Control accounts

SALES LEDGER CONTROL ACCOUNT

If the number of credit sales is low then a separate personal account for each debtor can be held within the General Ledger. However, whenever the number of credit sales becomes large, then it is advantageous to hold only one account in the General Ledger for all debtors. This account is called the Sales Ledger Control Account. What control does this account exercise? Well, it records the total debtors which the firm has at any one time.

The important point is that the Sales Ledger Control Account shows the total debtors. The records of the individual debtors must be kept, as the firm must know exactly how much each debtor owes to it at any point in time. The individual accounts for each debtor are maintained in the Sales Ledger. The Sales Ledger is not part of the General Ledger.

The Sales Ledger Control Account is held in the General Ledger acting as a control over the Sales Ledger totals.

An example illustrates: –

Suppose a firm makes credit sales to five debtors. The sales will be recorded as follows (in each individual debtor’s personal account held in the Sales Ledger):

­SALES LEDGER

A Debtor

                                      Sales          20

B Debtor

Sales          30

C Debtor

Sales          10

D Debtor

Sales          10

E Debtor

                                     Sales          20

The total sales (£90) would be entered in the Sales Day Book, and the individual

Accounts written up in the Sales Ledger from the Sales Day Book.

However, in the General Ledger only one account -a Sales Ledger Control Account – is maintained. The total of the Sales Day Book (£90) would be posted to the Sales Ledger Control Account as follows:-

Sales Ledger Control s/c

Sales account    90

It can now be seen that the Sales Ledger Control Account acts as a control over the total of the personal accounts held within the Sales Ledger. The balance on the Control Account is £90 debit whilst the total balances on the individual debtors accounts held in the Sales Ledger add up to £90 debit.

The balance on the Sales Ledger Control Account should at any time equate to the total of all the balances of the personal accounts. Whatever happens in the personal accounts of the debtors must be reflected in the Sales Ledger Control Account and vice versa.

If three of the debtors pay, then their personal accounts in the Sales Ledger would be credited. The total cash received would be credited to the Sales Ledger Control Account (debit Cash Account). The position would then be as follows:-

 

SALES LEDGER

A Debtor

Sales 20 Cash 20
       
  20   20

 B Debtor

Sales 30 Cash 25
    Balance c/d 5
  30   30
Balance b/d 5    

 C Debtor

Sales 10 Cash 8
    Balance c/d 2
  10   10
Balance b/d 2    

D Debtor

Sales 10    
    Balance c/d 10
  10   10
Balance b/d 10    

 E Debtor

Sales 20    
    Balance c/d 20
  20   20
Balance b/d 20    

 Sales Ledger Control Account

Sales 90  Cash 53
    Balance c/d 37
  90   90
Balance b/d 37    
       

Note:-

The total of the personal account balances in the Sales Ledger is £37. The balance on the Sales Ledger Control Account is also £37.

To expand the model further let us suppose that:­

(a)  The cheque received from A Debtor was unpaid.

(b) B Debtor was unable to pay his outstanding balance of £5. As a result this must be written off as a bad debt.

(c)  C Debtor was allowed discount of £2.

  • Debtor returned goods with a value of £7.

Again, these transactions would be recorded in the personal accounts and in the Sales Ledger Control Account to give the following situation:-

SALES LEDGER

 A Debtor

Sales 20 Cash 20
Cash 20 Balance c/d 20
  40   40
Balance c/d 20    

 B Debtor

Sales 30 Cash 25
    Bad Debts  5
  30   30
       

C Debtor

Sales 10 Cash 8
    Discount allowed 2
  10   10
       

D Debtor

Sales 10  Returns inwards 7
    Balance c/d 3
  10   10
Balance b/d 3    

 E Debtor

Sales 20    
    Balance c/d 20
  20   20
Balance b/d 20    

Sales Ledger Control Account

Sales 90  Cash 53
Cash 20 Bad Debts 5
    Discount Allowed 2
    Returns inwards 7
    Balance c/d 43
  110   110
Balance b/d 43    


Note
. The total of all unpaid cheques, bad debts, discounts allowed and returns inwards would be entered in the Sales Ledger Control Account. The other side of the accounting entry would be to credit Cash, and debit Bad Debts, Discount Allowed and Returns Inwards.

The balance on the Sales Ledger Control Account stands at £43 which equates to the total of the balances of the individual personal accounts. These balances are:­_
  £
A Debtor 20
B Debtor
C Debtor
D Debtor 3
E Debtor 20
Total 43

Thus the element of control is maintained and it can be seen why the Sales Ledger Control Account is so called – it acts as a control over the accounts of the individual debtors in the Sales Ledger. The balance on the Control Account must be agreed frequently with the total of the balances in the Sales Ledger and differences investigated.

This important reconciliation can detect fraud. Suppose that a debtor paid in cash but the Sales Ledger clerk kept the cash. The clerk would have to mark up the debtor’s account in the Sales Ledger as being paid to ensure that requests for the debt were not made. However, the cash would not be banked and as a result the Control Account in the General Ledger would not be credited. This would give a reconciliation difference.

Other examples of some of the differences, which may occur are:­

(i)  Cash received but although banked not marked up on the individual debtor’s account.

(ii) Discount allowed entered in the debtor’s personal account but not posted to the Control Account.

(iii) Returns inwards not posted to either the debtor’s personal account or to the Control Account.

(iv) An unpaid cheque not reflected in the personal account.

PURCHASES LEDGER CONTROL ACCOUNT

This account acts as a control over the total of the personal accounts in the Purchases Ledger. Again, each item that appears in the Control Account must appear in the creditor’s personal account and vice versa to ensure that reconciliation takes place. An example showing the items, which could appear in both the Control and personal accounts now follows:-

Purchases Ledger Control Account

Cash 50 Balance c/d 40
Discount received 10 Purchases 100
Returns Outwards 10    
Balance c/d 70    
  140   140
    Balance b/d 70


PURCHASES LEDGER

A Creditor

Cash 30 Balance b/d 10
Discount received 10 Purchases 40
Balance c/d 10    
  50   50
    Balance b/d 10

B Creditor

Cash 20 Purchases 20
  20   20

C Creditor

    Balance b/d 20
Balance c/d 40 Purchases 20
  40   40
    Balance b/d 40

D Creditor

Returns outwards 5 Balance b/d 10
Balance c/d 15 Purchases 10
  20   20
    Balance b/d 15

E Creditor

Returns outwards 5    
Balance c/d 5 Purchases 10
  10   10
    Balance b/d 5

The credit balance of £70 on the Purchases Ledger Control Account is reconciled to the totals in the Purchases Ledger as follows:-

£

A Creditor                                       10
C Creditor                                       40
D Creditor                                       15
E Creditor                                          5

                                                                       70

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