CHAPTER EIGHTControl AccountsIntroductionIn the previous chapters, it has been pointed out that the sales ledger and purchase ledger are subsidiary ledgers. The main ledger is the general ledger. The subsidiary ledgers are drawn to decongest the general ledger. Once they are drawn, the summaries must find their way to the general ledger. This is exactly what the control accounts do. Hence in the general ledger, there would be only one debtor’s account and one creditors account. These are the control accounts. Both the sales ledger control accounts and purchases ledger control accounts were introduced in chapter two.Objectives:After studying this chapter you should be able to:

Appreciate the need for control accounts Draw sales ledger control account Draw purchases ledger control accounts Appreciate ledger contra entries

Key TermsControl account: An account held in a ledger, which summarises the entries and

balances of all the accounts in the same or another ledger.

Purchases ledger control account : A control account which summarises the entries and balance of all the

individual accounts of suppliers in the purchases ledger.

Sales ledger control account: A control account which summarises the entries and balance of all the

individual accounts of customers in the sales ledger.

Uses of Control accounts Control accounts help summarise information in the subsidiary ledgers so as to incorporate them in the general ledger. If for instance there are 1000 debtor accounts, and 800 creditor accounts, imagine what the size of the general ledger would be if it was to include each and every of these personal accounts. If you open ledger accounts for each of the individual debtors and creditors, the general ledger would have nearly 1800 accounts not forgetting the other accounts of the general ledger like expenses account. The subsidiary accounts are drawn to decongest the general ledger. In the subsidiary ledgers one can manage and store specific information regarding each of the accounts for the debtors and

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creditors. Only the total of each of these two ledgers will be reflected in the general ledger through the control accounts.

In large business organisation with huge volumes of credit sales and purchases, the entry and management of the subsidiary ledgers may be delegated to the receivables accountant who balances the debit and credit entries in the individual ledgers accounts and compile a list of the balances at the end of a period. These balances must agree with the sales ledger control account in the general ledger. The same principles may apply for the purchases ledger and any other subsidiary ledger.

Control account is the account where entries of all accounts belonging to a given account group are made. Like sales and purchases ledger control accounts, which are control accounts for all the individual accounts of the group, there can also be control accounts for such items as stocks. The purpose of the control account is to make the complex accounting structures more efficient to organize by summarising the entries in the main books.

In summary the benefits of maintaining control account are:i) It shows at a glance the total value and balances contained

in the ledger to which it pertains. It would be a very tedious exercise to try to trace the totals of says sales, purchases and payments from subsidiary ledgers.

ii) The control accounts serves as trial balance for the subsidiary ledgers. It is a check on the accuracy of the entries made in the individual accounts. One only needs to take the totals from the individual accounts in the ledgers and compare them with the totals in the control accounts. If there is any difference, then there must be an error or a group of errors.

iii) Control accounts make location of errors easier and the accuracy of ledger is easily proved. Errors in the trail balance can easily be zeroed down to a specific ledger, making it easier to locate them.

iv) Control accounts helps to segregate the duties between the accountant responsible for ledgers and another for controls. This is a good means of helping the management to detect fraud and provides an effective control over the work of employees who writes the books of accounts

v) Speeds up the preparation of final accounts. Control accounts provide totals that will be used to draw the financial statements. A single balance in the control accounts is more easily extracted than aggregate of balances from the subsidiary ledger.

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Sales ledger Control Account The sales ledger control account (otherwise known as total debtors account) records the total transactions with credit customers and reflects the amount owed by all the debtors obtained from the individual balances in the sales ledger accounts. Other elements in the sales ledger control account include:

i) Returns inwardsii) Bad debtsiii) Dishonoured chequesiv) Discounts allowed.v) Inter- account settlements with suppliers (contra)

Inter – account settlements or transfers occur where a customer is a supplier at the same time. The debts receivable from that account is set – off against the debt payable to that person. This is known as a contra entry.It is recorded as:

Dr: Purchases ledger control accountCr: Sales ledger control account.

Some of the individual accounts may have credit balances. This may be a result of such factors as overpayment of account, or errors.

Purchases ledger Control Account The purchases ledger control account (otherwise known as the total creditors account) records the total transactions with credit suppliers and reflects the amount owed to all the suppliers obtained from the individual balances in the purchase ledger. Other elements in the purchases ledger control account include:

i) Returns outward wardsii) Discounts received iii) Dishonoured chequesiv) Inter- account settlements with Customers (contra)

Like the case of sales ledger control account, inter – account settlements or transfers occur where a supplier is a customer at the same time. The debts payable to that account is set – off against the debt receivable from that person.

