Learning Outcomes
After reading this article, you will be able to explain the function of the payables control account, analyse how total purchases, payments to suppliers, purchase returns, and discounts received affect the account, and apply these principles to common exam scenarios. You will also learn to prepare account entries and identify errors using reconciliations.
ACCA Recording Financial Transactions (FA1) Syllabus
For ACCA Recording Financial Transactions (FA1), you are required to understand the recording, control, and reconciliation of payables. You should focus on:
- The purpose and content of payables control accounts
- Recording credit purchases, payments, purchase returns, and discounts received
- How supplier balances are controlled and verified
- Identifying and correcting discrepancies in the payables control account
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- Which entries would you make in the payables control account for the following: (a) new credit purchases, (b) payments to suppliers, (c) purchase returns?
- A business takes advantage of a prompt payment discount when paying a supplier. How should this be recorded in the payables control account?
- True or false? The payables control account is only affected by purchases and payments, not by returns or discounts.
- Explain the impact on the payables control account if a return of goods to a supplier is omitted from the records.
Introduction
Payables control accounts play a key role in the bookkeeping of every business which buys goods or services on credit. The payables control account is a summary account used to record the total amounts owed to suppliers at any point in time. To understand this account, it’s essential to know how four main types of transactions—credit purchases, payments to suppliers, purchase returns, and discounts received—affect the balance. These transactions must be recorded accurately so that the control account agrees with the supporting individual supplier accounts and to enable reconciliations that detect and correct errors.
Key Term: payables control account
A general ledger account that summarizes the total amount due to all credit suppliers at any one time.
Recording Transactions in the Payables Control Account
Every transaction with a supplier—whether buying goods or settling bills—influences the payables control account. Let’s review how each transaction is entered.
Credit Purchases
When a business buys goods or services on credit, the total liability to suppliers increases. This transaction is recorded as a credit in the payables control account.
Key Term: credit purchases
Purchases of goods or services from suppliers which are paid for at a later date.
Payments to Suppliers
Paying suppliers decreases the liability. Amounts actually paid to suppliers are debited to the payables control account.
Key Term: payments to suppliers
Cash or bank payments made to reduce amounts owed to credit suppliers.
Purchase Returns
If goods purchased from suppliers are returned, this reduces what is owed. Purchase returns are debited to the payables control account.
Key Term: purchase returns
Goods or materials sent back to suppliers after being purchased on credit, reducing the liability.
Discounts Received
Suppliers may offer discounts if invoices are settled promptly. When the business pays less than the full amount, the discount received is debited to the payables control account.
Key Term: discounts received
Reductions in the amount payable to a supplier, usually for early settlement of an invoice.
Entries in the Payables Control Account
The structure of the payables control account is as follows:
- Credits: Increase balance—mainly credit purchases, corrections for understatements, interest charged by suppliers.
- Debits: Decrease balance—payments to suppliers, purchase returns, discounts received, corrections for overstatements.
The running total represents the amount owed to suppliers at any time. At period end, the balance c/f (carried forward) shows the outstanding liability for the statement of financial position.
Worked Example 1.1
During May, a business had the following transactions:
- Credit purchases: $6,000
- Payments to suppliers: $4,500
- Purchase returns: $800
- Discounts received: $100
Required: Show the entries in the payables control account for May and find the closing balance.
Answer:
Payables Control Account $ $ Payments to suppliers 4,500 Balance b/f X Purchase returns 800 Discounts received 100 Balance c/f 1,600 Purchases 6,000 ------ ------- 7,000 7,000 The closing balance of $1,600 is the total owed to suppliers at month end, assuming an opening balance of zero.
Reconciling the Payables Control Account
At regular intervals, businesses check that the total of individual supplier (payables) ledger accounts agrees with the control account. If there are differences, they might be due to unrecorded transactions, timing differences, or errors.
Key Term: reconciliation
The process of comparing two sets of records to identify and resolve differences.
Common Adjustments and Errors
Occasionally, items may be missed or entered inaccurately. Omissions, such as a forgotten purchase return or an unrecorded discount, will cause a difference between the control account and the sum of individual supplier accounts, which must be identified and corrected.
Worked Example 1.2
A payables control account balance does not match the total of the individual supplier accounts by $500. On investigation, it is found that a purchase return was not recorded in the control account.
Required: How should this be corrected?
Answer:
Debit the payables control account with $500 to record the missing purchase return. This will align the control account balance with the supplier account total.
Exam Warning
Exam Warning Failing to record discounts received or purchase returns in the payables control account is a frequent source of exam errors. Always check whether these debits have been included during reconciliation tasks.
Summary
The payables control account brings together all transactions involving suppliers: purchases (increase the liability), payments, returns, and discounts received (all decrease the liability). Keeping accurate records and reconciling regularly against supplier ledgers ensures errors are caught quickly. This is central for reliable financial information and is a frequent focus of ACCA exam questions.
Key Point Checklist
This article has covered the following key knowledge points:
- Explain the purpose and layout of the payables control account
- Record credit purchases, payments to suppliers, purchase returns, and discounts received
- Identify which account entries increase or decrease the payables balance
- Reconcile the payables control account with individual supplier balances
- Recognise common errors and necessary adjustments
Key Terms and Concepts
- payables control account
- credit purchases
- payments to suppliers
- purchase returns
- discounts received
- reconciliation