CAPE U1

CONTROL ACCOUNT

REVISION
 INTRODUCTION
Following the accruals and realization concepts, credit sales are
recognized when earned, i.e. when we have invoiced the customer. If
at a later point doubt exists about the collectability of the debt then
a loss is recognized immediately. Two types of adjustments are
made in relation to irrecoverable & doubtful debts.
TRADE RECEIVABLE
A trade receivable is a customer who owes money to the business as
a result of buying goods or services on credit in the course of normal
trading operations.
The provision of credit facilities
The majority of businesses will sell to their customers on credit and
state a defined time within which they must pay (a credit period).
The main benefits and costs of doing so are as follows:
Benefits
 The business may be able to enter new markets.
 There is a possibility of increased sales.
 Customer loyalty may be encouraged.
Costs
 Can be costly in terms of lost interest since the business is
accepting payment later.
 Cash flow of the business may deteriorate.
 There is a potential risk of irrecoverable debts.
Credit limits
It is also normal for a business to set a credit limit for each
customer. This is the maximum amount of credit that the
business is willing to provide.
The use of credit limits may:
1. Reduce risk to business of irrecoverable debts by limiting
the amount sold on credit
2. Help build up the trust of a new customer
3. Be part of the credit control strategy of a business.
NON PAYMENT OF DEBTS
More often than not, credit customers pay the amount that
they owe on time. They do this to maintain a good
relationship with their supplier and ensure on-going supply.
In some cases, however, a debt is not paid by the time that
the credit term has expired. It may even become apparent
before this time that it will not be paid, for example if a
customer has been declared bankrupt.
Where debts remain unpaid, they are considered to be either
a) Irrecoverable
b) Doubtful
IRRECOVERABLE DEBT (RECEIVABLES EXPENSE)
During the year some debts will become uncollectible and
will be written off at that time.
Writing off means removing the amount from trade
receivables account and charging it as expense against profit
for the period.
Reasons for Irrecoverable Debts
1. The customer has gone bankrupt
2. The customer is out of business
3. Dishonesty may be involved
4. Outright refusal to pay
5. Disappearance of customer
6. Death of customer
The accounting entry to remove such known irrecoverable
debts is:
Dr: Irrecoverable Debt Expense (Statement of profit or loss) X
Cr: Accounts Receivable a/c X
Irrecoverable debts are presented in financial statements as
follows:
1. The original sale remains in the accounts as this did actually
take place. Non-recovery is an administration issue. The sale
will not be reversed because of it.
2. The irrecoverable debts expense/receivables expense is
reported below gross profit in the statement of profit or loss
(mostly in administration expenses)
3. The receivable amount is removed from both receivables
control account and personal ledger.
EXAMPLE 1
Mr. Lancaster’s accounts receivable control account has a
balance of $44,000. Whilst finalizing his accounts he learns that
one of his customers Ms. Sadie has just been declared bankrupt.
She owes Lancaster$6,000.
Prepare ledger accounts to reflect this situation.
 Accounts Receivable a/c
$ $
Receivables 44,0000 Irrecoverable debt 6,000
expense
Balance c/f 38,000

