In real business operations, paying on cash may not be the only option of purchasing goods. Often, customers (debtors) purchased from you on credit. And you, as the owner, purchased goods from suppliers (creditors) on credit. So, recording numerous numbers of customers and suppliers on credit (throughout one year period) could create a lot of errors. One way to ensure arithmetic accuracy is to do control accounts by bringing multiple debtors/creditors in a year to the control accounts (like a summary throughout the year).
Control accounts are a type of accounting control which is used mainly in manual accounting systems. Control accounts are similar to trial ledger to check for arithmetical accuracy of the accounts, just that control accounts are more detailed in nature and only governs one activities at a time, such as the creditors and debtors amounts.
Please take note that “sales ledger control account‘ is also known as “debtors control account‘ and “purchases ledger control account” is the same as “creditors control account.” Both names should be familiarized because all the names are often used during examination. It is not hard to understand the meaning behind each name, you sale your products/services to a debtors and hence the name sales ledger control account and debtors control account. Likewise, you purchase your products from creditors and hence the name purchase ledger control account and creditors control account.
It should be noted that the following are not included in control accounts,
1) Bad debts recovered
2) Cash sales
3) Cash purchases
4) Increase in provision for doubtful debts
These four items do not affect debtors and creditors account.
Format for Debtors Control Account
Not being able to memorize this format could put you in trouble. A simple way to understand this format is to assume the normal debtor account. A normal debtor account will have a debit entry, representing an increase in the debtor account. An a credit entry represents a decrease in the debtor account. A short summary is represented below.
Format for Creditors Control Account
So the same thing goes with understanding this format, anything that will increase the creditors account will have to be credited, and anything that will decrease the creditors account will have to be debited.
If you recall that there is a contra entry for cash and bank account; this application is similar to control accounts. Contra entry occurs when you have a creditor that is a debtor at the same time. So, a supplier or (a creditor) will supply you with goods on credit and at the same time purchasing goods (now acting as a debtor) from you on credit. Contra amount is given most of the time.
(Optional): Useful for A-Level Students.
Note 1: A little bit complicated to explain but imagine this: Business A owes us money because they purchased goods on credit but Business A happens to sell something that our business requires (usually in lower quantity), so we purchased goods from Business A on credit. So we owe each other. For example, Business A owes us $20,000 and we owe Business A $1,000.
Note 2: Similar explanation as Note 1 but with different perspective this time. If our business owes Business A more than Business A owe us, then Business A becomes our creditors. In this context, we owe Business A $20,000 and Business A owes us $1,000.