Sales and purchases ledger control accounts

Last time

Before we start: last time, in Errors, the suspense account and the effect on profit, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Checking a whole ledger at once

A business with hundreds of credit customers cannot easily check every account. A control account summarises a whole ledger in one account, using totals from the books of prime entry. If its balance agrees with the total of the individual accounts, the ledger is probably correct.

What a control account is

A control account is a summary account that shows the totals of all entries in a ledger for a period. The sales ledger control account summarises the customers' accounts. The purchases ledger control account summarises the suppliers' accounts. Its closing balance should equal the total of the balances in that ledger.

Sources of the figures

Credit sales come from the sales journal; returns from the sales returns journal. Receipts and discount allowed come from the cash book. Irrecoverable debts and set-offs come from the general journal.

Sales ledger control account

This control account mirrors a customer's account: what increases debts is debited, what reduces them is credited.

Worked: the closing balance

Opening receivables are 4,000 dollars, and credit sales 15,000. That is 19,000 owed. Customers paid 12,500, returned goods worth 600, took 300 discount, and 100 was written off as irrecoverable. The closing balance is 5,500 dollars: the total customers still owe.

Purchases ledger control account

The purchases ledger control account is the other way round, because suppliers are liabilities.

Contra entries

A contra, or set-off, happens when a business both buys from and sells to the same firm, and they cancel what they owe each other. It is credited to the sales ledger control account and debited to the purchases ledger control account. It reduces both what the customer owes and what the business owes.

What does not go in

Cash sales and cash purchases never go in the control accounts: they do not affect credit customers or suppliers. Trade discount is never recorded at all. A provision for doubtful debts is not entered in the sales ledger control account.

Why keep control accounts?

They check the accuracy of the ledger: if the balance agrees, the ledger is probably correct. They help locate errors to one ledger, and make fraud harder, especially if a different person keeps them. And they give a quick total of receivables and payables for the financial statements.

Mistakes that lose marks

Mistake one: putting cash sales in the sales ledger control account. Mistake two: putting discount allowed on the debit side. It reduces what customers owe, so it is a credit. Mistake three: treating the purchases ledger control account like the sales one, not as its mirror. The fix: ask whether each item increases or decreases the debt.

The full-marks tip

The full-marks tip: for each item, ask: does it increase what customers owe, a debit, or reduce it, a credit? For suppliers, reverse it: increases in what we owe are credits.

On one card

So, on one card: control accounts. Keep it for revision.