It is recorded as:Dr: Purchases ledger control account

Cr: Sales ledger control account.

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Some of the individual accounts may have debit balances. This may be a result of such factors as overpayment of account, or errors.

Example

(a) The following information has been extracted from the books of Mutero Traders Limited for the month of April 2002

Balance as at 1 April 2002: Sh.Sales ledger – Debit balances 838,000

Credit balances 184,000Purchases ledger – Debit balances

196,000– Credit balances 598,000

Transactions during the month:Sales on credit 8,784,000Purchases on credit 7,849,000Returns in-wards 248,000Returns out-wards 179,000Cheques received from trade debtors 2,968,000Cheques paid to trade creditors 4,674,000Cash paid to trader creditors 1,393,000Bad debts written – off 139,000Discounts allowed to trade debtors 162,000Discounts received from traders creditors 231,000Credit sales offset against credit purchases 356,000Credit purchase of a Motor vehicle posted in the purchases ledger 598,000Dishonoured Cheques from trade debtors 193,000Cash received to replace dishonoured Cheques from trade debtors 106,000An invoice to trade debts of Sh. 174,000 posted as 147,000

Balances as at 30 April 2002Sales ledger credit balances 123,000Purchases ledger debit balances 177,000

Required:The sales ledger and purchases ledger control accounts for the month ended 30 April 2002. Suggested solution

Dr Sales ledger control account Cr

Bal b/f 838,000 Bal b/f 184,000Sales 8,784,000 Returns inwards

248,000Bank (dishon.. cheques) 103,000 Bank 2,968,000

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Sales 27,000 Bad debts w/o 139,000 Discount allowed 162,000

Purchases Ledger (contra) 356,000Bal c/f 123,000 Cash

106,000 Bal c/f 5,802,000

9,965000 9,965,000

Dr Purchases ledger control account Cr

Bal b/f 196,000 Bal b/f 598,000Returns outwards 179,000 Purchases 7,849,000Bank 4,674,000 Motor Veh. Supplier 598,000Cash 1,303,000 Discount rec.d 231,000 Sales Ledger (contra) 356,000Bal c/f 1,087,000 Bal c/f 177,000

8,624,000 8,624,000

EXAMINATION QUESTIONS

QUESTION ONE

Poesha Limited keeps sales and purchases control accounts in the General Ledger. The transactions for the month ended 30 April 2000 were as follows:

Sh.

Credit balances on 1 April 2000 – Sales ledger 154,000

– Purchases ledger 569,000Debit balances on 1 April 2000 – Sales ledger 956,000

– Purchases ledger 196,000Credit balances on 30 April 2000 – sales ledger 178,000Debit balances on 30 April 2000 – purchases ledger 189,000Credit purchases 2,450,000Credit sales 4,563,000Cheques received from debtors 3,140,000Cash received from debtors 1,367,000Cheque payments to creditors 1,994,000Cash payments to creditors 352,000Bad debts written-off 68,000Discounts received 104,000Discounts allowed 169,000

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Contra entry to sales ledger from purchases ledger 234,000Refunds to debtors 62,000Returns outwards 138,000Returns inwards 231,000

Required:(a) Sales ledger and purchases ledger control accounts for the month ended 30

April 2000 (20 marks)

Dr Sales ledger Control a/c Cr

Bal b/f 956,000 Bal b/f 154,000Credit sales 4,563,000 Bank 3,140,000

Cash 1,367,000Cash (refund) 62,000 Bad debts w/o 68,000

Discount allowed 169,000 Purchases Ledger a/c (Contra) 234,000

Bal c/f 178,000 Returns inwards 231,000 Bal c/f 396,000

5,759,000 5,759,000

Dr Purchases ledger Control a/c Cr Bal b/f 196,000 Bal b/f 569,000Bank 1,994,000 Credit purchases 2,450,000Cash 352,000 Discount received 104,000 Sales Ledger a/c(contra) 234,000Returns outwards 138,000Bal c/f 190,000 Bal c/f 189,000

3,208,000 3,208,000

Question Two

Faith Kujua Ltd. is a distributor of T.V. sets. The sales are entirely on credit terms. The following balances were extracted From its ledgers at 30 September 2001: Sh.

