Study smart | Instant expert
How do you control a control account?
Reconciliations are an example of an internal control, be that a bank reconciliation, trial balance or the reconciliation of the receivables or payables control account to their respective ledgers. But what happens when they don’t reconcile?
Words Gill Myers, Evolve Illustration Shutterstock
Reconciliations are only possible when information has been recorded in more than one place enabling it to be compared. In the case of receivables and payables balances, that is in the control accounts in the general ledger and the subsidiary receivables and payables ledgers themselves. In theory, as long as credit transactions with customers and suppliers have been processed correctly, the balance on the control account should be the same as the total of the balances of the individual customer or supplier accounts in the subsidiary ledgers. That’s great, until they don’t match. When there is a discrepancy, knowledge of the accounting process for credit sales and purchases needs to be applied to understand what might explain the difference.
Receivables ledger and control account
Let’s work through an example. The following table shows the account balances in a subsidiary receivables ledger:
As customers will owe money for the goods and/or services they have been sold, the normal expectation is that their accounts will have debit balances. However, it is possible for customers to have credit balances on occasions, like Customer D, if for example, the balance had been paid but then a credit note was applied to the account. It is important to recognise any credit balances as they will reduce the overall amount owed by customers, which in this case is £58,727.
The balance of the receivables control account should be the same but let’s say it’s £59,227 instead, £500 more. The question now is what could have caused the difference and there is potentially more than one answer.
Recording credit sales
When a credit sale is generated, the value is debited to the receivables control account. The same amount should also be debited to the customer’s account in the receivables ledger.
So, if a sale for £250 was posted to the correct side of the control account but the wrong side of the customer’s account, that could explain the difference because posting to the wrong side of an account doubles the impact:
These workings, with a made-up b/d balance, would give the control account a balance of £1,250 and the customer account one of £750.
Receipts from customers
When money is received from customers, the double entry is: debit the bank account and credit the receivables control account. A memorandum posting is also made to the credit side of the customer’s account to reduce the balance as invoices have been settled.
So, if a bank receipt of £500 was recorded in the customer’s account but omitted from the receivables control account, that could also explain the difference:
The workings now show, the control account balance being £500 more than the balance on the customer’s account.
Sales returns
When goods are returned, their value is credited to both the customer’s and receivables control accounts. This will offset the initial value of the sale as the reduction in the amount owed by the customer is, in effect, a refund.
So, if a sales return of £500 was recorded twice in a customer’s account but correctly in the control account, then the balance on the receivables control account would be £500 more than the total of the account balances in the receivables ledger:
Discounts allowed
Sometimes customers are offered prompt payment discounts which, if taken, need to be recorded in the customer’s and the receivables control accounts as well as the discounts allowed account. Allowing a customer a discount costs money as it is income that has been generated but won’t be received so is an expense. Therefore, the double entry will be: debit discounts allowed and credit receivables control account. The memorandum posting will also be on the credit side of the customer’s account as the discount will reduce the amount owed.
So, if a discount allowed was recorded in a customer’s account as a sales return, it wouldn’t make any difference to the control account reconciliation. This is because both transactions require debit postings to their accounts and credit postings to the control and customer accounts:
There would, of course, be an error in the general ledger accounts which would need to be corrected.
Working it out
Understanding what can cause the difference in a control account reconciliation is tricky as it requires the application of lots of accounting knowledge and is the last stage of the process of accounting for credit sales and purchases. The answer isn’t always obvious and as we’ve seen, there can be more than one possible explanation. Therefore, using workings, with a made-up b/d balance, to see what happens is a good way of working it out rather than guessing.
Read the question carefully
It is also important to ensure you have understood the situation correctly; if some of the postings above were the other way round, they would not have explained the difference.
For example, if a sale for £250 was posted to the wrong side of the control account but the correct side of the customer’s account:
The control account balance would be £750, which is £500 less rather than more, than the customer account balance of £1,250.
KEY TAKEAWAYS
Reconciliations are important controls within accounting systems that are designed to ensure the accuracy of accounts. However, understanding what can cause a difference in a control account reconciliation is tricky because it is the final stage of processing credit sales and purchases. If that process is not fully understood, working out what has happened can be challenging. Therefore, if you still have gaps in your understanding try reading AAT Comment’s sales and purchases series.
The Association of Accounting Technicians. 30 Churchill Place, London E14 5RE. Registered charity no.1050724. A company limited by guarantee (No. 1518983).