topic 11 control accounts

• Firms keep their accounts in 4 ledgers:

  • sales ledger
  • purchases ledger
  • general ledger
  • cash book
• As firms grow and have more accounts it is likely that errors might occur. Control accounts provide a double check on the sales and purchases ledger to see if the correct entries have been made
• The sales ledger control account checks the sales ledger and the purchases ledger control account checks the purchases ledger
• The basic principles of control accounts is: Opening balance + Entries which have increased the balance - Entries which have reduced the balance = Closing balance
• The SLCA: The opening balance will be a DR because it acts as a double check on the sales ledger which records trade receivables

  • items which increase amount of receivables owing goes on the DR side
  • items which reduce what receivables owing go on the CR side
• Examples for SLCA:

  DR - bal bd, credit sales, dishonoured cheques and discount allowed

  CR - cash/cheques received from receivables, discounts allowed, sales returns, irrecoverable debts, purchases ledger control C and bal cd
• Cash sales never go in a SLCA
• The PLCA: The opening balance will be a CR because it acts as a double check on the purchases ledger which records trade payables

  • items which increase what the business owes to suppliers are entered on the CR side
  • items which reduce what the business owes its trade payables are entered on the DR side
• Examples for PLCA:

  DR - cash/cheques paid to payables, purchases returns, discount received, sales ledger control C and bal cd

  CR - bal bd, credit purchases, cheques to payables cancelled, interest charged on overdue accounts, cheques dishonoured by the bank and discount received
• Contra entries: In control accounts contra entries are made when a business is both a customer and a supplier of another business
• The DR balance in the sales ledger is set off against the CR balance in the purchases ledger, so:

  • DR the purchases ledger and PLCA
  • CR the sales ledger and SLCA
• The benefits of using control accounts:

  • errors are minimised because a double check is carried out
  • if errors are made, the source of errors can be located more quickly
  • scope for fraud is reduced because the accounts are usually under the control of a senior bookkeeper
• The limitations of control accounts:

  • an error of omission if an invoice is mislaid
  • an error of commission if the entry is made in the wrong personal account
  • an error of original entry if the wrong figure is entered in the books of original entry
• Explain the usefulness of the SLCA - As firms grow and have more accounts there is a greater possibility that errors might occur, be more difficult to find, and the firm will need to employ more bookkeepers. The SLCA checks the sales ledger by identifying errors before correcting them. If the SLCA balances, it agrees with the receivables in the sales ledger
• Explain where the information on the sales ledger control account comes from - Entries in the general ledger are made from the totals in the books of prime entry and so control accounts are known as total accounts. The figures in the SLCA are obtained from the totals of the: sales day book, sales returns day book, journal and the cash book
• Explain where the information on the purchases ledger control account comes from - Entries in the general ledger are made from the totals in the books of prime entry and so control accounts are known as total accounts. The figures in the PLCA come from the: purchases day book, purchases returns day book and the cash book