Sales 21,716,070Creditors - Balance at 30 September 2000 1,403,430

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Debtors - Balance at 30 September 2000 2,538,330Purchases of T.V. Sets 10,287,480Discounts allowed 246,420Cash received from debtors 20,978,010Cash paid to creditors 9,655,590Returns inwards 1,107,750Carriage outwards 157,920Overdraft interest 382,440Provision for doubtful debts at 30 Sept.2000144,390Discounts received 209,340

Additional information.A cheque for Sh.37, 380 from B. Kamau, a customer, has been returned by the bank marked "Effects not cleared". Bad debts totalling Sh.205,620 are to be written off, and the provision for doubtful debts is to be raised to 10% of the debtor balances at 30 September 2001.

REQUIRED:

Prepare for the year ended 30

September 2001:

(a) Debtors Ledger Control

Account.(b) Bad and Doubtful Debts Account, and.(c) 'Show the Balance Sheet entry for debtors as at that date.

Question Three

Mwangaza Ltd. is in wholesale business selling roofing iron sheets on creditterms. The following balances were extracted from its ledgers at 30 September 2002:

Sh.Sales 7,438,560Purchases 3,263,430Cash and cheques received from debtors 7,092,650Cash paid to creditors 3,018,420Creditors - Balance at 1.10.2001 497,730Debtors - Balance at 1.10.01 842,200Discounts allowed 83,160Discounts received 70,780Returns inwards 370,360Carriage outwards 54,640

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Selling and distribution expenses 124,660Provision for doubtful debts at 1.10.2001 49,480

Further checks revealed that:

(i) Bad debts amounting to Sh.72, 540 are to be written off, and the provision for doubtful debts is to be raised to 10% of the debtor balances at 30 September 2002.

(ii) A cheque for Sh.14, 260 from one of the customers has been returned by the bank marked "effects not cleared".

(iii) Included in cash and cheques received from debtors is a cheque forSh.7, 500 from the liquidator of 'Ngiza Ltd.This customer hadowed Mwangaza Ltd. Sh.75, 000 when it ceased to trade in March 1995, and the debt had been written off as a bad debt in the year ended 30 September 1995.

REQUIRED:

(a) Debtors Ledger Control - Account. (12 marks)

(b) Bad and Doubtful Debts Account. (4 marks)

(c) Explain the benefits that accrue from operating control

accounts. (4 marks) (Total: 20marks)Question Four

Amboseli Co. Ltd. maintains ledgers for the credit customers and suppliers, in addition to the general ledger. In the general ledger, among other accounts, are two control accounts one for the debtors and the other for the creditors.The following figures were extracted from the hooks of the company for the month of August 2003, which is also the end of the accounting year of the company.

Sh.Credit purchases 2,950,0

00Provision for doubtful debt (established at the end of the 640,00Credit sales 3,800,

000Claims by Amboseli for pricereductions on defective goods as agreed with suppliers 107,80Returns inwards 120,00

0Discounts received 75,600Returns outwards 90,100Interest charged to credit customers 200,50

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0Discounts allowed 100,90

0Receipts from credit customers 3,306,4

00Payments to credit suppliers 3,800,

000Bad debts written off 80,700Customers' cheques dishonored.(Including cheques paid over the counter by customers - Sh.380,000)

965,000

Creditors ledger credits transferred to debtors ledger 214,600

Debtors balance at 1.8.03 2,100,000

Creditors balance at 1.8.03 800,000

Additional information:

(i). Amounts totaling Sh.28,600 written off two months ago are collected in the current month and credited to suspense account

(ii). On 31 August 2003 customers' accounts with credit balance were Sh.450, 000 and suppliers' accounts with debit balances were Sh.213,400.

(iii). One invoice of Sh.75, 000 was posted to the debtors’ ledger as Sh.57, 000.

(iv). A reconciliation of the debtors control with the debtors ledger balances on 31 July 2003 revealed a difference of Sh.60, 000.In August 2003, this difference was discovered to have been caused by failure to add one invoice of the same amount to the July sales invoices total that was posted to the debtors control account. The invoice has been correctly posted to the debtors’ ledger.

(v). It is estimated that 90% of customers with outstanding accounts on 31 August will take discounts in the first week of September 2003. The company offers a cash discount of 2% on sales.

(vi). Estimated price adjustment and other allowances on outstanding debtors amount to

Sh.180, 000.

