CHAPTER EIGHT Control Accounts Introduction In the previous chapters, it has been pointed out that the sales

ledger and purchase ledger are subsidiary ledgers. The main ledger is the general ledger. The subsidiary ledgers are drawn to decongest the general ledger. Once they are drawn, the summaries must find their way to the general ledger. This is exactly what the control accounts do. Hence in the general ledger, there would be only one debtors account and one creditors account. These are the control accounts. Both the sales ledger control accounts and purchases ledger control accounts were introduced in chapter two. Objectives:
After studying this cha ter you should be able to: A reciate the need for control accounts !ra" sales ledger control account !ra" urchases ledger control accounts A reciate ledger contra entries

#ey Ter$s Control account: Purchases ledger control account : %ales ledger control account:

n account held in a ledger, which summarises the entries and balances of all the accounts in the same or another ledger. control account which summarises the entries and balance of all the individual accounts of suppliers in the purchases ledger. control account which summarises the entries and balance of all the individual accounts of customers in the sales ledger.

&ses of Control accounts !ontrol accounts help summarise information in the subsidiary ledgers so as to incorporate them in the general ledger. If for instance there are "### debtor accounts, and $## creditor accounts, imagine what the si%e of the general ledger would be if it was to include each and every of these personal accounts. If you open ledger accounts for each of the individual debtors and creditors, the general ledger would have nearly "$## accounts not forgetting the other accounts of the general ledger li&e expenses account. The subsidiary accounts are drawn to decongest the general ledger. In the subsidiary ledgers one can manage and store specific information regarding each of the accounts for the debtors and creditors. Only the total of each of these two ledgers will be reflected in the general ledger through the control accounts. In large business organisation with huge volumes of credit sales and purchases, the entry and management of the subsidiary ledgers may be delegated to the receivables accountant who balances the debit and credit entries in the individual ledgers accounts and compile a list of the balances at the end of a period. These balances must agree with the sales ledger control account in the general ledger. The same principles may apply for the purchases ledger and any other subsidiary ledger. '

!ontrol account is the account where entries of all accounts belonging to a given account group are made. 'i&e sales and purchases ledger control accounts, which are control accounts for all the individual accounts of the group, there can also be control accounts for such items as stoc&s. The purpose of the control account is to ma&e the complex accounting structures more efficient to organi%e by summarising the entries in the main boo&s. In summary the benefits of maintaining control account are( i) It shows at a glance the total value and balances contained in the ledger to which it pertains. It would be a very tedious exercise to try to trace the totals of says sales, purchases and payments from subsidiary ledgers. ii) The control accounts serves as trial balance for the subsidiary ledgers. It is a chec& on the accuracy of the entries made in the individual accounts. One only needs to ta&e the totals from the individual accounts in the ledgers and compare them with the totals in the control accounts. If there is any difference, then there must be an error or a group of errors. iii) !ontrol accounts ma&e location of errors easier and the accuracy of ledger is easily proved. *rrors in the trail balance can easily be %eroed down to a specific ledger, ma&ing it easier to locate them. iv) !ontrol accounts helps to segregate the duties between the accountant responsible for ledgers and another for controls. This is a good means of helping the management to detect fraud and provides an effective control over the wor& of employees who writes the boo&s of accounts v) +peeds up the preparation of final accounts. !ontrol accounts provide totals that will be used to draw the financial statements. single balance in the control accounts is more easily extracted than aggregate of balances from the subsidiary ledger( %ales ledger Control Account The sales ledger control account ,otherwise &nown as total debtors account) records the total transactions with credit customers and reflects the amount owed by all the debtors obtained from the individual balances in the sales ledger accounts. Other elements in the sales ledger control account include( i) -eturns inwards ii) Bad debts iii) .ishonoured che/ues iv) .iscounts allowed. v) Inter0 account settlements with suppliers ,contra) Inter 1 account settlements or transfers occur where a customer is a supplier at the same time. The debts receivable from that account is set 1 off against the debt payable to that person. This is &nown as a contra entry. It is recorded as( .r( 2urchases ledger control account !r( +ales ledger control account.

