Chapter 14 - Control Accounts - Accounting Tuition

A sales ledger is used to record credit customers account (trade receivables) and a purchases ledger is used to record credit suppliers account (trade payables). Control accounts are prepared from books of prime entry to check the arithmetical accuracy of the sales ledger and purchases ledger. Control accounts may also be used to:

Act as a deterrent against fraud.
Locate errors made in the sales ledger and purchases ledger quickly and easily.
Calculate total trade receivables and total trade payables quickly.
Help in the preparation of trial balance.
Calculate credit sales and credit purchases in case of incomplete records

There are two types of control accounts:

Sales ledger control account (total trade receivables control account)
Purchases ledger control account (total trade payables control account)

Contra entries

A credit customer may also be a credit supplier in a business. Therefore we may set off the lowest amount between the customer and the supplier. The double entry to record the contra entry between the purchases ledger and the sales ledger is as follows:

Debit Purchases ledger control account

Credit Sales ledger control account

Credit balance in sales ledger

The main reasons for the sales ledger control account to have a credit balance are:

Overpayment made by the customer.
Advanced payment or deposit made by customer.
Return inwards made by customer after effecting payments.

Debit balance in purchases ledger

The main reasons for a purchases ledger account to have a credit balance are:

Overpayment made by the business (overpayment made to supplier).
Advanced payment or deposit made by the business
Return outwards made to the supplier after effecting payments.

Items not recorded in control account:

Cash sales and cash purchases
Provision for doubtful debts
Return inwards made from cash sales
Return outwards made from cash purchases

DR	Sales ledger control account / Total trade receivables control account				CR
Jan 1	Balance b/f (major)	***	Jan 1	Balance b/f (minor)	***
Jan 31	Credit sales	***	Jan 31	Return inwards	***
	Dishonoured cheque	***		Bad debts	***
	Interest charged on overdue accounts	***		Discount allowed	***
	Refund to customers	***		Cash / cheques received	***
	Balance c/d	***		Contra / set off	***
				Balance c/d	***
		***			***
Feb 1	Balance b/d	***	Feb 1	Balance b/d	***
				(CR balance in sales ledger)

DR	Purchases ledger control account /Total trade payables control account				CR
Jan 1	Balance b/f (minor)	***	Jan 1	Balance b/f (major)	***
Jan 31	Return Outwards	***	Jan 31	Credit purchases	***
	Payments to suppliers	***		Refund from suppliers	***
	Discount received	***		Interest charged by suppliers	***
	Contra / Set off	***		Balance c/d	***
	Balance c/d	***
		***			***
Feb 1	Balance b/d	***	Feb 1	Balance b/d	***
	(DR balance in purchases ledger)

Worked Example

Prepare a sales ledger control account and purchases ledger control account from the following information for the month of January:
		$
1-Jan	Sales ledger balance	12 750
	Purchases ledger balance	8 845
31-Jan	Credit sales	35 900
	Credit purchases	24 555
	Return inwards	1 200
	Return outwards	1 300
	Discount allowed	570
	Discount received	490
	Bad debts	1 110
	Dishonoured cheque	2 60
	Interest charged on overdue accounts	450
	Refund to customers	240
	Contra entry / Set off	350
	Receipts from customers	31 200
	Payment to suppliers	21 435
	Debit balances in purchases ledger	140
	Credit balances in sales ledger	150

DR	Sales ledger control account				CR
		$			$
Jan 1	Balance b/f (major)	12 750	Jan 1	Balance b/f (minor)	***
Jan 31	Credit sales	35 900	Jan 31	Return inwards	1 200
	Dishonoured cheque	260		Bad debts	1 110
	Interest on overdue accounts	450		Discount allowed	570
	Refund to customers	240		Cash/ cheques received	31 200
	Balance c/d	150		Contra/ set off	350
				Balance c/d	15 320
		49 750			49 750
Feb 1	Balance b/d	15 320	Feb 1	Balance b/d	150
				(CR balance in sales ledger)

DR	Purchases ledger control account				CR
		$			$
Jan 1	Balance b/f (minor)	***	Jan 1	Balance b/f (major)	8 845
Jan 31	Return Outwards	1 300	Jan 31	Credit purchases	24 555
	Payments to suppliers	21 435		Balance c/d	140
	Discount received	490
	Contra / Set off	350
	Balance c/d	9 965
		33 540			33 540
Feb 1	Balance b/d	140	Feb 1	Balance b/d	9 965
	(DR balance in purchases ledger)

Q1	Prepare a sales ledger control account and purchases ledger control account from the following information:
			$
	1-Mar	Sales ledger balance	2 456
		Purchases ledger balance	1 874
	31-Mar	Credit sales	8 765
		Credit purchases	6 745
		Return inwards	124
		Return outwards	116
		Discount allowed	237
		Discount received	256
		Bad debts	277
		Interest charged on overdue accounts	324
		Refund to customers	198
		Contra entry / Set off	230
		Receipts from customers	5 875
		Payment to suppliers	5 245
		Debit balances in purchases ledger	95
		Credit balances in sales ledger	75

Q2	Prepare a sales ledger control account and purchases ledger control account from the following information:
			$
	1-May	Sales ledger balance	11 445
		Purchases ledger balance	9 875
	31-May	Credit sales	15 235
		Credit purchases	10 435
		Return inwards	145
		Return outwards	1 255
		Discount allowed	1 765
		Discount received	1 675
		Bad debts	1 435
		Interest charged on overdue accounts	555
		Refund to customers	165
		Contra entry / Set off	175
		Receipts from customers	17 345
		Payment to suppliers	14 355
		Debit balances in purchases ledger	155
		Credit balances in sales ledger	115