(vii). The company makes provisions at the end of the year to recognize discounts, allowances and doubtful debts applicable to the end of year outstanding debtors.

Required:a) Debtors Ledger Control Account. (8

marks)b) Creditors Ledger Control Account. (6

marks)c) Show how debtors will appear in the Balance Sheet of Amboseli

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Company on 31 (3 marks)d) Distinguish between the direct write off and the provision for doubtful

Debts methods of accounting for bad debts expense. (3 marks) (Total: 20 marks)

Suggested solution

a) Debtors’ ledger control a/cBalance b/f 2,100,000 Bank 3,306,4

00Sales 3,878,000 Returns

inwards120,000

Interest charge 200,500 Discount allowed

100,900

Dishonoured cheques

585,000 Bad debts 80,700

Suspense 28,600 Creditors control a/c (Contra)

214,600

Suspense 18,000Balance c/f _450,000 Balance c/f 3,437,5

007,260,100 7,260,1

00

b) Creditors’ ledger control a/cDiscount received

75,600 Balance b/f 800,000

Returns outward

90,100 Purchases 3,950,000

Bank 3,800,000Debtors control A/C(Contra)

214,600

Claims 107,800Balance c/f 461,900 Balance c/f 213,400

_______ _______3,963,400 3,963,400

Workings

Sales As per accounts 3800,000Casting error 60,000Transposition error 18,000Total 3,878,000

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c) Balance sheet debtors

Debtors control account balance

Debit 3,437,500 Credit (450,000) Total 2,987,500Provision for:bad & doubtful debts (640,000)Price adj. & other allowances (180,000)Discounts allowance2%( 2,987,500-640,000) (46,950)

2,120,550d)

Bad debts are those debts that the business is not able to collect. These are written off as an expense. Some debtors may not qualify to be bad but their collection may be in doubt. These may include debtors that have taken longer than the normal /agreed credit period. It may also include debt held by people whose ability to pay is in doubt. Prudence requires that such debts be set aside as doubtful at least at the moment. A provision for bad and doubtful debts is set, at the end of the period equal to the amount whose receipts is in doubt.

Question five

(a) Explain the purposes for which control accounts are prepared. (b) Balances and transactions affecting G. Mwenda's control accounts for the month of May 2001 are listed below: Balances at 1 May 2001: Sh.

Sales ledger 456,150 (debit)

10,550 (credit)Purchases ledger 224,500(credit) 4,400 (debit)Transactions during May 2001:Purchases on credit 906,750Allowances from suppliers 31,450Receipts from customers by cheque 1,368,500Sales on credit 1,837,750Discounts received 55,250Payments to creditors by cheque 770,650Contra settlements 152,300Allowances to customers 86,000Bills of exchange receivable 325,300Customers' cheques dishonoured 24,450

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Cash receipts from credit customers 210, 050Balances at 31 May 2001:Sales ledger 6,800 (credit)Purchases ledger 3,350 (debit)

REQUIRED:

Prepare the Sales Ledger and Purchases Ledger Control Accounts for the month of May 2001 and derive the respective debit and credit closing balances at 31 May 2001. (20 marks)

Question Six

(a) Explain the advantages of maintaining control accounts. (6 marks)(b) The following balances were extracted from the books of Katec Ltd for the

month of April 2005:

Sh.Debit balances Sales ledger 1,428,

000Purchases ledger 1,500Credit balances Sales ledger 40,500Purchases ledger 553,80

0Discounts received 142,50

0Discounts allowed 209,70

0Purchases (including cash purchases of Sh.152,000)

1,334,000

Cash sales 618,000

Credit sales 2,068,000

Credit notes issued to customers for returning goods 75,000Sales ledger debit balances off-set against purchases ledger 36,900Payments to creditors 1,159,

200Interest charged by creditors on overdue accounts 69,000Receipts from customers 1,578,

000Bad debts written off 37,200Customers’ unpaid cheques 26,100Interest charged to customers on overdue accounts 96,000Debt collection expenses charged to debtors 10,800

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Credit notes received from suppliers 26,700Balances as at 30 April 2005: Purchases ledger (debit) 14,400Sales ledger (credit) 57,000Required:(i) Sales ledger control account for the month ended 30 April 2005. (7

marks)(ii) Purchases ledger control account for the month ended 30 April 2005. (7

marks)(Total: 20 marks)

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