+ome of the individual accounts may have credit balances. This may be a result of such factors as overpayment of account, or errors. Purchases ledger Control Account The purchases ledger control account ,otherwise &nown as the total creditors account) records the total transactions with credit suppliers and reflects the amount owed to all the suppliers obtained from the individual balances in the purchase ledger. Other elements in the purchases ledger control account include( i) ii) iii) iv) -eturns outward wards .iscounts received .ishonoured che/ues Inter0 account settlements with !ustomers ,contra)

'i&e the case of sales ledger control account, inter 1 account settlements or transfers occur where a supplier is a customer at the same time. The debts payable to that account is set 1 off against the debt receivable from that person. It is recorded as( .r( 2urchases ledger control account !r( +ales ledger control account. +ome of the individual accounts may have debit balances. This may be a result of such factors as overpayment of account, or errors. E*a$ le
,a) The following information has been extracted from the boo&s of 3utero Traders 'imited for the month of pril 4##4 Balance as at " pril 4##4( +h. +ales ledger 1 .ebit balances $5$,### !redit balances "$6,### 2urchases ledger 1 .ebit balances "78,### 1 !redit balances 97$,### Transactions during the month( +ales on credit 2urchases on credit -eturns in0wards -eturns out0wards !he/ues received from trade debtors !he/ues paid to trade creditors !ash paid to trader creditors Bad debts written 1 off .iscounts allowed to trade debtors .iscounts received from traders creditors !redit sales offset against credit purchases !redit purchase of a 3otor vehicle posted in the purchases ledger $,:$6,### :,$67,### 46$,### ":7,### 4,78$,### 6,8:6,### ",575,### "57,### "84,### 45",### 598,### 97$,###

.ishonoured !he/ues from trade debtors "75,### !ash received to replace dishonoured !he/ues from trade debtors "#8,### n invoice to trade debts of +h. ":6,### posted as "6:,### Balances as at 5# pril 4##4 +ales ledger credit balances "45,### 2urchases ledger debit balances "::,### Re,uired: The sales ledger and purchases ledger control accounts for the month ended 5# pril 4##4. %uggested solution

.r

+ales ledger control account

!r

Bal b;f +ales Ban& ,dishon.. che/ues) +ales Bal c;f

$5$,### Bal b;f "$6,### $,:$6,### -eturns inwards 46$,### "#5,### Ban& 4,78$,### 4:,### Bad debts w;o "57,### .iscount allowed "84,### 2urchases 'edger ,contra) 598,### "45,### !ash "#8,### Bal c;f 9,$#4,### 7,789### 7,789,###

.r Bal b;f -eturns outwards Ban& 3otor <eh. +upplier !ash .iscount rec.d +ales 'edger ,contra) Bal c;f

2urchases ledger control account "78,### ":7,### 6,8:6,### 97$,### ",5#5,### 45",### 598,### ",#$:,### $,846,### Bal b;f 2urchases 97$,### :,$67,###

!r

Bal c;f

"::,### $,846,###

E-A.I/ATIO/ 0&E%TIO/%
0&E%TIO/ O/E

2oesha 'imited &eeps sales and purchases control accounts in the =eneral 'edger. The transactions for the month ended 5# pril 4### were as follows(
+h. !redit balances on " pril 4### 1 +ales ledger 1 2urchases ledger "96,### 987,###

.ebit balances on " pril 4###

!redit balances on 5# pril 4### .ebit balances on 5# pril 4### !redit purchases !redit sales !he/ues received from debtors !ash received from debtors !he/ue payments to creditors !ash payments to creditors Bad debts written0off .iscounts received .iscounts allowed !ontra entry to sales ledger from purchases ledger -efunds to debtors -eturns outwards -eturns inwards

1 +ales ledger 1 2urchases ledger 1 sales ledger 1 purchases ledger

798,### "78,### ":$,### "$7,### 4,69#,### 6,985,### 5,"6#,### ",58:,### ",776,### 594,### 8$,### "#6,### "87,### 456,### 84,### "5$,### 45",###

-e/uired( ,a) +ales ledger and purchases ledger control accounts for the month ended 5# pril 4### ,4# mar&s)

.r Bal b;f !redit sales !ash ,refund)

+ales ledger !ontrol a;c 798,### 6,985,### 84,### Bal b;f Ban& !ash Bad debts w;o .iscount allowed 2urchases 'edger a;c ,!ontra) -eturns inwards Bal c;f

!r "96,### 5,"6#,### ",58:,### 8$,### "87,### 456,### 45",### 578,### 9,:97,### !r 987,### 4,69#,###

Bal c;f

":$,### 9,:97,###

.r

2urchases ledger !ontrol a;c Bal b;f !redit purchases

Bal b;f "78,### Ban& ",776,### !ash 594,### .iscount received "#6,### +ales 'edger a;c,contra) 456,### -eturns outwards "5$,### Bal c;f "7#,### 5,4#$,###

