Control Accounts

 

1.0 INTRODUCTION

When a trial balance does not agree, this is an indication that error (s) have been made in the accounting entries.

Location of errors in small business concern is relatively easy because or the few number of transactions. But, in a big business where there is a large number of transactions, the accounting books and ledgers are many and sub-divided.

 Therefore, tracing the errors might be difficult and time consuming. This problem can be simplified by haying a system that makes it possible to localize the error{s} to specific ledger (s) so that such ledger{s} will be thoroughly checked to locate and correct error{s}. This need is met by having, a control account for each that shall act as a check on the accuracy of the entries in the ledger.

A ledger that has a control account is sometimes referred to as a self-balancing ledger. 

2.0 OBJECTIVES

At the end of this note, you should be able to:

• define control Account

• explain Sales ledger Control Account

• explain Purchases ledger Control Account

• give the formats of control Accounts

• explain the Treatment of certain items in Control Accounts

• give the Advantages of Control Accounts.

3.0 MAIN CONTENT

3.1 Control Accounts

3.2 Definition

Control Accounts are accounts prepared to check the accuracy of some specified ledgers. They make use of total figures of items posted individually into the ledger accounts and are normally prepared for sales and purchases ledgers.

Control Accounts can also be defined' as accounts which contain the summary of total of entries in the individual accounts in the ledger.

In other words, control accounts are replica in summarized form of the accounts in the ledger to which they relate. It therefore follows that the balance, on these accounts will be equal to the total of all individual balances in the ledger. Where this is not so, it is an indication of errors in the ledger.

3.3 Sales Ledger Control Account

Sales ledger Control Account is also known as "Total Debtors Account". It is debited with the sum of all the items which have been debited in detail to various personal accounts in the sales ledger and credited with the total of all the items which have been credited to such accounts. The

balance of the sales ledger control accounts should be equal to the total of the balances shown in the sales ledger.

In summary, the sales ledger control account which contains on the debit side, the totals of the following items: 

A Opening debit balances

B Total sales made during the period

C Cash and cheques paid to debits 

On the credit side it will contain the totals of the following items: 

A Opening credit balances

B Cash and cheques received from debtors during the period

C Returns Inwards

D Bad debts written off

E Discount allowed to debtors.

3.4 Purchases Ledger Control Account

This is also known as "Total Creditors Account". It serves as a control account of the purchases ledgers and should show a balance equal to the total of all the balances of creditor's personal accounts in those ledgers.

The following will be shown on the credit side of the accounts:

A Opening Credit balances

B Total Purchases during the period.

On the debit side, the following are shown: 

A Opening debit balances

B Cash and cheques paid to customers during the period

C Discount received

D Returns Outwards

It should be noted that the entries in this account take the opposite form of the Total Debtors Account.

3.5 Formats of Control Accounts

3.5.1 Debtors Control Account/Sales Ledger

3.5.2 Creditors Control Account/Purchases Ledger Control Account

 

3.6 Treatment of Certain Items in Control Accounts

3.6.1 Debtors Control Account

I Bills Receivable: Where bills receivable and bills receivable accepted are both given, the latter should be used because the obligation of the debtor on the bills arises only when he accepts the bill. However, where only bills receivable is given, it should be interpreted to mean bills receivable accepted. 

II Bills receivable discounted should be disregarded. 

III Bills receivable honored should be disregarded. 

IV Bad debt recovered: Should be ignored unless it had earlier been

credited to the debtors control account, in which case it should be debited to the debtors control account. 

V Provisions for bad/doubtful debt and provision for discount

allowable should be disregarded. 

VI Cash sales should be disregarded 

3.6.2 Creditors Control Account

I Bills payable: The same rule as with bills receivable supplies.

II Bills payable honored should be disregarded.

III Provision for discount receivable should be disregarded

IV Cash purchases should be disregarded.

3.7 Disadvantages of Control Accounts

1. Control Accounts make it possible to localize error{s} so that time is not wasted checking ledger{s} where there are no errors.

2. Because control accounts are normally put under the charge of a senior official, they serve as a check against fraud by junior accounting officials keeping the ledgers.

3. Control Account saves the time and effort of drawing up the schedules of debtors and creditors and thereby, aids the preparation of draft annual accounts.

4. They aid the preparation of interim final accounts since the balances of control accounts at any time represent the total of the balances in the individual accounts.

5. They can be used to detect missing figures.

4.0 CONCLUSION

When all the accounts were kept in one ledger a trial balance could be extracted as a test of the arithmetical accuracy of the account. It must be remembered that certain errors were not revealed by such a trial balance. If the trial balance totals disagreed, the number of entries for such a small business being relatively few, the books could easily and quickly be checked so as to locate the errors. However, when the firm has grown an the accounting work has been so subdivided that there are several or many ledgers, a trial balance the totals of which did not agree could result in a great deal of unnecessary checking before the errors were found. What is required in fact is a type of trial balance for each ledger, and this requirement is met by the control Account.

5.0 SUMMARY

In this note, we have dealt with definitions of control account and we have also explained Sales Ledger Control Account, Purchases Ledger Account and the Treatment of certain items in Control accounts. A Control Account for a sales Ledger could be known either as a sales ledger control account or as a total debtors account. Similarly, a Control Account for a purchases ledger could be known either as a Purchases Ledger Control Account or as a Total Creditors Account.

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