5.3 Control Accounts and Reconciliations

Purpose of Control Accounts

In a double-entry bookkeeping system, control accounts (also known as trade receivables control and trade payables control accounts) are summary accounts kept in the General Ledger.

• The Sales Ledger Control Account (SLCA) (or Receivables Ledger Control Account) records the summary of all transactions involving credit customers.
• The Purchases Ledger Control Account (PLCA) (or Payables Ledger Control Account) records the summary of all transactions involving credit suppliers.

Control accounts serve several critical purposes in an organization:

1. Arithmetic Accuracy and Error Detection: They act as an independent check on the accuracy of the postings made to individual customer and supplier accounts. Since the control accounts are posted using totals from the day books, and the individual subsidiary accounts are posted using individual invoices/credit notes, comparing the two helps identify errors.
2. Concise Trial Balance: They keep the General Ledger clean and manageable. Instead of listing hundreds or thousands of individual customer and supplier balances in the trial balance, the bookkeeper only needs to list the single closing balance of the SLCA and the PLCA.
3. Internal Control and Division of Duties: By separating the General Ledger from the subsidiary ledgers, a business can assign different staff members to maintain them. For example, a junior clerk might maintain the individual customer accounts in the Receivables Ledger, while a senior accountant maintains the SLCA in the General Ledger. This reduces the risk of fraud and collusion.
4. Management Information: They provide management with a quick and reliable summary of total credit receivables and total credit payables at any given moment, without needing to add up hundreds of individual accounts.

---

Reconciling Control Accounts with Subsidiary Ledgers

At the end of each month, a reconciliation must be performed.

• The closing balance on the Sales Ledger Control Account in the General Ledger must equal the sum of all individual customer balances in the Receivables Ledger.
• The closing balance on the Purchases Ledger Control Account in the General Ledger must equal the sum of all individual supplier balances in the Payables Ledger.

A reconciliation involves:

1. Extracting a list of balances from the individual customer/supplier accounts in the subsidiary ledgers.
2. Summing this list to find the total receivables or payables outstanding.
3. Comparing this total with the closing balance on the corresponding control account in the General Ledger.
4. Investigating any discrepancies, preparing correction entries, and producing a reconciliation statement showing that the adjusted figures match.

---

Identifying and Resolving Reconciliation Differences

When the balance on a control account does not agree with the total of the subsidiary ledger list of balances, the bookkeeper must analyze the differences. Discrepancies can be divided into two main categories:

1. Errors that affect the Control Account only (rectified by making journal entries in the General Ledger).
2. Errors that affect the List of Balances only (rectified by updating the individual customer or supplier accounts in the subsidiary ledger).

1. Errors Affecting the Control Account Only

These errors occur in the General Ledger or the books of prime entry from which totals are posted:

• Casting Errors in Day Books: If a day book column (e.g., Sales Day Book) is added up incorrectly, the incorrect total will be posted to the control account in the General Ledger. However, the individual customer accounts will have been posted with the correct invoice amounts, leading to a difference.
• Undercast or Overcast Day Book Totals: Similar to casting errors, this affects only the control account posting.
• Omitted Day Book Totals: A day book total was completely omitted from the General Ledger, but individual customer accounts were updated.
• Direct Postings: A nominal ledger journal entry was posted directly to the Control Account but was not updated in the subsidiary ledger.

2. Errors Affecting the Subsidiary Ledger List of Balances Only

These errors occur during the posting of individual transactions to the memorandum customer or supplier accounts:

• Transposition Errors in Subsidiary Accounts: An invoice for £78 was correctly entered in the Sales Day Book but posted to the customer's individual account as £87.
• Omission of Postings to Customer/Supplier Accounts: An invoice or receipt was entered in the day book or cash book but was not posted to the customer or supplier account.
• Posting to the Wrong Side: An invoice of £120 was posted as a credit instead of a debit in a customer's individual account.
• Listing Errors: An individual customer balance was omitted from the list of balances, or was listed as a credit instead of a debit, or copied down with an arithmetic error.

Transactions Requiring Special Adjustments

• Contra Entries: A contra occurs when a business sells to and buys from the same entity, and agrees to offset the balances. A contra must be posted to both the General Ledger control accounts (Debit PLCA, Credit SLCA) and the individual accounts in both subsidiary ledgers (Debit supplier account, Credit customer account). An error in posting a contra will create discrepancies.
• Bad Debts Written Off: When a customer is bankrupt and the debt is irrecoverable, it is written off. This requires a debit to Bad Debts expense, a credit to SLCA, and a credit to the individual customer's account in the Receivables Ledger.

---

Worked Example: Sales Ledger Control Account Reconciliation

At 31 May, the Sales Ledger Control Account had a balance of £25,480, and the total of the list of balances extracted from the Receivables Ledger was £25,120. There is a discrepancy of £360.

An investigation revealed the following errors:

1. Sales Day Book Undercast: The Sales Day Book total was undercast by £200. (This affects the SLCA only, as the SDB total is debited to the SLCA).
2. Omitted Posting: A credit sale invoice of £560 to customer M. Smith was recorded in the Sales Day Book but was omitted from Smith's individual customer account in the Receivables Ledger. (This affects the List of Balances only).

Let's prepare the reconciliation.

Step 1: Adjust the Sales Ledger Control Account (General Ledger)

The Sales Day Book total is debited to the SLCA. Since it was undercast by £200, the debit balance was too low. We must add £200 to the SLCA.

• Unadjusted SLCA Balance: £25,480
• Add: Sales Day Book undercast correction: £200
• Adjusted SLCA Balance: £25,480 + £200 = £25,680

Step 2: Adjust the List of Balances (Receivables Ledger)

M. Smith's customer account was not debited with the invoice of £560. Thus, the list of balances is too low by £560.

• Unadjusted List of Balances Total: £25,120
• Add: Omitted customer invoice (M. Smith): £560
• Adjusted List of Balances Total: £25,120 + £560 = £25,680

Both balances now agree at £25,680, completing the reconciliation.