Vu Accounting Lesson 27
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Financial Accounting - I – MGT101
VU Lesson # 27
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 Credit: A (receivable/debtor) account
25,000 25,000
o 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 Credit: Cash / Bank
25,000 25,000
o 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 Credit: Debtors Control account
25,000 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 Credit: Cash / Bank
25,000 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. © Copyright Virtual University of Pakistan
197
Financial Accounting - I – MGT101 At the time of actual bad debt, the journal entry Debit Credit
VU
Provision / Bad Debts 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: Credit:
Discount Allowed Account 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. © Copyright Virtual University of Pakistan
198
Financial Accounting - I – MGT101 Opening Balance Dr. Transactions during the month: Sales for the month Sales return for the month Payments received Discount allowed Bad debts written off
VU 85,500 90,000 2,500 140,000 5,000 4,000
Solution: Debtors Control Account Date No. Jun 01 Jun
Debit Side Narration Bal B/F Sales
Dr. Rs. Date 85,500Jun 90,000Jun Jun
No.
Jun 31 Total
Credit Side Narration Cr. Rs. Returns 2,500 Receipts 140,000 Discount allowed 5,000 Bad Debts 4,000 Bal C/F Total
175,500
24,000 175,500
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 Transactions during the month: Purchases for the month Purchases return for the month Payments made Discount received
Cr. 65,000 70,000 5,000 90,000 3,000
Solution: Creditors Control Account Date Jun Jun Jun
Jun 31
No.
Debit Side Narration Returns Payments Discounts received Bal C/F Total
Dr. Rs. Date No. 5,000Jun 01 90,000Jun 3,000
37,000 135,000
Credit Side Narration Cr. Rs. Bal B/F 65,000 Total purchases 70,000
Total
© Copyright Virtual University of Pakistan
135,000 199
Financial Accounting - I – MGT101 Illustration # 3:
VU
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 Creditors Sales Cash Credit Purchases Cash Credit Total receipts Total payments Discount allowed Discount received Bad debts written off Increase in provision for doubtful debts
150,000 250,000 Note 1
180,000 260,000
Note 1
120,000 200,000 Note 2 350,000 Note 2 250,000 15,000 10,000 25,000 Note 3 5,000
Solution Debtors Control Account Date No. Jun 01 Jun
Debit Side Narration Bal B/F Sales(N1)
Dr. Rs. Date 150,000Jun 260,000Jun
No.
Jun 31 Total
410,000
Credit Side Narration Cr. Rs. Receipts(N2) 170,000 Discount allowed 15,000 Bad Debts 25,000 Bal C/F Total
200,000 410,000
Creditors Control Account Date Jun Jun
Jun 31
No.
Debit Side Narration Payments Discounts received Bal C/F Total
Dr. Rs. Date No. 130,000Jun 01 10,000Jun
310,000 450,000
Credit Side Narration Cr. Rs. Bal B/F 250,000 Total purchases 200,000
Total
© Copyright Virtual University of Pakistan
450,000
200
Financial Accounting - I – MGT101 Notes to the accounts:
VU
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.
© Copyright Virtual University of Pakistan
201
VU Lesson # 27
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 Credit: A (receivable/debtor) account
25,000 25,000
o 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 Credit: Cash / Bank
25,000 25,000
o 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 Credit: Debtors Control account
25,000 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 Credit: Cash / Bank
25,000 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. © Copyright Virtual University of Pakistan
197
Financial Accounting - I – MGT101 At the time of actual bad debt, the journal entry Debit Credit
VU
Provision / Bad Debts 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: Credit:
Discount Allowed Account 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. © Copyright Virtual University of Pakistan
198
Financial Accounting - I – MGT101 Opening Balance Dr. Transactions during the month: Sales for the month Sales return for the month Payments received Discount allowed Bad debts written off
VU 85,500 90,000 2,500 140,000 5,000 4,000
Solution: Debtors Control Account Date No. Jun 01 Jun
Debit Side Narration Bal B/F Sales
Dr. Rs. Date 85,500Jun 90,000Jun Jun
No.
Jun 31 Total
Credit Side Narration Cr. Rs. Returns 2,500 Receipts 140,000 Discount allowed 5,000 Bad Debts 4,000 Bal C/F Total
175,500
24,000 175,500
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 Transactions during the month: Purchases for the month Purchases return for the month Payments made Discount received
Cr. 65,000 70,000 5,000 90,000 3,000
Solution: Creditors Control Account Date Jun Jun Jun
Jun 31
No.
Debit Side Narration Returns Payments Discounts received Bal C/F Total
Dr. Rs. Date No. 5,000Jun 01 90,000Jun 3,000
37,000 135,000
Credit Side Narration Cr. Rs. Bal B/F 65,000 Total purchases 70,000
Total
© Copyright Virtual University of Pakistan
135,000 199
Financial Accounting - I – MGT101 Illustration # 3:
VU
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 Creditors Sales Cash Credit Purchases Cash Credit Total receipts Total payments Discount allowed Discount received Bad debts written off Increase in provision for doubtful debts
150,000 250,000 Note 1
180,000 260,000
Note 1
120,000 200,000 Note 2 350,000 Note 2 250,000 15,000 10,000 25,000 Note 3 5,000
Solution Debtors Control Account Date No. Jun 01 Jun
Debit Side Narration Bal B/F Sales(N1)
Dr. Rs. Date 150,000Jun 260,000Jun
No.
Jun 31 Total
410,000
Credit Side Narration Cr. Rs. Receipts(N2) 170,000 Discount allowed 15,000 Bad Debts 25,000 Bal C/F Total
200,000 410,000
Creditors Control Account Date Jun Jun
Jun 31
No.
Debit Side Narration Payments Discounts received Bal C/F Total
Dr. Rs. Date No. 130,000Jun 01 10,000Jun
310,000 450,000
Credit Side Narration Cr. Rs. Bal B/F 250,000 Total purchases 200,000
Total
© Copyright Virtual University of Pakistan
450,000
200
Financial Accounting - I – MGT101 Notes to the accounts:
VU
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.
© Copyright Virtual University of Pakistan
201
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