Chapter 10 Control Accounts

Introduction to Control Process
Chapter 10 Control Accounts

Revision (Source Document to Prime Entry to Ledger)
• Purchase Invoices (Invoice received) >>> Purchases Day Book or
Purchase Journal >>> Purchases Account (Dr) in Nominal Ledger and
Supplier Accounts (Cr) in Payables ledger
• Trade discount must be deducted in recording PDB/PJ (List price –
Trade discount = Net Price)
• Purchases Credit Note (received) >>> Purchases Return Day Book or
Purchases Return Journal >>> Purchases Return Account (Cr) in
Nominal Ledger and Supplier Accounts (Dr) in Payable Ledger
• Trade discount must be deducted in recording PRDB/PRJ (List price –
Trade discount = Net price)
Revision (Source Document to Prime Entry to
Ledger)
• Sales Invoices (Invoice issued) >>> Sales Day Book or Sales Journal
>>> Sales Account (Cr) in Nominal Ledger and Customer Accounts (Dr)
in Receivable Ledger
• Trade discount must be deducted in recording SDB/SJ (List price –
Trade discount = Net price)
• Sales Credit Note(issued) >>> Sales Return Day Book or Sales Return
Journal >>> Sales Returns Account (Dr) in Nominal Ledger and
Customer Accounts (Cr) in Receivable ledger
• Trade discount must be deducted in recording SRDB/SRJ (List price –
Trade discount = Net Price)
Revision (Source Document to Prime Entry to
Ledger)
• Pay-in -slip, Till roll, receipts, cheque counterfoil >>>> cash book >>>
nominal ledger, receivable ledger, and payable ledger
• Petty-cash- voucher >>>> Petty cash book >>> Nominal ledger,
payable ledger
• Journal voucher, invoice >>> General Journal >>> Nominal Ledger,
receivable ledger, and payable ledger
The two important groups to a business;
(1) Credit customers (trade receivables/Debtors)>>> Receivables Ledger/ Sales
ledger
(2) Credit suppliers (trade payables/Creditors)>>>> Payables Ledger/Purchases
Ledger
• Business should keep a check on their credit customers and credit suppliers
• If customers do not pay, the business will lose money
• If the business does not pay its suppliers, it will not have any inventory to sell
• Control accounts do not look at cash sales or cash purchases
The principle of control accounts
• To make it easier to identify errors, a type of mini trial balance for the revenue (sales) and
payables (purchases) ledger is drawn up. This is recorded in trade receivables ledger control
account and trade payables ledger control account.
• Trade receivables ledger control account summarizes the customer accounts in the receivables
ledger to check the arithmetical accuracy of the sales ledger.
• Trade payables ledger control account summarizes the supplier accounts in the payable ledger
to check the arithmetical accuracy of the purchases ledger.
• Control accounts are often referred to as total accounts since they contain the totals of the
various transactions that have taken place during the periods.
• The main purpose of the control account is to act as a check on the accuracy of the entries in
the ledger.
• The total of a list of the balances from the ledger should equal the balance on the control
account. If it does not, a mistake has been made.
• The information for preparing the control account must be obtained from books of prime
entry, not from purchases ledger/sales ledger. By doing so, we cannot locate error in those
ledgers.
Illustration of Trade Receivables ledger Control
• The business has the following customers;

