c/d 12,500
13,700 13,700
Balance b/d 12,500
Question: Receivables and payables control
accounts
Answer (b):
STATEMENT OF ADJUSTMENTS TO LIST OF
PERSONAL ACCOUNT BALANCES
$ $
Original total of list of 12,802
Add: debit balance omitted (b) 300
debit balance understated (e) 200
500
13,302
Question: Receivables and payables control
accounts
$ $
Less: transposition error (c) 180
cash debited instead of credited (h) 500
discounts received wrongly debit to Bell (i) 50
understatement of cash received (k) 72
802
12,500