Irrecoverable Debts Expense Account

$ $
Receivables 6,000 Transfer to P/L 6,000
Recovery of Debts Written Off
When an irrecoverable debt is recovered the double
entry is:
Dr. Cash / Bank A/C
Cr. Irrecoverable Debts expense A/C* OR
Cr. Irrecoverable Debts Recovered A/C*
*This amount can be showed either as a decrease in
expense or an increase in income depending upon the
policy of the company.
DOUBTFUL DEBTS
A doubtful debt is a receivable which a business may not
be paid. Thus, at the end of the year there may be
amounts owing to the business, which the accountant
considers will become irrecoverable debts in the future.
Prudence requires that an allowance is made for these
doubtful debts.
The purpose of this type of adjustment is to ensure that
the amount of trade receivables reported on the
statement of financial position is not overstated.
Doubtful receivables are also not removed from
receivables account in case the customer does pay up. An
allowance is created for these which is then set off
against the balance of receivable in statement of
financial position.
PROCEDURE FOR CALCULATION OF ALLOWANCE
This is procedure commonly followed in businesses as risk is
involved in selling items on credit.
1. When an allowance is first made, it is charged as an expense in
the statement of profit or loss. The credit side of the entry is to
create an allowance for receivables.
2. The closing balance of allowance is subtracted from the closing
balance of receivables. The net receivables are then presented
on the face of statement of financial position in current assets.
3. If allowance already exists, and there is an increase in its
amount, the difference is debited to irrecoverable debt expense
account and credited to allowance account.
4. The allowance account has brought down and carried down
balances as it is related to statement of financial position. The
receivables/irrecoverable debt expense account is closed off and
charged to statement of profit or loss every year.
5. If allowance already exists, and there is a decrease in its
amount, the difference is debited to allowance account and
credited to irrecoverable debt expense account. This decreases
the irrecoverable debt expense amount to be recognised in
statement of profit or loss
Increase in allowance
The accounting treatment to create a new allowance or to
increase an existing allowance is:
Dr.`Irrecoverable debts expense (P&L) X
Cr. Allowance for Doubtful Debts (SFP) X
The amount of the double entry (X) equals the movement on
the allowance for doubtful debts account. i.e. the increase in
the allowance for doubtful debts.
The accounting treatment to reduce an existing allowance
Dr. Allowance for doubtful debts (SFP) X
Cr. Irrecoverable debt expense (P&L) X
The amount of the double entry (X) equals the change in the
allowance i.e. the decrease in allowance.
The movement is calculated by subtracting opening balance
from closing balance. If answer is negative it is a decrease in
allowance for doubtful debts and the treatment for reducing
an existing allowance is applied, as described above.
The allowance for doubtful debts account is also called
‘Allowance for Receivables’
CONTROL ACCOUNT
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.
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 this account at any time will be the
total amount owed by the business at that time to its
payables.
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 the
receivable’s personal account. The amount owed by all
the receivables together (ie all the trade 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.
 Purchases Ledger Control Account
Balance b/f xx Balance b/f xx
Bank payment xx Credit Purchases xxx
Cash payment xx Cash/Bank refund x
Discount received x
Purchases returns x
Sales Ledger set off x
Balance c/f. xx ____
xxx xxx

Source : Purchases Journal

Cashbook
Purchases returned or Returns outward Journal
General Journal
 Sales Ledger Control Account
Balance b/f xx Balance b/f x
Credit sales xxx Bank received xx
Cash/cheque refund x Cash received xx
Dishonoured cheque x Discount allowed x
Interest charge x Sales return x
Balance c/f x Purch. Ledger set off x
____ Balance b/f xxx
xxxx xxxx

Source: Sales Journal

Sales returns or Returns Inwards Journal
Cashbook
General Journal
Sales Ledger Control Source
Opening Debtors List of debtor balances drawn up at the end
of the previous period
Credit Sales Total from the Sales Journal
Cheques received Cash book: bank column on received side.
List extracted
Cash received Cash book: cash column on the received
side.
Returns Inwards Total from the Returns Inwards Journal
Discount Allowed Total of discount allowed column in the
Cashbook
Bad debts written off General Journal
Closing debtors List of debtor balances drawn up at the end
of the period
Bad Debt Recovered
1 Oct 2018 the receivables ledger balances were $8,024 debit and $57
credit, and the payables ledger balances on the same date $6,235 credit
and $105 debit. For the year ended 30 September 2019 the following
particulars are available. $
Credit Sales 63,728
Credit Purchases 39,974
Cash from trade accounts receivable 55,212
Cash to trade accounts payable 37,307
Discount received 1,475
Discount allowed 2,328
Returns inwards 1,002
Returns outwards 535
Irrecoverable debts written off 326
Cash received in respect of debit balances in payables ledger 105
Amount due from customer as shown by receivables ledger, offset
against amount due to the same firm as shown by payables ledger
(settlement by contra) 434
Allowances to customers on goods damaged in transit 212
On 30 September 2019 there were no credit balances in the receivables
ledger except those outstanding on 1 October 2018, and no debit
balances in the payables ledger.
Required: Write up the following accounts recording the above
transactions bringing down the balances as on 30 September 2019:
(a) Receivables control account (b) Payables control account
 Accounts Payable Control Account
DATE DETAILS AMT. DATE DETAILS AMT.

