Study smart | Instant expert
What is the function of receivable and payable control accounts?
Understanding the purpose of control accounts is complicated because you are only likely to use manual accounts in education, while most organisations use accounting software. But you must understand how the balances of these accounts are created to fully appreciate why they are needed
Words Gill Myers, Evolve Illustration Shutterstock
Understanding the accounting entries involved in the buying and selling process is vital to appreciating the role of the receivables and payables control accounts. AAT Comment published a series of blogs that covers this topic comprehensively and culminates with an explanation of control accounts. If this is an area you find confusing in general then reading this series from the start should help you see the whole picture.
Sometimes, we understand parts of a process but not all of it and miss how the elements are linked. For example, the third blog explains the difference between cash and credit transactions. This might not be the first thing you think of in relation to receivables and payables ledger control accounts, but it is essential as only credit transactions are posted to them. The explanations are not repeated in this article, as you can read them here, so the focus of this piece will be to relate some of the manual explanations to digital systems.
Recognising control accounts
The first thing to appreciate is that the ‘receivables ledger control account’ is just another name for the ‘sales ledger control account’. It might also be termed ‘accounts receivable’ or ‘trade receivables’. However, when using accounting software, you are unlikely to need to go into the chart of accounts (the name accounting software usually uses for the general ledger) to find the balance of the receivables ledger control account. This is because it generally features on the dashboard, perhaps labelled ‘invoices owed to you’ or ‘amounts outstanding from customers’.
The important thing to recognise is that all of these names and phrases are referring to the same thing: the total amount at any given time that is owed to the business from customers for sales made on a credit basis. It is therefore the amount that a manager or business owner will want to know in order to help them manage their organisation, for example, to make decisions or prepare budgets.
Similar terminology is used in relation to the payables control account. It is also known as the ‘purchases ledger control account’ and accounting software can use the names ‘accounts payable’ and ‘trade payables’, or terms such as ‘bills you need to pay’ (bills being used to distinguish purchase invoices from sales invoices) or ‘amounts owed to suppliers’.
Again, the important thing is not to be thrown by the terminology, as there will be other variations, but to understand that the balance on the account enables the user to quickly identify the total amount owed by the organisation to its suppliers. This is why, along with the receivables control account balance, it is usually featured on accounting software dashboards.
Using control accounts
Another challenge to understanding the purpose of the receivables and payables control accounts is that, in manual accounting, they are central to the process of recording credit sales and purchases. For example, purchase invoices are listed in the purchase day book and double-entry bookkeeping is used to post the totals to the general ledger accounts, which would be:
The memorandum postings are then made in the individual suppliers’ accounts in the subsidiary payables ledger. These will credit the supplier accounts for the full amount owed and serve as reminders of the specific details of the purchases.
It is worth noting that day books do not feature in all accounting software and are only usually used by organisations large enough to need to batch their invoices. Generally, when accounting software is used, the focus of the process is reversed and the individual customer or supplier become central to the process, as it is their details that are entered when a sales invoice is generated or a purchase invoice (bill) is entered. Accounting software automates the postings, both to the general and subsidiary ledger accounts, so it is easy to forget about the control accounts because they have not consciously been used.
Recognising subsidiary ledgers
The terminology around the subsidiary ledgers also differs between manual and digital systems. An accounting system can be thought of like a cupboard, with a box for each ledger containing files for each account. In accounting software, each box is a module or block, so the receivables ledger, which contains individual customer accounts, is simply the area in the software that lists all customer records. There may be a ‘contacts’ module that is then divided into ‘customers’ and ‘suppliers’. If so, these are the digital equivalents of manual receivables and payables ledgers. It is into these areas that you would need to go if, for example, you wanted to know how much was owed to a specific supplier or see a particular invoice a customer had queried.
Reconciling control accounts
While accounting software for small and medium-sized organisations can be a one-stop shop for accounts, incorporating all ledgers in one package, larger organisations may use different packages or modules to manage their sales and purchases. These modules then send information about a batch of invoices at the end of the day or week to a central digital accounting system in the same way that day books are posted in manual systems. However, this transfer of data can go wrong; it can get interrupted and sometimes data is lost. Control account reconciliations are therefore used to identify discrepancies in the same way as in manual accounting.
KEY TAKEAWAYS
The point of the receivable and payable control accounts is to show, at a glance, the totals currently outstanding from customers and owed to suppliers. However, if you need to know the specific details of a credit sale or purchase, you would need to look in the customer’s or supplier’s individual account and those are found in the receivable and payable ledgers. Reconciliations take place in manual systems and by organisations that transfer data about sales and purchase invoices from one digital system to another. However, they may be unnecessary for organisations that solely use one accounting software package because automated postings will ensure the balances on the control accounts will always be the same as the total of the balances of the accounts in their respective subsidiary ledgers.
The Association of Accounting Technicians. 30 Churchill Place, London E14 5RE. Registered charity no.1050724. A company limited by guarantee (No. 1518983).