Learning Outcomes
After reading this article, you will be able to explain the purpose and structure of receivables and payables control accounts, prepare them from prime entry records, and apply appropriate double-entry bookkeeping for common transactions. You will identify typical sources of errors, perform reconciliations, and interpret control account balances for exam scenarios.
ACCA Maintaining Financial Records (FA2) Syllabus
For ACCA Maintaining Financial Records (FA2), you are required to understand how control accounts support the accuracy and completeness of the accounting system. For revision, focus on:
- The purpose of control accounts in monitoring receivables and payables
- Preparing receivables and payables control accounts from books of prime entry
- Applying double-entry principles to transactions affecting control accounts
- Reconciling control accounts with subsidiary ledger totals
- Identifying and correcting discrepancies or errors in control accounts
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which document is typically used as the primary source for posting to the receivables control account?
- Petty cash book
- Sales day book
- Supplier statement
- Bank statement
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What would be the correct double-entry to record a cash receipt from a customer within the main ledger and control account system?
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True or false? The payables control account is credited with the value of purchase returns processed during the period.
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Briefly explain the difference between a control account and an individual (memorandum) ledger account.
Introduction
Control accounts for receivables and payables are summary accounts within the general ledger that provide an overall check on the completeness and accuracy of accounting records. They bring together information from prime entry books such as sales and purchases journals, allowing for the monitoring of credit customers (receivables) and credit suppliers (payables) at a glance.
Understanding how to prepare and balance control accounts directly from prime entries is essential for error detection, reconciliation, and confidence in the figures reported in the financial statements. For FA2, you will be assessed on producing these accounts using double-entry principles and identifying common posting errors.
Key Term: control account
A summary account within the general ledger that aggregates the total of transactions relating to a specific area, such as receivables or payables, based on prime entry records.
Purpose and Structure of Control Accounts
Receivables and payables control accounts serve as control mechanisms over the subsidiary ledgers (memorandum accounts for each customer or supplier). When transactions are recorded in prime entry books, summarized totals are posted to the control accounts to maintain an overview and to help reconcile individual balances.
- Receivables control account (also known as sales ledger control account) summarizes the total amounts owed by customers.
- Payables control account (also known as purchases ledger control account) summarizes the total amounts owed to suppliers.
These accounts help to:
- Detect errors or omissions in postings
- Reconcile the total balances with individual ledger accounts
- Ensure accuracy before reporting totals in the statement of financial position
Key Term: subsidiary ledger
A detailed set of accounts providing information about individual items (e.g., individual customer or supplier accounts), supporting the total shown in the control account.
Posting from Prime Entry Books
The accuracy of control accounts depends on the correct extraction of totals from prime entry books. For each type of transaction, a specific double-entry is required:
Posting to Receivables Control Account
- Credit sales: Debited to the control account (from the sales day book)
- Cash receipts: Credited to the control account (from the cash receipts book)
- Sales returns: Credited to the control account (from the sales returns book)
- Irrecoverable debts written off: Credited to the control account
- Discounts allowed: Credited to the control account as appropriate
- Other adjustments, such as dishonoured cheques: Debited to the control account
Key Term: prime entry
The initial record of a transaction, often in a book such as the sales day book, purchases day book, cash book, or journal.Key Term: irrecoverable debt
An amount owed by a customer that is considered uncollectable and written off as an expense.
Posting to Payables Control Account
- Credit purchases: Credited to the control account (from the purchases day book)
- Cash payments: Debited to the control account (from the cash payments book)
- Purchase returns: Debited to the control account (from the purchase returns book)
- Discounts received: Debited to the control account as appropriate
- Other adjustments, such as interest charged by suppliers: Credited to the control account
Key Term: discount allowed
A reduction in the amount receivable from customers, offered as an incentive for prompt payment.Key Term: discount received
A reduction in the amount payable to suppliers, received as a reward for early settlement.
Balancing and Reconciling Control Accounts
At the end of each period, the control accounts should be balanced. The closing balance on the receivables control account should equal the total of individual receivables accounts (the list of balances), and similarly for payables.
Regular reconciliations help to detect discrepancies, such as unposted transactions, omissions, or duplications. Reconciliation steps include:
- Compare the closing balance per control account to the sum of individual ledger balances
- Investigate differences, which may be due to timing, errors in posting, missing transactions, or misallocations
Worked Example 1.1
A business has the following transactions in January:
- Credit sales: $15,000 (posted from the sales day book)
- Cash received from customers: $12,000
- Sales returns: $500
- Irrecoverable debts written off: $300
Required: Prepare the receivables control account for January and determine the closing balance.
Answer:
- Debit with credit sales: $15,000
- Credit with cash received: $12,000
- Credit with sales returns: $500
- Credit with irrecoverable debts: $300
- Closing balance: $15,000 – $12,000 – $500 – $300 = $2,200 (debit), representing total receivables at month end.
Worked Example 1.2
During February, a business made credit purchases of $8,000, paid suppliers $7,400, returns outwards totaled $200, and received discounts of $100.
Required: Show the entries in the payables control account for the month.
Answer:
- Credit for credit purchases: $8,000
- Debit for cash paid: $7,400
- Debit for purchase returns: $200
- Debit for discounts received: $100
- Closing balance: $8,000 – ($7,400 + $200 + $100) = $300 (credit), representing the amount payable to suppliers at period end.
Exam Warning
Be cautious not to confuse the direction of entries. For receivables, credits decrease the balance (cash received, returns, write-offs); for payables, debits decrease the liability (payments, returns, discounts received). Errors here commonly result in incorrect balances.
Common Errors and Exam Pitfalls
Mistakes often occur in the following areas:
- Omitting transactions from either the control account or the subsidiary ledger
- Incorrect application of discounts/returns
- Posting cash receipts or payments on the wrong side
- Not updating the control account for irrecoverable debts or returns
- Failing to reconcile the control account with the total of individual accounts
Summary
Receivables and payables control accounts provide an essential summary to monitor total amounts owed by customers and to suppliers. They consolidate entries from prime entry books and enable easy reconciliation with subsidiary ledgers, supporting the reliability of the reported figures and helping detect errors.
Key Point Checklist
This article has covered the following key knowledge points:
- Define and explain the purpose of control accounts and subsidiary ledgers
- Identify prime entry books used in control account postings
- Prepare receivables and payables control accounts from summarized prime entries using double-entry principles
- Recognize the effect of key transactions: sales, purchases, receipts, payments, returns, discounts, write-offs
- Perform simple reconciliations between control accounts and subsidiary ledger totals
- Identify common errors and how to correct or investigate them for the exam
Key Terms and Concepts
- control account
- subsidiary ledger
- prime entry
- irrecoverable debt
- discount allowed
- discount received