$ $
 Accounts Receivable Control Account
DATE DETAILS AMT. DATE DETAILS AMT.

$ $
 REASONS FOR HAVING CONTROL ACCOUNTS
The reasons for having control accounts are as follows.
(a) They provide a check on the accuracy of entries made in the
personal accounts in the receivables ledger and payables ledger.
It is very easy to make a mistake in posting entries, because
there might be hundreds of entries to make. Figures can get
transposed. Some entries might be omitted altogether, so that an
invoice or a payment transaction does not appear in a personal
account as it should. By comparing (i) and (ii) below, it is possible
to identify the fact that errors have been made.
(i) The total balance on the receivables control account with the
total of individual balances on the personal accounts in the
receivables ledger.
(ii) The total balance on the payables control account with the
total of individual balances on the personal accounts in the
payables ledger.
(b) The control accounts also assist in the location of errors,
where postings to the control accounts are made daily or
weekly, or even monthly. If a clerk fails to record an invoice
or a payment in a personal account, or makes a
transposition error, it would be a formidable task to locate
the error or errors at the end of a year, say, given the
number of transactions. By using the control account, a
comparison with the individual balances in the receivables
or payables ledger can be made for every week or day of the
month, and the error found much more quickly than if
control accounts did not exist.
c) Where there is a separation of clerical (bookkeeping) duties,
the control account provides an internal check. The person
posting entries to the control accounts will act as a check on
a different person(s) whose job it is to post entries to the
receivables and payables ledger accounts.
(d) To provide total receivables and payables balances more
quickly for producing a trial balance or statement of
financial position. A single balance on a control account is
obviously extracted more simply and quickly than many
individual balances in the receivables or payables ledger.
Errors and omissions can occur when entering information
into the accounting records. When a ledger control account is
not in balance, it indicates that something has gone wrong
with the entries made to the accounting records. This leads
to an investigation which (hopefully) reveals the cause(s).
Then, in order to verify whether the identified item(s)
caused the failure to balance the control account, a
reconciliation is carried out.
An example of a Purchases Ledger Control Account Reconciliation
$
Original purchases ledger control account balance xxx
Add Invoice omitted from control account, but entered in xxx
Purchases Ledger
Supplier balance excluded from Purchases Ledger total because xxx
the account had been included in the Sales Ledger by mistake
Credit sale posted in error to the debit of a Purchases Ledger xxx
account instead of the debit of an account in the Sales Ledger
Under-casting error in calculation of total end of period xxx
creditors’ balances
Xxxxx
Less Customer account with a credit balance included in the (xx)
Purchases Ledger that should have been included in the Sales
Ledger
Return inwards posted in error to the credit of a Purchases (xxx)
Ledger account instead of the credit of an account in the Sales
Ledger
Credit note entered in error in the Returns Outwards Day Book (xx)
as $223 instead of $332
Revised purchases ledger control account balance obtained xxx
from revised source amounts
 EXAMPLE
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 2013 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. Upon investigating the matter, the following errors were discovered.
(a) Sales for the week ending 27 March 2013 amounting to $850 had been omitted
from the control account.
(b) A customer's 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.
(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.
(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 dishonoured by the bank,
but no adjustment had been made in the control account.
Required (a) Prepare a corrected receivables control account, bringing down the
amended balance as at 1 November 2013.
(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.
Solution to Part (a)
Accounts Receivable Control account
$ $