Accounting (0452) | Control accounts

Welcome to the Control Accounts Chapter!

Hi there! We are diving into a super important topic called Control Accounts. You’ve already learned how the Trial Balance helps us check if our Debits equal our Credits, but sometimes, even if the Trial Balance balances, there might still be errors lurking in the details!

Control Accounts are like a powerful microscope used for verifying the records of our biggest groups of people: the customers who owe us money (Trade Receivables) and the suppliers we owe money to (Trade Payables).

Don't worry if this seems tricky at first. Control accounts simply use totals from our Books of Prime Entry to create summary accounts. They are a fantastic tool for checking accuracy and detecting mistakes fast!

Key Takeaway from this Section:

Control Accounts are an extra layer of checking (verification) to ensure the individual accounts in the Sales and Purchases Ledgers are correct.

1. Understanding the Purpose of Control Accounts

1.1 What are Control Accounts?

A Control Account is a ledger account, usually kept in the Nominal (General) Ledger, that summarizes all the transactions affecting the individual accounts in a subsidiary ledger (the Sales Ledger or Purchases Ledger).

Think of it like this: Imagine you have 100 individual customer accounts (Debtors) in your Sales Ledger. Instead of checking all 100 accounts manually, the Sales Ledger Control Account provides the total balance owed by all 100 customers combined.

1.2 The Two Main Control Accounts

• Sales Ledger Control Account (SLCA): Summarises transactions with Trade Receivables (Debtors/Customers). This account tracks the total amount owed to the business.
• Purchases Ledger Control Account (PLCA): Summarises transactions with Trade Payables (Creditors/Suppliers). This account tracks the total amount owed by the business.

1.3 Why Do We Use Them? (The Purposes)

The syllabus requires you to understand the purposes. They are all about efficiency and verification:

1. To Check for Accuracy (Verification): This is the main purpose! If the balance in the SLCA does not match the total list of balances extracted from the Sales Ledger, we know an error has occurred in the individual ledger accounts.
2. To Deter Fraud: When two different people (or systems) calculate the same total independently, it reduces the opportunity for someone to manipulate figures.
3. To Locate Errors Quickly: If the Trial Balance doesn't agree, the control accounts help isolate the error to either the Sales Ledger, the Purchases Ledger, or the Nominal Ledger.
4. To Provide Management Information: They give the business owner a quick total figure of how much is owed by customers or owed to suppliers without having to add up hundreds of individual accounts.

2. Sources of Information (Books of Prime Entry)

The entire control account is built using the totals taken directly from the Books of Prime Entry (BPE), not from the individual ledger accounts themselves. This is why they are great for checking the accuracy of the ledgers.

2.1 Identifying Sources for Control Account Entries

You must be able to identify which BPE provides the information for each item in the control account:

• Credit Sales / Credit Purchases: Sales Journal (Day Book) / Purchases Journal (Day Book).
• Returns Inwards / Returns Outwards: Sales Returns Journal / Purchases Returns Journal.
• Receipts from Debtors / Payments to Creditors: Cash Book (Bank and Cash Columns).
• Discounts Allowed / Discounts Received: Cash Book (Discount Columns).
• Irrecoverable Debts / Interest on Overdue Accounts / Contra Entries: General Journal.

Analogy: If the BPEs are the kitchen mixing bowls containing the ingredients (totals), the Control Accounts are the summary recipes created using those totals, designed to check if the individual plates of food (the individual ledgers) were made correctly.

3. The Sales Ledger Control Account (SLCA)

The SLCA is essentially the account for all Trade Receivables (Debtors). Since Trade Receivables are Assets, they normally have a Debit balance.

3.1 T-Account Structure for SLCA

Remember: Anything that increases the amount customers owe us is Debited. Anything that decreases the amount customers owe us is Credited.

SLCA: DEBIT SIDE (Increases total debt owed to us)

• Opening Balance (Dr): The total amount customers owed at the start of the period.
• Credit Sales (Total): Total credit sales from the Sales Journal.
• Dishonoured Cheques: A cheque paid by a customer bounces (is not cleared by the bank). The debt is back on the books!
• Interest on overdue accounts: Charged to customers who pay late.
• Refunds from Suppliers (Uncommon): If a supplier refunded us money, sometimes this might be channelled through the trade receivables.
• Unusual Credit Balance (Brought Down): Sometimes a customer overpays and we owe them money. This 'unusual' credit balance from the prior period appears on the Debit side as a balance b/d.

