FAF3
Syllabus E. Preparing A Trial Balance E3. Control Accounts and Reconciliations

E3c. Control accounts from given information 3 / 5

Syllabus E3c)

Prepare ledger control accounts from given information.

Main entries in control accounts

The two main entries in the RLCA are credit sales and cash received from credit customers. 

The double-entry for credit sales is: -

Dr RLCA
Cr Sales

The double-entry for cash received from customers is: -

Dr Bank/Cash
Cr RLCA

The two main entries in the PLCA are credit purchases and cash paid to credit suppliers.

The double-entry for credit purchases is: -

Dr Purchases
Cr PLCA

The double-entry for cash paid to suppliers is: -

Dr PLCA
Cr Bank/Cash

There are other entries which will be included in the control accounts. It is important to note that any transaction recorded in the RLCA or the PLCA is also reflected in the memorandum ledgers.

Other entries in control accounts

Contras

This is where an amount of money is owed to a supplier, who is also a customer who owes money, i.e., a payable who is also a receivable. 

Instead of paying the full amount to the creditor, who then pays the full amount of their debt to you, the two amounts owed and owing are offset against each other and only the difference is settled in cash. This must be reflected in the individual accounts in the sales and purchase ledgers and in the control accounts in the nominal ledger.

The double entry for a contra is: -

Dr PLCA
Cr SLCA

The contra value is of the maximum common amount. A contra always has the effect of reducing both receivables and payables.

Returns, Credit Notes and Refunds

When a customer returns goods which have already been paid, he may either be given a credit note or refunded for the value of these returned goods.

When a credit note is given, the double-entry is: -

Dr Returns In (sales returns)
Cr RLCA

When the customer is refunded: -

Dr RLCA
Cr Bank

The same applies when a customer over-pays an invoice.

Interest charged on overdue accounts

An entity may decide to charge interest if a customer does not pay within the specified credit period.  

The double-entry for interest charged on these overdue accounts is: -

Dr RLCA
Cr Interest Receivable (Income (I/S))

Discounts

There are two types of discounts

  1. Trade discount is a reduction in the list price of an article, given by a wholesaler or manufacturer to a retailer. It is often given in return for bulk purchase orders.

  2. Cash/settlement discount is a reduction in the amount payable for the purchase of goods or services in return for payment in cash, or within an agreed period.

Trade discounts received are deducted from the cost of purchases. Trade discounts allowed are deducted from sales. Therefore, sales are recorded net of trade discounts but inclusive of settlement discounts.

Purchases are also recorded net of trade discounts but inclusive of settlement discounts. Therefore, trade discounts never appear in the financial statements.

Sales Tax and Discounts

Sales tax is calculated on the amount after all discounts, regardless of whether the discount is taken or not.

ACCA FA E3c receivables ledger graph ACCA FA E3c Payables ledger graph

Control account balances

Very often, PLCA’s have a credit balance since payables are a liability. However, there may be situations when there will be a debit balance on a PLCA

  • Returning goods which have been paid for and receiving a ‘credit’ (to us, a debit) on our account

  • Overpayment

  • Payments in advance

Credit balance on a RLCA

There may be situations when there will be a credit balance on a RLCA

  • Returned goods credit to account

  • Overpayment

  • Payments in advance