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lesson 8...

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Lesson Eight Introduction Dear learner in this topic we are to learn about control accounts. Control accounts are maintained in order to provide arithmetic check on the individual debtor’s ledger and creditors ledgers. We shall prepare sales ledger and creditors ledger control accounts Expected Learning Outcomes By the end of this lesson the learners should be able to 1. Explain the meaning of a control Account 2. Explain the purpose of control accounts 3. Identify items that are used in sales ledger control account and creditors ledger control accounts 4. Prepare sales ledger control account 5. Prepare creditors ledger control account Control Accounts Control account may be defined as a total account inserted in a ledger to make itself balancing. It is an account in the general ledger in which a listing is kept of a number if similar but individual items and their values. The balance of this account should be similar to the total of the detailed balances of the ledger giving proof of the arithmetical accuracy of the book keeping entries in the ledger. Control accounts in the general ledger represent the total of all the accounts in some other ledgers. The accuracy of these ledgers is proved by the control accounts. They are mostly used to record trade receivables and trade payables. There are two main types of control accounts  

Sales ledger control accounts Purchases ledger control account

Purposes of Control Accounts      

Provide arithmetical check on the posting made in the individual ledger accounts Provides a quick total of the balances for debtors and creditors Detect and correct errors that may have occurred in the debtors and creditors account Control accounts serve the purpose of a trial balance To prevent fraud Assists in the control function of management

Sales Ledger Control Account This is also called debtors ledger control account. It comprises of information pertaining credit customers and the balance derived at the end of the period is supposed to be equal to Page 1 of 7

the balances of the individual debtor’s ledgers. This account is prepared to ascertain arithmetical accuracy of the individual debtor’s ledger. If there is a difference in the totals then an error was committed while posting transactions in the debtor’s ledgers which must be located and corrected. The format of the control account is given below Debtors Ledger/Sales Ledger Control Account Balance B/d XX Balance B/d Credit Sales XX Cash received from debtors Customer Cheques dishonoured XX Cheques received from debtors Refund to customers for overpayment XX Bad debts written off Interest charged to debtors XX Discount Allowed Debt collection expenses charged XX Return Inwards Bills of exchange receivable Allowances to Customers Contra Settlements Balance C/d XX Balance C/d XX

XX XX XX XX XX XX XX XX XX XX XX

Note The balance B/d on the credit side of the sales ledger control account refers to the debtor accounts which are overpaid at the beginning of the period and the balance c/d on the debit side are debtors accounts overpaid at the end of the period. Contra settlements At times the business may have credit customers who are also suppliers for goods and services on credit. The net debt is calculated and then deducted from both debtors and creditors control account. The net debt is referred to as a contra settlement. Purchases Ledger Control Account This is also referred to as creditors ledger control account. It is also prepared to determine the arithmetic accuracy of the individual creditor’s ledger accounts. The balance in this account should be equal to the total balances of the individual creditor’s accounts. The format for the control account is provided below Creditors Ledger/Purchases Ledger Control Account Balance B/d XX Balance B/d Cash payments to creditors XX Credit Purchases Cheque payments to creditors XX Creditors cheques Dishonoured Discount received XX Refund by suppliers for overpayment Allowances from suppliers XX Interest charged by creditors Return Outwards XX Balance C/d Bills of Exchange payable XX Contra settlements XX Balance C/d XX Page 2 of 7

XX XX XX XX XX

XX XX

Note The opening balance b/d on the debit side of the creditor’s ledger control represent creditor accounts that are overpaid at the beginning of the period and the balance c/d on the credit side represent creditor ledgers overpaid at the end of the period. The opening balances (Balances B/d) in the ledgers are recorded as indicated, whereas the balances at the end (Balances c/d) will be interchanged in the ledger. If it indicates Debit it will be recorded in the credit and vice versa The control accounts only record credit transactions with respect to debtors and creditors. Cash transactions are not recorded in the control accounts Example One The following balances were obtained from the books of Mali Mingi a sole trader based in Nakuru town for the month of October 2019 Balances 1.10.2019

sh.000

Sales ledger

9,123 (Dr) 211 (Cr)

