Control accounts and their reconciliation with receivables and payable ledger acoount

CONTROL ACCOUNTS AND THEIR RECONCILIATION WITH RECEIVABLE AND PAYABLE LEDGER ACCOUNTS

Control accounts are accounts that summarize the transactions recorded in a particular ledger. They are normally prepared for accounts receivable and payable ledgers. Control accounts may also be prepared for inventory, etc. 

Control accounts normally form part of the double entry system whereas the individual debtors and creditors accounts are considered memorandum accounts only.

Purpose of Receivable and Payable Ledger Control Accounts

1.      To correct errors.

2.      To ensure accuracy in the double entry system.

3.      To ensure that debtors and creditors balances can be ascertained more readily.

4.      To act as an internal check on staff.

5.      To save time.

Receivables Ledger Control Accounts

It is an account that is prepared to summarize the individual transactions in the accounts receivable ledger.

The format may be as follows:

Receivables Ledger Control Account

Balance b/f	***	Balance b/f (if any)	***
Credit sales	***	Discount allowed	***
Refund to debtors	***	Return inwards	***
Interest on overdue debt	***	Bad debt	***
Correction of errors	***	Bank	***
Balance c/d (if any)	***	Correction of errors	***
		Contra set-off	***
		Balance c/d	***
	***		***

Payable Ledger Control Account

It is an account that is prepared to summarize the individual transaction in the accounts payable ledger.

The format may be as follows:

Payables Ledger Control Account

Balance b/f (if any)	***	Balance b/f	***
Discount received	***	Credit purchases	***
Return outwards	***	Refund from creditors	***
Bank	***	Correction of errors	***
Correction of errors	***	Balance c/d (if any)	***
Set -off	***
Balance c/d	***
	***		***

EXERCISE 1

a.       State whether a control account is personal or impersonal account and indicate the ledger in which the payable or receivables ledger control account can be found.

b.      Record the following transactions in the receivable and payables ledger control accounts and balance them off.

Jan 1: Receivables:      balance b/f       $ 5,000 (DR)               -           20 (CR)

          Payables:           balance b/f       $ 2,000 (CR)               -           15 (DR)

Transactions during the month:

                                                                                                    $

Credit sales                                                               100,000

Cash sales                                                                    40,000

Credit purchases                                                         65,000      

Cash purchases                                                            30,000

Return inwards                                                             4,000

Return outwards                                                           2,500

Bad debts written off                                                      120

Cash discount allowed to credit customers                     600

Cash discount received from credit suppliers               1,200

Interest on overdue debts of customers                        1,200

Receivable ledger account balance set off against

    payable ledger account balance                                   750

Overstatement of return inwards                                     820

Cash from credit customers                                        30,000

Cash paid to suppliers for goods bought on credit     20,000

Cash refund to credit customers                                   1,500

Cash refund from credit suppliers                                2,000

Jan 31. Credit balance in the receivables ledger (prepayment)   500

            Debit balance in the payables ledger (prepayment)      1,100

EXERCISE 2

Take a look at an inexperienced bookkeeper who has drawn up the receivables ledger control account below

Receivables Ledger Control Account

	$		$
Opening balance	180,000	Credit sales	190,000
Cash from credit customers	228,000	Bad debts written off	1,500
Sales returns	8,000	Contras against payables	2,400
Cash refunds to credit customers	3,300	Closing balance (Balancing figure)	229,600
Discount allowed	4,200
	423,500		423,500

You are required to determine the correct closing balance after correcting the errors made in preparing the accounts.

EXERCISE 3

A careful study of the receivables ledger control account below reveals many inaccurate entries

Receivables Ledger Control Account

	$		$
Opening balance	138,400	Credit sales	80,660
Cash received from credit customers	78,400	Contras against credit balances in         payable ledger	1,000
		Discount allowed to credit       customers	1,950
		Bad debts written off	3,000
		Dishonoured cheques from credit         customers	850
		Closing balance	129,360
	216,820		216,820

What should the closing balance be when all the errors have been corrected?

Reconciliation of Control Account Balance with Personal Ledger Balances

The control account balance may not agree with the sum of the personal ledger balances as a result of any of the following:

Error of omission (in day book or personal ledger)

Error of transposition (in day book or personal ledger)

Error of casting (in day book or personal ledger)

Error of reversal of entry

Error of original entry

Error of duplication

Generally, the personal ledgers are not part of the double entry system but are kept as memorandum accounts only. Where this is the case the following may be followed for the reconciliation:

        i.            Pass all relevant entries in the control account to correct any errors that have affected the control account.

      ii.            Prepare a reconciliation statement to explain the difference between the control account balance and the sum of the personal ledger balances, using the errors affecting the personal ledgers only.

Note that it is easier to start the reconciliation with the total of the individual accounts balances rather than the control account balance. But all two approaches must be learnt.

EXERCISE 4

Flaws Ltd maintains receivables and payables control accounts. In addition, individual accounts are kept for debtors and creditors as memorandum accounts only.

The Receivable ledger control account showed a balance of $50,000 which is different from the total of the balances of the individual accounts in the Receivables ledger. Further investigations showed the following:

        i.   Cash from credit customers of $500 was omitted from the control account.

      ii.   Returns by a customer of $250 had been recorded twice in the control account.

    iii.   Bad debts in respect of Mr Sun, a customer, had not been recorded in his account $20.

    iv.   A contra set off between the Receivable and Payable ledger control accounts of $52 had been recorded as $25 in the control accounts.

      v.   A debit balance of one customer was omitted when casting the individual account balances $30.

    vi.   Refund of $4,000 to a customer was totally omitted in the cash book.

Required:

Prepare a reconciliation statement to determine what the total of the individual account balances would be after the above errors have been corrected.

EXERCISE 5

You are assisting in the preparation of the year end accounts of Rogers and Co. The balance on the trade payables control account in the general ledger is $45,505. The total value of the list of balances on the suppliers’ personal accounts is $46,886.

You have noted the following:

        i.   An invoice from a supplier for $739 has been entirely omitted from the accounting records;

      ii.   A credit note received from a supplier for $266 was entered in the daybook as an invoice;

    iii.   No entries have been made in respect of an agreement to offset a credit balance of $864 in the payables ledger against a debit balance in the receivables ledger;

    iv.   Payments to a supplier totaling $1,800 have been recorded in the general ledger, but no entries have been made in the supplier’s personal account;

      v.   A payment of $17,500 was made to settle a balance of $17, 585. The balance on the supplier’s personal account was fully written off, but only the payment of $17,500 was entered in the general ledger;

    vi.   A payment of $340 to a supplier was recorded in the cheques issued daybook as $430;

  vii.   A credit balance of $167 on a supplier’s account was listed as a debit balance.

Required: 

a)      Prepare the payables control account including the necessary adjusting entries and the corrected balance.

b)      Prepare a reconciliation of the list of balances to the corrected balance on the payables control account.

c)      State the corrected payables balance for inclusion in the final accounts and where it should be reported.

 
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