Chapter 11: Control account reconciliations

Chapter learning objectives

Upon completion of this chapter you will be able to:

• prepare, reconcile and understand the purpose of supplier statements
• identify errors which would be highlighted by performing a control account reconciliation
• perform basic control account reconciliations for receivables and payables, identifying and correcting errors in control accounts and ledgers.

1 Control accounts

• Control accounts are a means of proving the accuracy of the ledger accounts, such as receivables and payables.
• The diagram above shows the information that is included in the accounts receivables ledger.
• If we wanted to check the accuracy of the accounts receivables ledger, one way we can do this is by getting the information from different sources:
  • The sales can be taken from the sales day book.
  • The cash received and discounts allowed are recorded in the cash book.
  • The opening balances can be taken from the prior month’s closing balances.
• An alternative way to check the accuracy of the accounts receivables ledger is to compare the sum total of the individual receivables accounts with the balance on the receivables ledger control account.
• Remember, the control account is normally part of the double entry system, whereas the ledger contains memorandum accounts which are not part of the double entry system. Nevertheless, both are updated using the same sources and therefore should agree.

2 Supplier statements

These statements are issued to a business by suppliers to summarise the transactions that have taken place during a given period, and also to show the balance outstanding at the end of the period.

• Their purpose is to ensure that the amount outstanding is accurate and agrees with underlying documentation.
• The payables (individual) ledger account should agree with the total of the supplier statement.
• As such, these are a further way to prove the accuracy of accounting records.

Supplier statement reconciliations

It is also possible to reconcile a supplier statement to the control account.

The purpose for doing this is as follows:

• before any payments are made to suppliers it is important to ensure that the suppliers statement is correct – else we could make over or under payments.
• each invoice and credit note listed on the statement should be checked to the original documentation for accuracy.
• once accuracy has been established, it is then possible to decide which invoices need paying and when by.

Below is an example extract of a statement from a supplier:

Here is the payables ledger which corresponds with this supplier:

You can see that the invoice dated 4 July 20X9 in the ledger is of a total $110.99, however in the statement it appears as $101.99.

The purchase invoice itself should be reviewed to check which is the correct amount. If the suppliers statement is incorrect, then a polite telephone call to the supplier should be made or a letter sent explaining the problem.

If it is the ledger that is incorrect then it should be updated.

3 Control account reconciliations

The reconciliation is a working to ensure that the entries in the ledger accounts agree with the entries in the control account. The two should have the same closing balance as ideally they have had exactly the same entries in both accounts.

• A receivables ledger reconciliation compares the total of the accounts in the receivables ledger with the balance on the receivables ledger control account.
• A payables ledger reconciliation compares the total of the accounts in the payables ledger with the balance on the payables ledger control account.

If there are differences between the control account and the ledger accounts, they must be identified and reconciled. Differences may arise due to:

• errors in the receivables or payables ledger
• errors in the receivables or payables ledger control accounts
• errors in both the control account and ledger account.

Test your understanding 1

Suggest reasons why there might be a difference between the balance on the receivables ledger control account and the total of the list of accounts receivable ledger balances.

4 Preparing a control account reconciliation

The format of a control account reconciliation, in this case for sales is as follows:

Reconciliation of individual receivables balances with control account balance

• The examiner will provide details of the error(s).
• You must decide for each whether correction is required in the control account, the list of individual balances or both.
• When all errors have been corrected, the revised balance on the control account should agree to the revised total of the list of individual balances.
• Due to the nature of the F3/FFA exam, you will not be asked to produce a full control account reconciliation, however you may be asked for the revised balance on the control account / list of individual balances after one or two errors have been corrected.

Illustration 1 – Preparing a control account reconciliation

Alston’s payables ledger control account is an integral part of the double entry system. Individual ledger account balances are listed and totalled on a monthly basis, and reconciled to the control account balance. Information for the month of March is as follows:

(1) Individual ledger account balances at 31 March have been listed out and totalled $19,766.

(2) The payables ledger control account balance at 31 March is $21,832.

