Study Notes: Control Accounts (Introduction to Control Processes)
Hello future Accountants! This chapter is super important because it introduces you to one of the best ways businesses check their own work: Control Accounts. Don't worry if this seems tricky at first—it’s just a clever way of double-checking your figures.
You’ve already learned how to record transactions in the books of prime entry (like Day Books) and how to post these to individual ledger accounts (like the Debtors’ Ledger). Now, we learn the final check that ensures all those individual postings were correct!
Section 1: What is a Control Account and Why Do We Need It?
1.1 Defining the Control Account
A Control Account (sometimes called a Total Account) is an account kept in the General Ledger (or Nominal Ledger) that summarises all the transactions affecting either the trade debtors or the trade creditors.
Think of your school bag. You have many individual pens, pencils, and rulers inside. The Control Account is like a special checklist you keep outside the bag that tracks the total number of items you should have.
- It does not record individual transactions.
- It records the totals of transactions that happen over a period (usually a month).
- The information comes directly from the Books of Prime Entry (e.g., the total sales from the Sales Day Book).
1.2 The Purpose of Control Accounts
Why go to all this effort? Control accounts serve three main purposes, all related to strong internal control:
1. Checking Accuracy (The Magic Check)
This is the primary reason. The final balance of the Control Account must match the total of all the individual balances in the respective subsidiary ledger (the list of all your customers or suppliers). If they don't match, you know an error has occurred, and you must find it!
2. Providing Quick Totals
Management can quickly look at the Control Account in the General Ledger to see the total amount owed to the business (debtors) or by the business (creditors) without having to add up hundreds of individual ledger balances.
3. Internal Control and Deterrence
If the General Ledger is kept by one person and the subsidiary ledgers (individual accounts) are kept by another, the Control Account acts as a check on the work of the person keeping the subsidiary ledgers. This helps prevent fraud or careless mistakes.
Key Takeaway: Control accounts act as a mathematical check on the accuracy of the individual ledger entries by comparing the total balance with the sum of all individual balances.
Section 2: The Two Types of Control Accounts
In IGCSE Accounting, we focus on two types of control accounts, based on who the business deals with on credit:
2.1 Sales Ledger Control Account (SLCA)
Also known as the Total Debtors Account or Total Receivables Account.
- It summarises all transactions relating to our Trade Debtors (customers who owe us money).
- Since Debtors are Assets, the SLCA usually has a Debit Balance.
2.2 Purchases Ledger Control Account (PLCA)
Also known as the Total Creditors Account or Total Payables Account.
- It summarises all transactions relating to our Trade Creditors (suppliers whom we owe money to).
- Since Creditors are Liabilities, the PLCA usually has a Credit Balance.
Remember the core accounting rules:
- Assets (Debtors) increase on the Debit side and decrease on the Credit side.
- Liabilities (Creditors) increase on the Credit side and decrease on the Debit side.
Section 3: Preparing the Sales Ledger Control Account (SLCA)
The SLCA tells us how much our customers owe us in total. We need to know which transactions increase this debt and which decrease it.
3.1 Debit Side Entries (Increases in Debtors / Asset Increases)
These are transactions that make our customers owe us more money.
- Opening Debit Balance: The total amount owed at the start of the period.
- Total Credit Sales: The total figure from the Sales Day Book. This is the biggest entry!
- Dishonoured Cheques (Bank): When a customer’s cheque bounces (we thought we received payment, but we didn't). This means they still owe us, so the debt increases again.
- Interest Charged: If we charge interest on overdue accounts.
- Credit Balance at Start: If a customer had overpaid us last month (a rare item, posted on the credit side as an opening balance), this balance is brought down to the debit side at the start of the new period.
3.2 Credit Side Entries (Decreases in Debtors / Asset Decreases)
These are transactions that reduce the amount our customers owe us.
- Cash/Cheques Received (Bank/Cash): Total money received from debtors (from the Cash Book).
- Total Sales Returns: Total returns made by customers (from the Sales Returns Day Book).
- Discounts Allowed: Total discounts given to customers (from the Cash Book, discounts column).
- Bad Debts Written Off: Amounts we know will never be collected. We remove these from the total debt.
- Contra Entries (PLCA): When the same entity is both a debtor and a creditor, we transfer/cancel the amounts between the two ledgers. (More details below).
- Closing Credit Balance: If any customer has overpaid us at the end of the period (a rare entry, but necessary to balance).
| DEBIT (Amounts owed TO us increase) | CREDIT (Amounts owed TO us decrease) |
| Opening Balance b/f (Debit) | Bank/Cash (Total payments received) |
| Sales (Total Credit Sales from SDB) | Sales Returns (Total from SRDB) |
| Dishonoured Cheques (Bank) | Discounts Allowed |
| Interest Charged | Bad Debts Written Off |
| Opening Balance b/f (Credit - if any) | Contra Entry (PLCA) |
| Closing Balance c/d (Debit - usual balance) |
Did you know? A Debit Balance in the SLCA means customers owe us money. A Credit Balance in the SLCA means we owe the customer (they overpaid or received too many returns).
