Revise Control accounts for Cambridge 9706 (1.4.4)

Control accounts are memorandum accounts, meaning they are not part of the main double-entry bookkeeping system. Their primary function is to verify the arithmetical accuracy of the subsidiary ledgers they summarise: the sales ledger and the purchases ledger. The Sales Ledger Control Account (SLCA) shows the total amount owed by all trade receivables, while the Purchases Ledger Control Account (PLCA) shows the total amount owed to all trade payables. By comparing the closing balance of a control account with the sum of the individual balances in its corresponding subsidiary ledger (a 'schedule of balances'), a business can quickly identify discrepancies. This makes them a vital tool for internal control, helping to detect errors and deter fraud by segregating duties.

The Sales Ledger Control Account is an asset account, normally holding a debit balance. The opening balance represents the total amount owed by customers at the start of the period. The account is debited with items that increase the total amount owed by customers, such as credit sales (from the sales day book total) and interest charged on overdue accounts. Dishonoured cheques are also debited, as they reverse a previous payment and reinstate the debt. The account is credited with items that decrease the total amount owed. These include receipts from customers (from the cash book), sales returns (from the sales returns day book), discounts allowed to customers, irrecoverable debts written off, and contra entries where a customer is also a supplier.

The Purchases Ledger Control Account is a liability account and therefore normally carries a credit balance. This opening balance is the total amount owed to suppliers at the period's start. The account is credited with items that increase the total amount owed to suppliers, primarily credit purchases (from the purchases day book total) and any interest charged by suppliers on late payments. Conversely, the account is debited with items that decrease the total amount owed. These include payments made to suppliers (from the cash book), returns of goods to suppliers (from the purchases returns day book), discounts received from suppliers, and contra entries. The final closing balance represents the total trade payables at the end of the period.

A common application of control accounts in examinations is to calculate a missing figure, such as total credit sales or total credit purchases for a period. By constructing the control account as a T-account and inserting all the known information (opening/closing balances, payments, returns, etc.), the missing figure can be deduced as it will be the amount required to make the debit and credit sides balance. This technique is a crucial part of preparing final accounts when primary records are incomplete.

A key procedure is the reconciliation of the control account balance with the schedule of individual balances from the subsidiary ledger. If they do not agree, errors must be found and corrected. It's crucial to determine whether an error affects the control account, the subsidiary ledger, or both.

Common Errors:

• Affecting Control Account only: Incorrect total from a day book (e.g., sales day book undercast by $100).$
• Affecting Subsidiary Ledger only: An invoice posted to the wrong customer's account, or an amount misposted in an individual account.
• Affecting Both: A transaction completely omitted from the books of prime entry.

A contra entry or 'set-off' is a special transaction that must be recorded in both control accounts. This occurs when a business buys from and sells to the same organisation. Instead of separate payments, the smaller balance is 'set-off' against the larger one. This is recorded as a debit in the PLCA and a credit in the SLCA, reducing both total payables and total receivables.