ACC 102 – Introduction to Accounting II

Control Account – Supplementary Lecture Note

A control account, as was defined in the class, is a memorandum account that contains the
total amounts of transactions that have been debited and credited in detail to individual ledger
accounts. Therefore, a control account for a certain ledger serves as a control account for the
ledger and provides a check on the accuracy of the specified ledgers. Control accounts, also
known as debtors and creditors control accounts, are often prepared for sales and purchase
ledgers and use total figures of items posted individually into the ledger account.

Uses of Control Account

i. It provides a proof of the total arithmetic accuracy of the book keeping entries in
any ledger as it represents trial balance of such ledger.

ii. When used in conjunction with other preventative measures in an internal check
system, it may act as a check against dishonest ledger keepers.

iii. With the use of control or total accounts, errors could be localized so that it could
be said with certainty that they appeared in one book or the other. As a result, it
eliminates wasteful efforts usually required with complete check of all entries
which can take days or weeks to locate errors which put books out of balance and
may delay preparation of final accounts.

iv. It enables the book keeper to proceed with the preparation of annual or periodical
accounts pending the extraction of the schedules of debtors and creditors. This
enhances immediate supply of information to management for efficient control.

v. Normally, the control accounts are under the charge of responsible officials and
fraud is made difficult because transfers made to disguise frauds will have to pass
the scrutiny of this person.
Principles of Control Account
The control account is based on the simple principle that the closing balance of an account
can be computed provided both the opening balance and the details of the additions and
deductions made to the account are known.
When this is applied to a complete ledger, the total opening balances, together with
transactions that increase and reduce the accounts during a period, should give the
total closing balances.

Classification of Control Account

i. Sales ledger control account or total debtors control account
ii. Purchase ledger control account or total creditors control account

Control accounts are frequently referred to as "total accounts" because totals are used. Thus, a
control account for a sales ledger may be referred to as either sales ledger control account’ or
as a ‘total debtors control account’. Similarly, a control account for a purchases ledger ledger
may be referred to as either ‘purchases ledger control account’ or as a ‘total creditors control
account’.

Keep in mind that a control account is a memorandum account. It does not function as a part
of the double entry system. It will be prepared in the general ledger or the specific ledger to
which it pertains, such as the purchases ledger or the sales ledger.

Dr Format of Debtors Control Account Cr

Balance b/d xx Balance b/d xx
Credit sales xx Cash received from customers xx
Dishonoured bill of exchange xx Cheque received from customers xx
Interest charges on overdue account xx Discount allowed xx
Returned cheques (bounced) xx Bill receivable xx
Discount disallowed xx Bad debts xx
*Sundry journal debits (transfer) xx Return inwards xx
Balance c/d _xx_ *Sundry journal credits (transfer) xx
Balance c/d _xx_
xxx xxx
*Sundry journal debits/credits: this is also known as contra settlement/entry or set-offs. It is a
situation in which the same person/entity is both a customer and a supplier of a business, and
inter-indebtedness is set off. This will be entered in the control accounts. A working example
was provided in the class.

Dr Format of Creditors Control Account Cr

Balance b/d xx Balance b/d xx
Cash payment to suppliers xx Credit Purchases xx
Cheque issued to suppliers xx Returned cheques xx
Purchase returns xx Sundry journal transfer xx
Bills Payable Balance c/d _xx_
Discount received xx
Sundry journal transfer xx
Balance c/d _xx_

xxx xxx

Sources of Information for Control Account

S/N Sales Ledger Control Account Source of Information
1 Opening accounts balances List of the outstanding debtor balances at the end of the
preceding period.
2 Credit Sales Total from the sales day book
3 Return inwards Total of the returns inwards day book
4 Cash received Cash column on receipt side of the cash book.
5 Cheques received Bank column on the receipt side of the cash book.
6 Discounts allowed Total from discounts allowed column in the cash book
7 Closing accounts balances List of outstanding debtor balances in the at end of the
current period

S/N Purchases Ledger Control Account Source of Information

1 Opening accounts balances List of outstanding creditors balances at the end of the
preceding period.
2 Credit purchases Total from the purchases day book
3 Return outwards Total of the returns outwards day book
4 Cash paid Cash column on payment side of the cash book.
5 Cheques paid Bank column on the payment side of the cash book.
6 Discounts received Total from discounts received column in the cash book
7 Closing accounts balances List of outstanding creditor balances at the end of the
current period

Process/Steps in Preparing Control Accounts

Control accounts kept in the general ledger are normally prepared in the same form as an
account, with the totals of the debit entries in the ledger on the left hand side of the control
account, and the totals of the various credit entries in the ledger on the right hand side.
Taking the sales ledger control account as an example, the process is as follows:

i. Individual amounts received from debtors are transferred from the cash book into
the personal accounts in the sales ledger. (The double entry is completed
automatically in the normal way, because the cash book is, in itself, a ledger
account).

ii. Individual invoice amounts are transferred from the sales day book into the
personal accounts in the sales ledger. (You will complete the double entry in the
normal way, by crediting the sales account).

iii. The sales ledger control account will open each period with the total of the
accounts receivable balances at the start of the period.

iv. This is followed by posting to the debit side of the sales ledger control account the
totals of all new sales during the period shown in the sales day book.

v. Then, post the total of the returns inwards day book to the credit side of the sales
ledger control account.
 vi. At the end of the period, you will post the totals of all payments from debtors
received during the period from the cash book to the credit side of the sales ledger
control account.

vii. Balance-off the control account.

viii. Check whether the balance on the control account is equal to the total of all the
accounts receivable balances in the sales ledger.