• T Allen owes 850, P May owes 1500, K White owes 750, C Young owes 450 at 1 May
2017.
• During the month of may, the following transactions were occurred.
• May 4 Credit sales to T Allen $ 900
• May 7 T Allen paid cheque to settle his account of $ 850, after deducting discount $30.
• May 9 P May returns some goods $ 200.
• May 14 P May paid a cheque for $ 900 to settle his account, after deducting discount $
20.
• May 15 sold goods on credit to K White $ 600.
• May 20 K White returns some goods at $ 110.
• May 28 Write off as a irrecoverable debts from the amount owed from C Young.
• Prepare the receivables ledger accounts and trade receivable ledger control
account.
Practice
Contra Entry
• Contra entry is to be made when the same business is both a supplier and a
customer, so inter-indebtedness is set-off.
• This is credited in Receivables Ledger control account and debited in Payables
Ledger control account.
• Example 1:
• A business has sold A Oduya KES 60000 goods on 1 May.
• A Oduya has supplied the business with KES 88000 goods on 12 May.
• The KES 60000 that Oduya owes is set off against the KES 88000 owing to him on 30 May.
Credit balances on sales ledger accounts
• Normally, sales ledger accounts have always debit balance
• Occasionally, a sales ledger account will have a credit balance when a
customer makes
• overpayment their accounts,
• payment made without deducting cash discount,
• Advance payment.
• Example
• June 12 Goods were sold to Jody $ 850.
• June 29 Jody paid the amount due by cheque.
• June 30 Jody returned some goods to the business. Jody noticed that some of the goods
sold to her on 12 June with a value of $120 were faulty.
• Prepare Jody’s account.
Debit balances on purchases ledger accounts
• Normally, purchases ledger accounts have always credit balance
• Occasionally, a sales ledger account will have a debit balance when a supplier
makes
• overpayment their accounts,
• payment made without deducting cash discount,
• Advance payment.
Dishonoured cheque
• The cheque received from a customer is not accepted by the bank
when it is presented at the bank.
• This normally happens because the customer has insufficient funds in
their own account to cover the amount of cheque.
• Entries for Dishonoured cheque;
• Debit Trade Receivables Account
• Credit Bank Account
Refunds
• A refund occurs when money is returned to a credit customer,
because they have overpaid the amount due.
• Refund to customers are recorded
• Debited to Trade Receivable Account
• Credited to Bank/Cash Account
• Refund from a supplier are recorded
• Debited to Bank/Cash Account
• Credited to Trade Payables Account
Interest charges on overdue accounts
• One way of trying to encourage credit customer to pay on time is to
charge interest on overdue accounts.
• Interest charged to the customer is recorded
• Debited to Trade Receivable Account
• Credited to Interest Received Account
• Interest charged by the supplier is recorded
• Debited to Interest Charges Account
• Credited to Trade Payables Account
Control Accounts
Advantages Disadvantages
• Help Locate the arithmetical errors in the • Not all errors are revealed
sales and purchases ledgers • Compensating error, error of original
• Provide instant totals of trade receivables and entry
trade payables • Error of omission
• Provide a summary of transactions relating to • Error of commission
trade receivables and trade payables
• Prevent of frauds because the works of the • Only check the arithmetical
individuals who keep the sales ledger and accuracy of the ledger
purchases ledger will be checked regularly by
a more senior member of staff.
• Provide Information for management;
information about total trade receivables and
total trade payables for inclusion in a trial
balance and financial statement.
CIE Pg. 150
CIE Pg. 151
Chapter End Questions
(1) Why does a business keep control accounts?
A business keep control accounts to check the arithmetical accuracy on the trade receivables
ledger and trade payables ledger.
(2) What is “contra”?
Contra is a set-off entries in both receivable control account and payable control account when
one business is both supplier and customer.
(3) How often does a business prepare control accounts?

Normally, a business prepares control accounts on a monthly basic.
(4) In which control account would you find irrecoverable debts?

Irrecoverable debts can be found in trade receivable ledger control account.
Chapter End Questions
(5) Name three ledgers

Receivables ledger, Payables Ledger and General Ledger.
(6) Explain how a trade receivables ledger control account should be used to verify the balances in
the receivable ledger?
The balance of the trade receivables ledger control account should be the same with the
total of all the balances of the accounts in the receivables ledger. Otherwise, there may be some
errors in receivables ledger.
(7) Explain two ways in which the trade payables ledger control account can act as an aid to
managing the business.
• Locate errors in payables ledger
• keep a check on its credit suppliers and pay on time.

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Introduction to Control Process

• The business has the following customers;

ledger and trade payables ledger.

(2) What is “contra”?

one business is both supplier and customer.

(3) How often does a business prepare control accounts?

(4) In which control account would you find irrecoverable debts?

(5) Name three ledgers

errors in receivables ledger.

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