Bal c;f

"$7,### 5,4#$,###

0uestion T"o >aith ?u@ua 'td. is a distributor of T.<. sets. The sales are entirely on credit terms. The following balances were extracted >rom its ledgers at 5# +eptember 4##"( +h. +ales 4",:"8,#:# !reditors 0 Balance at 5# +eptember 4### ",6#5,65# .ebtors 0 Balance at 5# +eptember 4### 4,95$,55# 2urchases of T.<. +ets "#,4$:,6$# .iscounts allowed 468,64# !ash received from debtors 4#,7:$,#"# !ash paid to creditors 7,899,97# -eturns inwards ","#:,:9# !arriage outwards "9:,74# Overdraft interest 5$4,66# 2rovision for doubtful debts at 5# +ept.4### "66,57# .iscounts received 4#7,56# dditional information. che/ue for +h.5:, 5$# from B. ?amau, a customer, has been returned by the ban& mar&ed A*ffects not clearedA. Bad debts totalling +h.4#9,84# are to be written off, and the provision for doubtful debts is to be raised to "#B of the debtor balances at 5# +eptember 4##". -*CDI-*.( 2repare for the year ended 5# +eptember 4##"( ,a) ,b) ,c) 0uestion Three
3wanga%a 'td. is in wholesale business selling roofing iron sheets on credit terms. The following balances were extracted from its ledgers at 5# +eptember 4##4( +ales 2urchases !ash and che/ues received from debtors !ash paid to creditors !reditors 0 Balance at "."#.4##" .ebtors 0 Balance at "."#.#" .iscounts allowed .iscounts received -eturns inwards !arriage outwards +h. :,65$,98# 5,485,65# :,#74,89# 5,#"$,64# 67:,:5# $64,4## $5,"8# :#,:$# 5:#,58# 96,86#

.ebtors 'edger !ontrol ccount. Bad and .oubtful .ebts ccount, and. E+how the Balance +heet entry for debtors as at that date.

+elling and distribution expenses 2rovision for doubtful debts at "."#.4##" >urther chec&s revealed that( ,i)

"46,88# 67,6$#

Bad debts amounting to +h.:4, 96# are to be written off, and the provision for doubtful debts is to be raised to "#B of the debtor balances at 5# +eptember 4##4. che/ue for +h."6, 48# from one of the customers has been returned by the ban& mar&ed Aeffects not clearedA. Included in cash and che/ues received from debtors is a che/ue for +h.:, 9## from the li/uidator of EFgi%a 'td.This customer had owed 3wanga%a 'td. +h.:9, ### when it ceased to trade in 3arch "779, and the debt had been written off as a bad debt in the year ended 5# +eptember "779.

,ii) ,iii)

-*CDI-*.( ,a) ,b) ,c) .ebtors 'edger !ontrol 0 Bad and .oubtful .ebts ccount. ccount. ,"4 mar&s) ,6 mar&s)

*xplain the benefits that accrue from operating control accounts. ,6 mar&s) ,Total( 4#mar&s) 0uestion 4our mboseli !o. 'td. maintains ledgers for the credit customers and suppliers, in addition to the general ledger. In the general ledger, among other accounts, are two control accounts one for the debtors and the other for the creditors. The following figures were extracted from the hoo&s of the company for the month of ugust 4##5, which is also the end of the accounting year of the company. !redit purchases 2rovision for doubtful debt ,established at the end of the month) !redit sales !laims by mboseli for price reductions on defective goods as agreed with suppliers -eturns inwards .iscounts received -eturns outwards Interest charged to credit customers .iscounts allowed -eceipts from credit customers 2ayments to credit suppliers Bad debts written off +h. 4,79#,### 86#,### 5,$##,## # "#:,$## "4#,### :9,8## 7#,"## 4##,9## "##,7## 5,5#8,6# # 5,$##,## # $#,:##

!ustomersE che/ues dishonored. ,Including che/ues paid over the counter by customers 0 +h.5$#,###) !reditors ledger credits transferred to debtors ledger .ebtors balance at ".$.#5 !reditors balance at ".$.#5 dditional information( ,i).

789,### 4"6,8## 4,"##,## # $##,###

mounts totaling +h.4$,8## written off two months ago are collected in the current month and credited to suspense account

,ii). On 5" ugust 4##5 customersE accounts with credit balance were +h.69#, ### and suppliersE accounts with debit balances were +h.4"5,6##. ,iii). One invoice of +h.:9, ### was posted to the debtors ledger as +h.9:, ###. ,iv). reconciliation of the debtors control with the debtors ledger balances on 5" Guly 4##5 revealed a difference of +h.8#, ###.In ugust 4##5, this difference was discovered to have been caused by failure to add one invoice of the same amount to the Guly sales invoices total that was posted to the debtors control account. The invoice has been correctly posted to the debtors ledger.