Section 4: Preparing the Purchases Ledger Control Account (PLCA)
The PLCA tells us the total amount we owe to our suppliers (our creditors). Creditors are Liabilities, so they operate in the opposite way to Debtors.
4.1 Credit Side Entries (Increases in Creditors / Liability Increases)
These are transactions that make us owe our suppliers more money.
- Opening Credit Balance: The total amount owed at the start of the period.
- Total Credit Purchases: The total figure from the Purchases Day Book.
- Debit Balance at Start: If we had overpaid a supplier last month (a rare item, posted on the debit side as an opening balance), this balance is brought down to the credit side at the start of the new period.
4.2 Debit Side Entries (Decreases in Creditors / Liability Decreases)
These are transactions that reduce the amount we owe our suppliers.
- Cash/Cheques Paid (Bank/Cash): Total money paid to creditors (from the Cash Book).
- Total Purchases Returns: Total goods returned to suppliers (from the Purchases Returns Day Book).
- Discounts Received: Total discounts given to us by suppliers (from the Cash Book, discounts column).
- Contra Entries (SLCA): When we offset an amount owed to a supplier against an amount they owe us.
- Closing Debit Balance: If we have overpaid a supplier at the end of the period (a rare entry, but necessary to balance).
| DEBIT (Amounts owed BY us decrease) | CREDIT (Amounts owed BY us increase) |
| Bank/Cash (Total payments made) | Opening Balance b/f (Credit - usual balance) |
| Purchases Returns (Total from PRDB) | Purchases (Total Credit Purchases from PDB) |
| Discounts Received | Opening Balance b/f (Debit - if any) |
| Contra Entry (SLCA) | |
| Closing Balance c/d (Credit - usual balance) |
4.3 Understanding Contra Entries
A Contra Entry occurs when a business is both a customer (Debtor) and a supplier (Creditor) to the same company. Instead of sending two cheques—one from us to them, and one from them to us—we agree to cancel out (or ‘set off’) the smaller amount against the larger one.
The Entry Rule: The contra entry reduces both the amount we owe (Creditor balance) and the amount they owe us (Debtor balance).
- In the SLCA (reducing the Debt owed to us), the contra entry goes on the Credit side.
- In the PLCA (reducing the Debt we owe), the contra entry goes on the Debit side.
Key Takeaway: SLCA starts with a Debit balance; PLCA starts with a Credit balance. Both accounts must only use TOTAL figures from the books of prime entry.
Section 5: Control Accounts as a Tool for Checking (Reconciliation)
The control account system is part of a wider control process designed to find errors.
5.1 The Reconciliation Process
At the end of the accounting period, the most important step is the reconciliation:
Step 1: Calculate the Control Account Balance
Using the totals from all the books of prime entry, calculate the final balance (c/d) of the SLCA and PLCA.
Step 2: Calculate the Schedule of Balances
Add up the balances of all the individual accounts in the Sales Ledger and Purchases Ledger. This list is called the Schedule of Debtors or Schedule of Creditors.
Step 3: Compare
The balance calculated in Step 1 must equal the total calculated in Step 2.
If: Control Account Balance = Schedule Total, your individual postings are correct!
If: Control Account Balance ≠ Schedule Total, an error exists!
5.2 Common Errors Revealed by Reconciliation
Errors that mean the Control Account and the Schedule won't match are usually errors made only in the individual accounts:
- Posting an individual entry to the wrong side of a customer's account (e.g., posting a payment as a Debit instead of a Credit).
- Casting (adding up) an individual account incorrectly.
- A posting not being made to an individual account at all.
Important Note: Control accounts are powerful, but they don't catch every mistake. They only check if the totals agree with the sum of the parts.
For example, if you incorrectly calculated the Total Credit Sales in the Sales Day Book (affecting the Control Account) and also made a mistake when posting the individual sales to the Sales Ledger, the errors might cancel each other out, or they might be missed entirely if the mistake affected both the total and the individual accounts equally.
Do not confuse the Control Account (which uses Day Book totals) with the individual account in the Subsidiary Ledger (which uses the individual items). They work together, but they are separate records.
5.3 Handling Abnormal Balances
Sometimes, accounts will have an abnormal balance:
- SLCA Credit Balance: A customer has overpaid us, or we owe them a refund for returned goods. This credit total must be included on the credit side of the closing balance (c/d) of the SLCA.
- PLCA Debit Balance: We have overpaid a supplier. This debit total must be included on the debit side of the closing balance (c/d) of the PLCA.
When preparing the Schedule of Debtors/Creditors, you must list these abnormal balances separately (e.g., Credit balances must be deducted from the total Debit balances on the Schedule of Debtors).
Summary & Final Thoughts
Control accounts are essential internal controls. They ensure that the detailed work done by junior accountants (posting to individual ledgers) agrees with the summary work done in the General Ledger. This process of using totals to check detail is a cornerstone of reliable accounting.
Remember the source documents are key: Day Books provide the totals for sales and purchases, and the Cash Book provides the totals for money paid and received! Keep practising the SLCA and PLCA layouts until they become second nature!