Purchases Ledger

4,490 (Cr) 88(Dr)

Transactions during the month Purchases on credit

18,135

Allowances from suppliers

639

Cash purchases

2,675

Receipts from customers by cheque

27,370

Credit sales

36,755

Discount received

1,105

Payments to creditors by cheque

15,413

Contra settlement

3,046

Bills of exchange receivable

6,506

Cash sales

4,805

Page 3 of 7

Allowances to customers

1,720

Customer cheques dishonoured

489

Cash received from credit customers

4,201

Refund to customers for overpayment

53

Discount allowed

732

Balances 31.10.2019 Sales ledger

136(Cr)

Purchases Ledger

76(Dr)

Required: Prepare a) Sales Ledger control Account b) Purchases Ledger Control Account Example two The following balances were obtained from the books of Kopesha Ltd for the month of April 2019 Credit balances 1.4 2019

sh.000

Sales ledger

154

Purchases ledger

569

Debit balances 1.4.2019 Sales ledger

956

Purchases ledger

196

Credit balances 30.4.2019 Sales ledger

178

Debit balances 30.4.2019 Purchases Ledger

189

Credit purchases

2,450

Credit sales

4,563

Cheques from debtors

3,140

Cash from debtors

1,367

Cheque paid to creditors

1,994 Page 4 of 7

Cash paid to creditors

352

Bad debts written off

68

Discount received

104

Discount allowed

169

Contra settlement

234

Refund to debtors

62

Return outwards

138

Return inwards

231

Required: Prepare a) Sales ledger control account b) Purchases ledger control account Conclusion We have now come to the end of the lesson. You are now expected to apply the knowledge acquired in order to answer the review questions at the end of the lesson Review Questions 1. 2. 3. 4.

Explain the meaning of a control Account (2marks) Outline four purposes of control Account (4marks) Explain the meaning of contra settlement as used in control accounts (2marks) The following information was extracted from the books of a trading organisation for the month of May 2019 Sh.000

Sales ledger balances 1.5.2019

Purchases Ledger balances

Dr.

624,200

Cr.

6,420

Dr.

3,220

Cr.

522,420

Receipts from credit customers

663,040

Payments to trade creditors

`

592,500

Credit sales

734,380

Credit purchases

252,040

Interest charged on debtors

300

Debtor’s cheques dishonoured

6,300

Discount received

28,320 Page 5 of 7

Discount allowed

30,420

Bad debts written off

8,420

Sales ledger debits transferred to purchases ledger

2,400

Sales ledger balance 31 May

7920(cr)

Purchases ledger balance 31 May

4,380(cr)

Required: Prepare a) Sales ledger control account b) Purchases ledger control account

(8marks) (7marks)

5. The following figures were extracted from the records of Mr Stephen Magadi a sole trader based in Nakuru town for the six months ended 30 June 2019 Shs. Opening balances 1 January 2019

Sales ledger (Dr)

142,800

Purchases ledger (Dr)

1.050

Sales ledger (Cr)

4,050

Purchases ledger (Cr)

55,380

Sales ledger debit balances off set against purchases ledger

3,690

Discounts –

Allowed

20,970

Received

14,250

Purchases (Including cash purchase of sh, 2,000)

120,200

Cash sales

61,800

Credit sales

206,820

Credit notes issued to customers for goods returned

7,500

Cash purchases

13,200

Payments to creditors

115,920

Interest charged by creditors on overdue accounts

6,900

Receipts from customers

157,800

Bad debts written off

3,720

Customers unpaid cheques

2,610

Interest charged to customers

9,600

Debt collection expenses charged to debtors

1,080

Page 6 of 7

Credit notes received for goods returned to suppliers

2,670

Balances on 30 June 2019: Purchases ledger (Dr)

1,440

Sales Ledger (Cr)

5,070

Required: Prepare a) Debtors ledger control account b) Creditors ledger control account

(10marks) (8marks)

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