Control Accounts

Introduction

Control accounts are general ledger accounts that summarise a large number of transactions. As such they are part of the double entry system. They are used to prove the accuracy of the ledger accounting system. They are mainly used with regard to receivables and payables balances.

Accounting entries for credit sales and purchases

When a company transfers the daily total of the sales book into the general ledger the double entry is:

Dr Receivables ledger control account

Cr Sales revenue.

When they transfer the total of the purchase day book the double entry is:

Dr Purchases

Cr Payables ledger control account

Memorandum accounts

Whilst maintaining control accounts most businesses will maintain what is referred to as a 'memorandum.' This is a separate list of individual receivable and payable amounts due from each customer and to each supplier, respectively. This simple 'list of balances' is used as a record so that companies know how much each customer is due to pay and how much they are due to pay each supplier. This assists with credit control and cash flow management.

A key control operated by a business is to compare the total balance on the control account at the end of the accounting period with the total of all the separate memorandum balances. In theory they should be identical. This is referred to as a control account reconciliation.

Note: the memorandum balances are often, confusingly, referred to as the 'receivables ledger' and the 'payables ledger.' Don't get these mixed up with the control accounts in the main/general ledger!

Illustrative control accounts

Receivables ledger control account

Payables ledger control account

Abbreviation key:

SDB Sales day book

PDB Purchases day book

SRDB Sales returns day book

PRDB Purchases returns day book

CB Cash book

Note that any entries to the control accounts must also be reflected in the individual memorandum accounts.

Contra entries

The situation may arise where a customer is also a supplier. Instead of both owing each other money, it may be agreed that the balances are contra'd, i.e. cancelled.

The double entry for this type of contra is:

Dr Payables ledger control account

Cr Receivables ledger control account

The individual receivable and payable memorandum accounts must also be updated to reflect this.

Credit/debit balances in the wrong account

Sometimes the receivables ledger control account may show a credit balance, i.e. we owe the customer money. These amounts are usually small and arise when:

• The customer has overpaid.
• Credit notes have been issued for fully-paid-for goods.
• Payment is received in advance of raising invoices.

The payables ledger control account may show a debit balance for similar reasons.

Technically such balances should not exist and should be transferred to the correct account. Thus a credit in a receivable account should be adjusted as follows:

Dr Receivables

Cr Payables

Debit balances in the payables ledger will be adjust using exactly the same double entry.

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Tags:	receivables ledger control account;payables ledger control account;contra;memorandum