(3) On further examination the following errors are discovered:

• The total of discount received for the month, amounting to $1,715, has not been entered in the control account but has been entered in the individual ledger accounts.
• On listing-out, an individual credit balance of $205 has been incorrectly treated as a debit.
• A petty cash payment to a supplier amounting to $63 has been correctly treated in the control account, but no entry has been made in the supplier’s individual ledger account.
• The purchases day book total for March has been undercast (understated) by $2,000.
• Contras (set-offs) with the receivables ledger, amounting in total to $2,004, have been correctly treated in the individual ledger accounts but no entry has been made in the control account.

(i) Prepare the part of the payables ledger control account reflecting the above information.

(ii) Prepare a statement reconciling the original total of the individual balances with the corrected balance on the control account.

Solution

Solution

The best way to approach the question is to consider each of the points above in turn and ask to what extent they affect (i) the payables ledger control account and (ii) the listing of payables ledger balances.

Step 1

The total of discount received in the cash book should have been debited to the payables ledger control account and credited to discount received. Thus, if the posting has not been entered in either double entry account it clearly should be. As this has already been entered into the individual ledger accounts, no adjustment is required to the list of balances.

Step 2

Individual credit balances are extracted from the payables ledger. Here, this error affects the ledger accounts balance. No adjustment is required to the control account, only to the list of balances.

Step 3

The question clearly states that the error has been made in the individual ledger accounts. Amendments should be made to the list of balances. Again, no amendment is required to the control accounts.

Step 4

The total of the purchases day book is posted by debiting purchases and crediting payables ledger control account. If the total is understated, the following bookkeeping entry must be made, posting the $2,000 understatement:

As the individual ledger accounts in the payables ledger are posted individually from the purchases day book, the total of the day book being understated will not affect the listing of the balances in the payables ledger.

Step 5

Here it is clear that the error affects the control account, not the payables ledger. Correction should be made by the bookkeeping entry:

Reconciliation of individual balances with control account balance

Test your understanding 2

Rayneydaze is a business selling umbrellas branded with corporate logos. The umbrellas are sold in bulk lots on credit. The accountant is carrying out a reconciliation of the receivables ledger control account balance, which is $172,120 to the total of the balances on the individual accounts in the receivables ledger, which is $176,134.

The following has been found:

(1) A contra item of $1,500 has not been entered in the receivables ledger control account.

(2) A cheque for $555 from a customer has been dishonoured. The correct double entry has been posted but the individual accounts have not been updated.

(3) A payment of $322 from a customer has incorrectly been entered in the accounts receivable ledger as $233.

(4) Discounts allowed totalling $120 have not been entered in the control account.

(5) Cash received of $800 has been debited to the individual customer’s account in the accounts receivable ledger.

(6) Total credit sales of $4,500 to a large accountancy firm, Close & Counter have been posted correctly to the ledger account but not recorded in the control account.

Correct the receivables ledger control account and reconcile this to the sum total of the individual accounts in the accounts receivable ledger.

Test your understanding 3

Tonga received a statement from a supplier, Cook, showing a balance of $14,810. Tonga’s Payables ledger shows a balance due to Cook of $10,000. Investigation reveals the following:

(1) Cash paid to Cook of $4,080 has not been allowed for by Cook.

(2) Tonga’s recorded the fact that a $40 cash discount was not allowed by Cook, but forgot to record this in the payables ledger.

What discrepancy remains between Tonga and Cook’s records after allowing for these items?

A $9,930

B $9,850

C $770

D $690

Chapter summary

Test your understanding answers

Test your understanding 1

The following are reasons why the accounts receivable control account may not agree with the ledger account:

• The sales day book, sales returns day book or cash receipts book have been incorrectly totalled.
• A total from a book of prime entry has been transferred to the control account as a different figure.
• An individual entry from a book of prime entry has been transferred to the individual customer’s account as a different figure.
• An entry in the control account or the individual customer’s account has been omitted or posted to the wrong side of the account.
• The double entry for a day book total has been incorrectly made.
• An individual customer’s account has been incorrectly balanced.
• The list of accounts receivable ledger balances has been incorrectly totalled.
• An entry has been made in either the control account or the individual customer’s account but not in both.
• An individual customer’s balance has been omitted from the list of balances.

Test your understanding 2

Receivables ledger reconciliation

Test your understanding 3

The correct answer is D.

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