1 CONTROL ACCOUNTS

1.1 Relationship with double entry - recap

• Relevant transactions are posted twice
• In total to control a/c in general ledger (say)
• Individually to trade receivables/trade payables ledger accounts kept in memorandum (say).

Detailed extract

1.2 Purpose of control a/cs

• To provide an internal control (also called "internal check") over the recording of credit transactions and their subsequent settlement.
• If all postings are correct both individually and in total

individual balances in sub-ledger = balance on control a/c

• If errors in control a/c (kept in G/L) TB will not balance
• If errors in individual a/c (kept in memorandum)
• over/(under *) payments to suppliers
• under/(over *) receipts from customers.

* less likely

• Control a/c reconciliations identify errors for correction.

1.3 Procedure for agreeing

• Balance off individual a/cs in the sub-ledger
• Extract a list of a/c balances and sum it
• Balance control a/c
• Investigate any difference.

1.4 Possible reasons for difference

• Casting error in a book of prime entry (affects total) will give rise to an error in the control a/c.

• Omission or duplicate posting of individual transactions.

• Transposition errors (in individual amounts or totals) will result in errors (in the individual and control a/cs respectively).

• "Contra entries" (set-offs) in individual a/cs not recorded in control a/cs.

Note: Contra entries may arise when a business has accounts in both the receivables and payables ledgers for the same party (ie the business obtains supplies from a customer). Instead of exchanging cheques, the accounts are settled by setting off the smaller balance to leave a net amount owing.

• Bad debts in individual a/cs not recorded in control a/c.

• Casting error in balancing off a/cs (individual or total).

• Errors in extracting individual balances (= list)

o omission

o recording Cr balance † in trade receivables ledger as Dr

o recording Dr balance in trade payables ledger as Cr.

† It is easily assumed that all receivables should have debit (or nil) balances. However, a customer could have a credit balance, eg if they made an advance payment.

Note: Not all errors will give rise to a difference (eg omitting a transaction from a book of prime entry).

1.5 Agreement

Step 1 Identify reasons for differences (above)

Step 2 Identify control a/c adjustments adjust control a/c

Step 3 Adjust list of balances for errors in its make-up and extraction.

2 TRADE RECEIVABLES

2.1 Proforma

• A trade receivables ledger control account may contain any or all of the following totals for the period.

† This balance must be the same as the sum of the individual balances on the customers’ ledger a/cs
Any difference must be reconciled.

2.2 Reconciliation

Illustration 1

Solution

• Step 1

Adjustments to the control a/c (see above) will require double entries to be made (except where the error is made in determining the balance on the control a/c).

• Step 2

• Step 3

Note: The mechanics of payables ledger control a/c reconciliations are the same.

Example 1

At 30 September the balance on the trade receivables ledger control a/c was $7,555. The total of the list of balances extracted amounted to $7,580.

The following errors have been discovered.

(1) An invoice for $560 has been correctly recorded in the sales day book – but
recorded in the individual customer’s a/c as $650.

(2) A contra of $90 recorded in the individual accounts has been omitted from
the control a/c.

(3) Discounts in the individual accounts amounting to $135 have not been
recorded in the control a/c.

(4) The sales day book was undercast by $100.

(5) A credit balance of $30 was extracted as a debit balance.

Required

Reconcile the control account balance to the total of the list of balances.

Solution

Step 1 Identify the trade receivables ledger control a/c adjustments

Step 2 Adjust the control a/c

Trade receivables ledger control a/c
	$		$
	_____		_____
	_____		_____

Step 3 Adjust the list of balances

	$
Original listing

3.1 Proforma

• A trade payables ledger control account may contain any or all of the following totals for the period.

• of payables ledger control a/c reconciliations are the same as for receivables.

EXAMPLE SOLUTIONS

Solution 1 – Trade receivables control a/c reconciliation

Step 1 Identify the trade receivables ledger control a/c adjustments

ie (2), (3) & (4)

Step 2 Adjust the control a/c

Trade receivables ledger control a/c
	$			$
Balance b/f	7,555		(2) Payables ledger control a/c	90
(4) SDB - u/cast error	100		(3) Discounts allowed	135
			Balance c/f	7,430
	_____			_____
	7,655			7,655
	_____			_____
Balance b/f	7,430

Step 3 Adjust the list of balances

	$
Original listing (1) Transposition (560 – 650) (2) Credit balance wrongly treated (2 30)	7,580 (90) (60) _____ 7,430 _____