Lecture on Control Accounts

Introduction

• Lecture by Open Tuition.
• To fully benefit, download free lecture notes from opentuition.com.

Overview of Control Accounts

• Control accounts act as a check on the accuracy of recording in practice.
• Common exam question topic.

Books of Prime Entry Revision

• Sales on Credit: Listed in Sales Day Book.
  • Example: Sales to Mr. A ($500), Mr. B ($200), Mr. C ($100).
  • End of the month: Total ($800); Double-entry: Debit Receivables, Credit Sales.
  • Receivables Ledger: Tracks individual customer balances (e.g., Mr. A owes $500).

Cash Receipts Book

• Records cash received from customers.
  • Example: Mr. A ($400), Mr. B ($200), Mr. C ($0).
  • End of the month: Total ($600); Double-entry: Debit Cash, Credit Receivables.
  • Updated Receivables Ledger: Reflects payments made by each customer.

Checking Accuracy

• Discrepancies: Example of addition error in receivables journal.
  • Correct total: $800; Incorrect total could be $900 leading to balance errors.
  • Receivables Ledger: Acts as a cross-check to identify errors.

Three Extra Entries in Control Accounts

• Relevant in control account questions:
  1. Returns
  2. Discounts
  3. Contra Entries

Returns

• Example: Sale of goods for $500 to Mr. X; returns half.
  • Entries: Debit Receivables $500, Credit Sales $500.
  • For returns: Credit Receivables $250, Debit Sales $250 (or a separated Returns account).
  • Ensures accurate net sales.

Discounts

• Quantity Discount: Included in the invoice amount (no special accounting treatment).
• Early Payment Discount: Accounting treatment required if payment is early.
  • Example: Purchase $1000, 5% discount if paid within one month.
  • Entries: Initial - Debit Purchases $1000, Credit Payables $1000.
  • If paid early: Credit cash $950, Debit Payables $950; also, Debit Payables $50, Credit Discounts Received $50.

Contra Entries

• Used when a customer is also a supplier.
  • Example: Sell to Mr. Z ($800), buy from Mr. Z ($1000).
  • Normal entries for sales and purchases.
  • Contra Entry: Agree to net payment of $200.
    • Entry: Debit Payables $800, Credit Receivables $800.

Importance in Practice

• Ensures accuracy and helps in detecting errors.
• Control accounts provide totals that must match the sum of individual balances in the ledger.

Conclusion

• Types of questions in exam related to control accounts will be discussed in further lectures.
• Future topics: Examples of different types of control account questions.