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MGT101 - Financial Accounting - I - Lecture Handout 27

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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.

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