Keep control

Control accounts

The art of preparing control accounts is an essential part of foundation stage - no student can afford to ignore it. And it becomes even more important at intermediate stage where it is included in both the financial and cost accounting units.

At foundation stage, "Reordering and accounting for credit transactions", elements 2.3 and 2.4 include performance criteria relating to the reconciliation of the control account with the total of balances in the sales and purchase ledgers.

A control account has been defined by the CIMA terminology as: "A total account inserted in a ledger (or section of accounts) to make it self-balancing. When debits or credits are posted to individual ledger accounts, their total is posted to the control account. The balance of the account should equal the total of the balances on the individual accounts."

The most common uses of control accounts are the sales ledger control (debtors control) and the purchase ledger control (creditors control). For example, in businesses with a large volume of transactions and many customer and supplier accounts there is a need to reconcile the balances on such accounts with total debtors and creditors. It is important that the entries posted to the personal accounts can be checked quickly and this can be achieved with control accounts.

For example, the books of the original entry for Musgrave Arts showed the following for the month ended 31 March 1999:

Cash book:
Discounts allowed
£7,500
Cash and cheques from customers
£295,100
Discounts received
£3,400
Cash and cheques paid to suppliers
£251,000
Journal:
Bad debt written off
£1,200
Purchase day book
£263,000
Sales day book
£315,100
Returns inwards
£5,200
Returns outwards
£4,750

The previous month end debtor and creditor balances had been agreed as £52,100 and £61,250.

From this information we can prepare the sales and purchase ledger control accounts. The opening balance represents the total debtors at the start of the period. It is a debit balance because it denotes an asset (debtors are classified as a current asset). The entries on both the debit and credit sides of the account represent the total of the separate transactions that have been posted to the individual debtor accounts in the sales ledger.

The closing balance on the account represents the value of the company’s debtors at the end of the period. This would be reconciled with the total of individual balances in the sales ledger at that time.

The opening balance represents total creditors at the start of the period. It is a credit balance and denotes a liability (creditors are classified as a current liability).

The entries on both the credit and debit sides of the account represent the total of all the separate transactions that have been posted to the individual creditor accounts in the purchase ledger.

The balance on the account represents the value of the company’s creditors at the end of the period. This would be reconciled with the total of the individual creditor accounts in the purchase ledger.

We have noted that all transactions are entered individually in the personal accounts of customers and suppliers and are also entered in total in the control accounts.

This technique focuses on the control accounts being considered as part of the double entry system, the entries to the personal accounts being merely an analysis of the control account entries. The control account would be prepared on an ongoing basis throughout the financial year.

Sales Ledger Control Account

1 March 1999BalanceB/D5210031 March 1999Discounts allowedCB7500
31 March 1999SalesSDB31510031 March 1999Cash/ ChequesCB295100
    31 March 1999Returns inwardRDB5200
     Bad debtsJ1200
     BalanceC/D58200
   367200   367200
1 April 1999BalanceB/D58200    

Purchase Ledger Control Account

31 March 1999Discount receivedCB34001 March 1999BalanceB/D61250
31 March 1999Cash/ ChequesCB25100031 March 1999PurchasesPDB263000
31 March 1999Returns outRDB4750    
31 March 1999BalanceC/D65100    
   324250   324250
    1 April 1999BalanceB/D65100

Philip Dunn is a training consultant at Management Accounting Services

AT, July 1999, page 38

Top