If the balance and the sum of all the balances in the sales ledger differ, there is either an error
in the totals recorded in the control account from the books of original entry or, possibly, an
error in the sales ledger itself.

Note: As I told you in the class, the debit side contains all entries that increased the balances,
and the credit side contains all entries the reduced the accounts. Reverse is the case for
purchases ledger control account.

Illustration 1
You are required to prepare a sales ledger control (total debtors) account from the following
data for the month of July, 2019.

2019 #’000
July 1 Sales ledger balances 4,936
Totals for July:
Sales Journal 49,916
Return inwards journal 1,139
Cheques received from customers 26,490
Cash received from customers 20,000
Discounts allowed 1,455
Bad debts written off 99
Balances in the sales ledger set off against credit balances 259
Balance at the end of the month 5,410
Dr Sales Ledger Control Account Cr
2019 #’000 2019 #’000
July 1 Balance b/d 4,936 July 1 Sales returned 1,139
Sales 49,916 Bank 26,490
Cash 20,000
Discount allowed 1,455
Bad debts 99
Set-off 259
____ July 30 Balance c/d 5410
_
54852 54,852
Aug. 1 Balance b/d 5,410

Illustration 2
The following balances were extracted from the books of Deejay Enterprises on 31 st October,
2020.

2020 #’000
Aug 1 Purchases ledger balances (Cr) 7,219
Purchases ledger balances (Dr) 421
Purchases Journal 51,362
Discount received 1,392
Contra settlement 622
Return outwards 892
Cash paid to suppliers 49,514
Purchase ledger balance at the end of the month (Dr) 334

You are required to prepare a purchases ledger control account.

Dr Purchases Ledger Control Account Cr
2020 #’000 2020 #’000
Aug 1 Balance b/d 421 Aug 1 Balance b/d 7,219
Discount received 1,932 Purchases 51,362
Contra settlement 622 Aug 31 Balance c/d 334
Return outwards 892
Cash paid 49,514
Balance c/d 5,534 ______
58,915 58,915
Sept. 1 Balance b/d 334 Sept 1. Balance b/d 5,534

These illustrations have demonstrated that the ledger is arithmetically correct given that the
control account's balance is the same as the total of the balances taken from the sales and
purchases ledgers.
If the totals of a control account are not equal, just like the trial balance, it indicates that there
is an error in the ledger.

Reconciliation of Control Account

When inputting information into the accounting records, mistakes and omissions are possible.
An error in the entries made in the accounting records becomes apparent when a ledger
control account is out of balance. This prompts an inquiry that, ideally, identifies the cause(s).
Reconciliation is carried out to see if the identified item or items were the reason the control
account did not balance.
Reconciliation starts with the original control account balance and makes adjustments to it in
order to arrive at an amended balance which is expected to be equal to the revised total of
the source amounts, which when added together should be equal to the control account
balance.
The procedure is generally the same as that used for bank reconciliation statements.
Finding the reason for the control account imbalance, however, would likely require a far
more thorough examination than when carrying out bank reconciliation because each control
account may be prepared using information from a variety of sources.
Illustration
Gideon & Co. sells goods on credit to its customers. In order to control its debt collection
system, the company maintains a sales ledger control account.
During the preparation of the account for the year ended 31 st December, 2020, the accountant
found out that the total of the personal accounts in the sales ledger amount to #32,005,000,
and the sales ledger control account balance shows a balance of #31,375,000.
On investigation, the following errors were discovered:
i. A debtor’s account balance of #750,000 had not been included in the list of
balances.
ii. Discount allowed totalling #250,000 had not been entered in the control account.
iii. An amount of #1,875,000 received from a customer had been entered in his
personal account as #1,425,000.
iv. Sales for the month of August, 2020 amounting to #2,125,000 had been omitted
from the control account
v. A contra item of 1,000,000 with the purchase ledger had not been entered in the
control account
vi. A personal account balance had been under-cast by #500,000.
vii. A bad debt of #1,250,000 had not been entered in the control account.
viii. Discount received of #125,000 had been debited to Wilson’s sales ledger account.
ix. An amount of #625,000 received had been debited to a personal account
x. Returns inwards valued at #500,000 had not been included in the control account.
xi. A cheque of #200,000 received from a customer had been credited to his personal
account.
xii. A cheque for #750,000 received from a customer had been dishonoured by the
bank, but no adjustment had been made in the control account.

You are required to:

i. Prepare a corrected sales ledger control account bringing down the amended
balance at 1st January, 2021, and
ii. Prepare a reconciliation of the total revised list of sales balances as at 31 st
December, 2020.
Dr Sales Ledger Control Account (Revised) Cr
#’000 #’000
Balance b/d 31,375 Discount allowed (ii) 250
Sales omitted (iv) 2,125 Transfer/contra entry (v) 1,000
Dishonoured cheque (xii) 750 Bad debts (vii) 1,250
Returns Inwards (x) 500
_______ Balance c/d 31,250
34,250 34,250
Jan. 1 2021 Balance b/d 31,250

Reconciliation Statement
#’000 #’000

Balance b/d 32,005

Less:
Transposition error (iii) 450
Misposted account: Wale (viii) 125
Wrong posting (Complete reversal error) (ix) 1250
Cheque under casted item (xi) 180 2005
3000
Add:
Balance omitted (i) 750
Personal account under casted item (vi) 500 1250
Revised Balance 31,250