,v). It is estimated that 7#B of customers with outstanding accounts on 5" ugust will ta&e discounts in the first wee& of +eptember 4##5. The company offers a cash discount of 4B on sales. ,vi). *stimated price ad@ustment and other allowances on outstanding debtors amount to +h."$#, ###. ,vii). The company ma&es provisions at the end of the year to recogni%e discounts, allowances and doubtful debts applicable to the end of year outstanding debtors. Re,uired: a) .ebtors 'edger !ontrol ccount. ,$ mar&s) b) !reditors 'edger !ontrol ccount. ,8 mar&s) c) +how how debtors will appear in the Balance +heet of mboseli !ompany on 5" ,5 mar&s) d) .istinguish between the direct write off and the provision for doubtful .ebts methods of accounting for bad debts expense. ,5 mar&s) ,Total( 4# mar&s)

%uggested solution a) !ebtors6 ledger control a7c Balance b;f 4,"##,### +ales 5,$:$,### Interest charge 4##,9## .ishonoured che/ues 9$9,### +uspense 4$,8## +uspense "$,### 8 Ban& -eturns inwards .iscount allowed Bad debts !reditors control a;c ,!ontra) 5,5#8,6## "4#,### "##,7## $#,:## 4"6,8##

Balance c;f

H69#,### :,48#,"##

Balance c;f

5,65:,9## :,48#,"##

b) Creditors6 ledger control a7c .iscount received :9,8## -eturns outward 7#,"## Ban& 5,$##,### .ebtors control 4"6,8## ;!,!ontra) !laims "#:,$## Balance c;f 68",7## HHHHHHH 5,785,6## 9or:ings +ales s per accounts !asting error Transposition error Total c; <alance sheet debtors
.ebtors control account balance .ebit !redit Total 2rovision for( bad I doubtful debts 2rice ad@. I other allowances .iscounts allowance 4B, 4,7$:,9##086#,###)

Balance b;f 2urchases

$##,### 5,79#,###

Balance c;f

4"5,6## HHHHHHH 5,785,6##

5$##,### 8#,### "$,### 5,$:$,###

5,65:,9## ,69#,###) 4,7$:,9## ,86#,###) ,"$#,###) ,68,79#) 4,"4#,99#

d)
Bad debts are those debts that the business is not able to collect. These are written off as an expense. +ome debtors may not /ualify to be bad but their collection may be in doubt. These may include debtors that have ta&en longer than the normal ;agreed credit period. It may also include debt held by people whose ability to pay is in doubt. 2rudence re/uires that such debts be set aside as doubtful at least at the moment. provision for bad and doubtful debts is set, at the end of the period e/ual to the amount whose receipts is in doubt.

0uestion five ,a) *xplain the purposes for which control accounts are prepared.

,b) Balances and transactions affecting =. 3wendaEs control accounts for the month of 3ay 4##" are listed below( Balances at " 3ay 4##"( +h. +ales ledger 698,"9# ,debit) "#,99# ,credit) 446,9##,credit) 6,6## ,debit) 7#8,:9# 5",69# ",58$,9## ",$5:,:9# 99,49# ::#,89# "94,5## $8,### 549,5## 46,69# 4"#, #9# 8,$## ,credit) 5,59# ,debit)

2urchases ledger Transactions during 3ay 4##"( 2urchases on credit llowances from suppliers -eceipts from customers by che/ue +ales on credit .iscounts received 2ayments to creditors by che/ue !ontra settlements llowances to customers Bills of exchange receivable !ustomersE che/ues dishonoured !ash receipts from credit customers Balances at 5" 3ay 4##"( +ales ledger 2urchases ledger RE0&IRE!:

2repare the +ales 'edger and 2urchases 'edger !ontrol ccounts for the month of 3ay 4##" and derive the respective debit and credit closing balances at 5" 3ay 4##". ,4# mar&s) 0uestion %i* >a) *xplain the advantages of maintaining control accounts. ,8 mar&s) ,b) The following balances were extracted from the boo&s of ?atec 'td for the month of pril 4##9( +h. ",64$,## # ",9## 6#,9## 995,$## "64,9## 4#7,:## ",556,## # 8"$,### 4,#8$,## # :9,###

.ebit balances +ales ledger 2urchases ledger !redit balances +ales ledger 2urchases ledger .iscounts received .iscounts allowed 2urchases ,including cash purchases of +h."94,###) !ash sales !redit sales !redit notes issued to customers for returning goods

'?

+ales ledger debit balances off0set against purchases ledger 2ayments to creditors Interest charged by creditors on overdue accounts -eceipts from customers

Bad debts written off !ustomers unpaid che/ues Interest charged to customers on overdue accounts .ebt collection expenses charged to debtors !redit notes received from suppliers Balances as at 5# pril 4##9( 2urchases ledger ,debit) +ales ledger ,credit) Re,uired: ,i) +ales ledger control account for the month ended 5# pril 4##9. ,ii) 2urchases ledger control account for the month ended 5# pril 4##9. ,Total( 4# mar&s)

58,7## ","97,4# # 87,### ",9:$,## # 5:,4## 48,"## 78,### "#,$## 48,:## "6,6## 9:,###

,: mar&s) ,: mar&s)

''