Financial Accounting - I – MGT101 VU

Lesson # 27

CONTROL ACCOUNT (Continued)

A person is both debtor and creditor:

This happens so many times in business that a person is both your debtor and creditor. This
means that you are purchasing one thing from him. So, you have to pay him against that
purchase and at the same time you are selling him another thing for which he has to pay you.
For example, you purchase item X from Mr. A for Rs. 50,000 and sell him item Y for Rs.
25,000. Now, one way of settling the payable and receivable is that you can pay Mr. X 50,000
and ask him to pay you Rs. 25,000. The other and may be the wiser method is that you pay him
Rs. 25,000 and both transactions are settled. This is how such transactions are handled in real
life.

Journal Entries

Normally where no control accounts are maintained, following entries will be recorded:

Debit: A (payable/creditor) account 25,000

Credit: A (receivable/debtor) account 25,000

o This will bring down the balance of A (receivable/debtor) account to 0 and that
of A (payable/creditor) account to 25,000. The other entry will be:

Debit: A (payable/creditor) account 25,000

Credit: Cash / Bank 25,000

o This will settle the payable account fully.

Where control accounts are being maintained the above two entries are still recorded but with
slight modification:

Debit: Creditors Control account 25,000

Credit: Debtors Control account 25,000

At the same time A’s account in Creditor’s ledger is debited with 25,000 and Credited in
Debtors’ ledger with the same amount.

Debit: A (payable/creditor) account 25,000

Credit: Cash / Bank 25,000

This entry comes from the creditor’s column of cash / bank book payment side as usual.

Bad Debts

Provision does not affect debtors account in simple books. It will, therefore, have no effect
either on debtor control account or debtors ledger.

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Financial Accounting - I – MGT101 VU
At the time of actual bad debt, the journal entry

Debit Provision / Bad Debts

Credit Individual Debtors Account

If control account system is in operation, the debit entry will be same but the credit effect will
go to Debtors control account with a credit effect to Individual Debtors Account in Debtors
Ledger.

Similar treatment is given to discounts received and allowed.

Recording Of Bad Debts in Control Accounts

To record bad debts in control accounts, following entries are recorded:

• In case no provision was created for doubtful debts:

Debit: Bad Debts
Credit: Debtors Control Account

• In case provision was created for doubtful debts:

Debit: Provision for Doubtful Debts
Credit: Debtors Control Account

Recording is also made in the respective accounts of the debtor in subsidiary ledger.

Recording of Discounts Received In Control Accounts

To record discount received in control accounts, following entry is recorded:

Debit: Creditors Control Account
Credit: Discount Received Account

Recording is also made in respective accounts of the creditors in subsidiary ledger.

Recording of Discounts Allowed In Control Accounts

To record discount allowed in control accounts, following entry is recorded:

Debit: Discount Allowed Account

Credit: Debtors Control Account

Recording is also made in the respective account of the debtors in subsidiary ledger.

Illustration # 1:

Following information is given from the books of Mr. A(Debtor) for the month of June, 2002.
You are required to prepare Debtors Control Account and work out the closing balance of
debtors control account of Mr. A.

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Financial Accounting - I – MGT101 VU
Opening Balance Dr. 85,500
Transactions during the month:
Sales for the month 90,000
Sales return for the month 2,500
Payments received 140,000
Discount allowed 5,000
Bad debts written off 4,000

Solution:

Debtors Control Account

Debit Side Credit Side
Date No. Narration Dr. Rs. Date No. Narration Cr. Rs.
Jun 01 Bal B/F 85,500Jun Returns 2,500
Jun Sales 90,000Jun Receipts 140,000
Jun Discount allowed 5,000
Bad Debts 4,000

Jun 31 Bal C/F 24,000

Total 175,500 Total 175,500

Illustration # 2:

Following information is given from the books of Mr. B(Creditor) for the month of June, 2002.
You are required to prepare Creditors Control Account and work out the closing balance of
Creditors control account of Mr. B.

Opening Balance Cr. 65,000

Transactions during the month:
Purchases for the month 70,000
Purchases return for the month 5,000
Payments made 90,000
Discount received 3,000

Solution:

Creditors Control Account

Debit Side Credit Side
Date No. Narration Dr. Rs. Date No. Narration Cr. Rs.
Jun Returns 5,000Jun 01 Bal B/F 65,000
Jun Payments 90,000Jun Total purchases 70,000
Jun Discounts 3,000
received

Jun 31 Bal C/F 37,000

Total 135,000 Total 135,000

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Financial Accounting - I – MGT101 VU
Illustration # 3:

The financial year of Atif Brothers is closed on June 30, 2002. You are required to prepare
Debtors control account and Creditor control account from the data given below:

Opening balances
Debtors 150,000
Creditors 250,000
Sales
Cash Note 1 180,000
Credit 260,000
Purchases
Cash Note 1 120,000
Credit 200,000
Total receipts Note 2 350,000
Total payments Note 2 250,000
Discount allowed 15,000
Discount received 10,000
Bad debts written off 25,000
Increase in provision for doubtful debts Note 3 5,000

Solution

Debtors Control Account

Debit Side Credit Side
Date No. Narration Dr. Rs. Date No. Narration Cr. Rs.
Jun 01 Bal B/F 150,000Jun Receipts(N2) 170,000
Jun Sales(N1) 260,000Jun Discount allowed 15,000
Bad Debts 25,000

Jun 31 Bal C/F 200,000

Total 410,000 Total 410,000

Creditors Control Account

Debit Side Credit Side
Date No. Narration Dr. Rs. Date No. Narration Cr. Rs.
Jun Payments 130,000Jun 01 Bal B/F 250,000
Jun Discounts 10,000Jun Total purchases 200,000
received

Jun 31 Bal C/F 310,000

Total 450,000 Total 450,000

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Financial Accounting - I – MGT101 VU
Notes to the accounts:

1. In control accounts, only cash sales/purchases are dealt with. Credit sales/purchases are
not included in control accounts,
2. Receipts/Payments include both cash and credit receipts/payments. So, we enter the
figures in control accounts, after deducting cash sales/purchases from total
receipts/payments. i. e.
Receipts = 350,000 – 180,000 = 170,000
Payments = 250,000 – 120,000 = 130,000
3. Provision for doubtful debts has no effect on control accounts. So, any change in
provision will not affect actual bad debts.

Benefits of Subsidiary Ledgers

• Subsidiary ledgers contain the record of all individuals Debtors and Creditors.
• Subsidiary ledgers give information about the main clients and slow moving
clients which is helpful for the management in decision making.
• If the business has distributors in different areas, subsidiary ledger gives
information about sale of different distributors in different areas which are
helpful for the management in decision making.

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