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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

• 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

• 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.

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.

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	85,500	Jun		Returns	2,500
Jun		Sales	90,000	Jun		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	5,000	Jun 01		Bal B/F	65,000
Jun		Payments	90,000	Jun		Total purchases	70,000
Jun		Discounts received	3,000
Jun 31		Bal C/F	37,000
		Total	135,000			Total	135,000

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	150,000	Jun		Receipts(N2)	170,000
Jun		Sales(N1)	260,000	Jun		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	130,000	Jun 01		Bal B/F	250,000
Jun		Discounts received	10,000	Jun		Total purchases	200,000
Jun 31		Bal C/F	310,000
		Total	450,000			Total	450,000

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.

Related Content: MGT101 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of Financial Accounting

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