Control accounts

Control account is an account which maintains in the general ledger to represent a particular subsidiary ledger. There are two control accounts. 1 Sales Ledger Control account 2 Purchases Ledger Control Account

1. Control Accounts Sanjaya Jayasundara B.Sc.(Finance)Sp. University of Sri Jayewardenepura, ICASL Finalist, CCM, RIA, International School Teacher 071 25 45 001

2. Control Accounts * Introduction * Advantages of Control Accounts * Sales Ledger Control Account * Purchases Ledger Control Account * Balances on Both Sides of a Control Account * Contra entries in Control Accounts * Summary Sanjaya Jayasundara Accounting

3. Introduction At the end of an accounting period the accounts are balanced off and a trial balance prepared to check the accuracy of the book keeping entries. If a trial balance fails to balance this usually indicates that an error or errors may have been made and needs to be identified. As the business expands the accounting requirements increase which may lead to more errors occurring which are very difficult to find. To help alleviate the problem of identifying errors more easily, what is required is a type of mini trial balance for the sales and purchase ledgers and this is met by a control account . The two main control accounts are as follows. * Sales ledger control account – an account which summarizes the customer accounts (debtors) in the Sales Ledger. * Purchases ledger control account – an account which summar izes all the supplier accounts (creditors) in the Purchases Ledger . Sanjaya Jayasundara Accounting

4. Advantages of Control Accounts Locating errors when the trial balance fails to balance. They are proof of the arithmetical accuracy of the ledgers they control. The balances on these accounts are regarded as being equal to the total debtors and the total creditors, so this information is available immediately. Draft final accounts can be prepared quickly because of the balances provided by the control accounts. They help to reduce fraud as the control accounts are prepared by someone who has not been involved in making the entries in those particular ledgers. They provide a summary of the transactions affecting the debtors and creditors for each financial period. Sanjaya Jayasundara Accounting

5. Sales Ledger Control Account This is also referred to as a total debtors account. This account resembles the account of a debtor, but instead of containing transactions concerned with just one person or business it contains transactions relating to all the debtors. Sales Ledger Control Account Sanjaya Jayasundara Accounting Date Details Folio $ Date Details Folio $ Balance b/d ×× Sales returns ×× Sales ×××× Cash ××× Bank ( dishonoured Cheque ) ×× Bank ××× Bank/Cash (refunds) × Discount allowed ×× Interest charged × Bad debts ×× Balance c/d ×× ×××× ×××× Balance b/d

6. Purchases Ledger Control Account This is also known as a total creditors account. This account resembles the account of a creditor, but instead of containing transactions concerned with just one person or business it contains transactions relating to all the creditors. Purchases ledger Control Account Sanjaya Jayasundara Accounting Date Details Folio $ Date Details Folio $ Purchases returns ×× Balance b/d ×× Cash ××× Purchases ×××× Bank ××× Interest charged × Discount received × Bank/Cash (refunds) × Balance c/d ×× ×××× ×××× Balance b/d ××

7. Balances on Both Sides of a Control Account Occasionally a debtor’s account may show a credit balance. This may occur due to the following factors: * an overpayment by the debtor. * the debtor returning goods after paying the account. * the debtor paying in advance for the goods. * cash discount not being deducted before payment was made. In the sales ledger control account it is usual to keep any credit balance separate from the debit balance. The control account will, therefore, have two balances – the usual debit balance representing money owing by debtors, and the more unusual credit balance representing money owing to debtors. Sanjaya Jayasundara Accounting

8. In a similar way, a creditor’s account can show a debit balance. This may occur due to the following factors: * an overpayment to the creditor. * returning goods to the creditor after paying the account. * paying the creditor in advance for the goods. * cash discount not being deducted before payment was made. As in the sales ledger control account, the debit balance and the credit balance are shown separately in the purchases ledger control account. The purchases ledger control account will, therefore, have two balances – the usual credit balance representing money owing to creditors, and the more unusual debit balance representing money owing by creditors. Sanjaya Jayasundara Accounting

9. Contra entries in Control Accounts. These are also known as inter-ledger transfers or set-offs. It may happen that a business sells goods to another business and also buys different goods from that business. This means that there will be two ledger accounts for that business – one in the sales ledger and the other in the purchases ledger. Rather than each business sending the other a cheque to cover the amount due, they may agree to set one account off against the other. Any remaining amount will be settled by one business issuing a cheque . Sanjaya Jayasundara Accounting

10. Summary The main purpose of control accounts is to assist in locating errors in the sales ledger and the purchases ledger. A sales ledger control account resembles the account of a debtor but contains transactions affecting all debtors. A purchases ledger control account resembles the account of a creditor but contains transactions affecting all creditors. The information to prepare control accounts is obtained from the books of prime entry. It is possible to have a balance on each side of a control account. If a business is both a customer and supplier, a contra entry may be made to transfer a balance from the sales ledger account to the purchases ledger account. Sanjaya Jayasundara Accounting

11. Notes………… ................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................ ……………………………………………………………………………….. ……………………………………………………………………………….. Sanjaya Jayasundara Accounting

12. I wish you an enjoyable learning…..! Sanjaya Jayasundara Talk, you teach. Listen, you learn.