SLCA: CREDIT SIDE (Decreases total debt owed to us)

• Receipts from Customers (Total): Total money received via cash, cheque, or electronic transfer from the Cash Book.
• Returns Inwards (Total): Goods returned by customers (from Sales Returns Journal).
• Discounts Allowed (Total): Discounts given to customers for prompt payment (from Cash Book).
• Irrecoverable Debts (Bad Debts): Debts written off because the customer will never pay (from General Journal).
• Contra Entries (Set-off): Explained in detail below, where a customer is also a supplier.
• Closing Balance (Dr Balance c/d): The total amount customers owe us at the end of the period (placed on the Credit side to balance).
• Unusual Credit Balance (Carried Down): If any customer overpaid, that total credit balance appears here.

4. The Purchases Ledger Control Account (PLCA)

The PLCA is the account for all Trade Payables (Creditors). Since Trade Payables are Liabilities, they normally have a Credit balance.

4.1 T-Account Structure for PLCA

Remember: Anything that increases the amount we owe to suppliers is Credited. Anything that decreases the amount we owe to suppliers is Debited.

PLCA: CREDIT SIDE (Increases total liability owed by us)

• Opening Balance (Cr): The total amount we owed suppliers at the start of the period.
• Credit Purchases (Total): Total credit purchases from the Purchases Journal.
• Unusual Debit Balance (Brought Down): Sometimes we overpay a supplier or return goods after full payment, meaning they owe us money. This 'unusual' debit balance from the prior period appears on the Credit side as a balance b/d.

PLCA: DEBIT SIDE (Decreases total liability owed by us)

• Payments to Suppliers (Total): Total money paid via cash, cheque, or electronic transfer from the Cash Book.
• Returns Outwards (Total): Goods returned to suppliers (from Purchases Returns Journal).
• Discounts Received (Total): Discounts we received from suppliers (from Cash Book).
• Contra Entries (Set-off): Explained below.
• Refunds from Customers (Uncommon): If we refunded money to a customer, sometimes this might be channelled through the trade payables.
• Closing Balance (Cr Balance c/d): The total amount we owe suppliers at the end of the period (placed on the Debit side to balance).
• Unusual Debit Balance (Carried Down): If we overpaid any supplier, that total debit balance appears here.

5. Important Special Entries in Control Accounts

Some items require extra care because they affect the Control Accounts differently than standard sales or payments.

5.1 Contra Entries (Set-Off)

A contra entry happens when a business is both a customer AND a supplier to another business.

• Instead of exchanging cash, the two businesses agree to cancel out (set off) the debt against the liability.

How Contra Entries Affect the Accounts:

Suppose Business A owes Business B $500, and Business B owes Business A $300. They agree to settle $300.

• Effect on SLCA (Trade Receivables): Our customer's debt is reduced. This is a Credit entry.
• Effect on PLCA (Trade Payables): Our liability to the supplier is reduced. This is a Debit entry.

The source for this entry is always the General Journal, as it involves transfers between two ledgers.

5.2 Dishonoured Cheques

When a customer pays us by cheque, we initially record this as a receipt (Credit the SLCA).

If the cheque "bounces" (is dishonoured), the bank takes the money back out of our account, and the customer's debt returns. We need to reverse the reduction of the debt.

• Effect on SLCA: Increase the customer's debt again. This is a Debit entry.
• Note: Dishonoured cheques only affect the SLCA (Trade Receivables).

5.3 Interest on Overdue Accounts

If a customer pays late, we might charge them interest, increasing the amount they owe us.

• Effect on SLCA: Increase the total debt. This is a Debit entry.

5.4 Dealing with Refunds

Sometimes we give a refund to a customer (e.g., they returned faulty goods they paid for earlier), or we receive a refund from a supplier (e.g., we overpaid them).

• Refund to Customer: We pay cash (Cash Book). Reduces the customer balance (if they had one). This is a Credit entry in the SLCA.
• Refund from Supplier: We receive cash (Cash Book). Reduces the supplier balance (if they had one). This is a Debit entry in the PLCA.

6. Summary of Control Account Movements

This table summarizes where common transactions appear in the control accounts. Memorising the normal balance (Debit for SLCA, Credit for PLCA) is the most helpful tool.

You did a great job covering this complex verification tool! Control accounts are a cornerstone of organised accounting. Keep practicing the placement of these entries, and you’ll master them in no time!