Control accounts summarize total receivables and total payables in one place.

Flow diagram showing how transactions move from source documents (invoices/receipts) into books of prime entry (purchases journal, cash book), then into the general ledger as summary postings to the accounts payable (purchases ledger) control account. It also shows the link to the subsidiary ledger totals, reinforcing the idea that the control account balance should agree with the total of individual supplier balances after posting. Source

They are used to check the accuracy of personal ledgers and to support the preparation of reliable accounting records.

What are control accounts?

A control account is kept in the general ledger and contains the combined total of balances and transactions from a subsidiary ledger. In this topic, the important control accounts are the sales ledger control account and the purchases ledger control account.

The sales ledger control account shows the total amount due from credit customers. The purchases ledger control account shows the total amount owed to credit suppliers.

These accounts do not replace the individual customer and supplier accounts. Instead, they act as an independent check on them. If the balance on a control account does not agree with the total of the balances in the related ledger, a difference exists and must be investigated.

A sales ledger control account will normally end with a debit balance, because receivables are assets. A purchases ledger control account will normally end with a credit balance, because payables are liabilities.

Entries in the sales ledger control account

Main entries

The sales ledger control account records all transactions affecting the total owed by credit customers.

Format/layout of a sales ledger control account (total trade receivables) shown as a T-account. It highlights the typical postings on each side—items that increase receivables on the debit side (e.g., credit sales) and items that reduce receivables on the credit side (e.g., cash received, sales returns, discounts allowed, bad debts). Source

Common debit entries are:

• opening balance of trade receivables

• credit sales

• dishonored checks from customers

• any other adjustment that increases the amount due from customers

Common credit entries are:

• cash received from credit customers

• sales returns

• discounts allowed

• irrecoverable debts written off

• contra entries against amounts the customer is also owed as a supplier

• any other adjustment that reduces the amount due from customers

The closing balance is the total amount still due from customers at the end of the period.

What to remember

The control account must reflect the total effect of entries made in individual customer accounts. If a transaction affects receivables overall, it should appear in the sales ledger control account. This is why entries are often taken from total figures rather than from one customer account at a time.

Accuracy matters in two ways:

• the entry must be on the correct side of the control account

• the amount posted must agree with the related total in the personal ledger

Entries in the purchases ledger control account

Main entries

The purchases ledger control account records all transactions affecting the total owed to credit suppliers.

Common credit entries are:

• opening balance of trade payables

• credit purchases

• any other adjustment that increases the amount owed to suppliers

Common debit entries are:

• cash paid to credit suppliers

• purchase returns

• discounts received

• contra entries against amounts due from the same business as a customer

• any other adjustment that reduces the amount owed to suppliers

The closing balance is the total amount still owed to suppliers at the end of the period.

Key point

The purchases ledger control account is the opposite of the sales ledger control account in its usual balance. This is because payables are normally credit balances in the ledger. Students should be careful not to reverse the normal debit and credit treatment.

Reconciliation statements

After preparing a control account, the balance should be compared with the total of the individual balances in the related ledger. If they are not equal, a reconciliation statement is prepared.

A reconciliation statement is not the same as the control account itself. The control account records transactions. The reconciliation statement explains why two totals differ.

Reasons for disagreement

Differences between a control account balance and a ledger total may arise because:

• an entry was made in the control account but omitted from an individual account

• an entry was made in an individual account but omitted from the control account

• an amount was entered incorrectly in one place

• an item was posted to the wrong side of an account

• a balance was left out when listing the individual ledger balances

• the list of balances was added incorrectly

• a contra entry was recorded in one ledger but not reflected in the control account

These are checking differences between the summary record and the detailed records.

Preparing a reconciliation statement

When preparing a reconciliation statement:

• begin with either the control account balance or the total of the balances in the sales or purchases ledger

• identify each item causing the difference

• add items that should increase the starting figure

• subtract items that should reduce the starting figure

• show a final adjusted balance that agrees with the other record

The direction of the adjustment depends on the figure you start with. For example, if you begin with the control account balance, each item in the reconciliation must explain how that balance is converted into the total of the ledger balances.

Clear labeling is essential. Each adjustment should state whether it relates to:

• omission

• incorrect posting

• balance omitted from the list

• arithmetic error in the listing of balances

Good practice in exams

In examination questions, read carefully whether you are reconciling:

• sales ledger control account to sales ledger balances, or

• purchases ledger control account to purchases ledger balances

Also check whether the question gives:

• a prepared control account balance

• a list of personal ledger balances

• extra information about errors or omissions

Marks are often lost by adjusting in the wrong direction. A sensible check is to ask whether the item would make the starting balance larger or smaller. If the logic is correct, the reconciliation is more likely to be accurate.