Learning Outcomes
After reading this article, you will be able to explain the purpose and operation of receivables and payables control accounts, perform reconciliations between the control accounts and subsidiary ledgers, identify typical causes of discrepancies, and apply systematic methods for error tracing and correction. You will strengthen your ability to answer ACCA FA2 exam questions on this subject area.
ACCA Maintaining Financial Records (FA2) Syllabus
For ACCA Maintaining Financial Records (FA2), you are required to understand how receivables and payables control accounts function as summary accounts, how to reconcile these with the subsidiary ledgers, and how to trace and correct differences. Revision for this subtopic should cover:
- The structure and purpose of receivables and payables control accounts
- Recording transactions in both individual accounts and control accounts
- Reconciling control accounts with lists of ledger balances
- Identifying, tracing, and rectifying errors or omissions in control accounts or subsidiary ledgers
- Understanding the impact of errors and corrections on the trial balance and financial statements
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.
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Which one of the following is NOT normally a cause of a difference between a receivables control account and the list of receivables ledger balances?
- Double posting a receipt from a credit customer
- Failure to post a credit sale to the receivables control account
- Posting a cash sale to the receivables control account
- A returned cheque recorded only in the bank account
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If the total of the payables control account does not match the total of the individual payables ledger balances, what is usually the first step in investigation?
- Adjust the control account for the difference
- Prepare a list of all entries affecting the control account for the month
- Repeat the reconciliation calculation
- Re-do the trial balance completely
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True or false? A settlement discount taken by a customer but omitted from the control account will result in the control account balance being higher than the ledger total.
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Briefly state the double-entry required to adjust for an error where a supplier’s invoice has been entered twice in the payables ledger but only once in the control account.
Introduction
Receivables and payables control accounts are essential for monitoring and verifying total amounts owed by and to an entity. These control accounts serve as summaries of all transactions affecting credit customers and suppliers. Regular reconciliation between control accounts and the individual account balances in the subsidiary ledgers enables detection and correction of errors before financial statements are prepared.
During the accounting cycle, different types of discrepancies can arise from mistakes in data entry, omissions, or timing differences. Effective error tracing and reconciliation procedures ensure the reliability of reported figures, support management control, and meet exam requirements for the ACCA FA2 paper.
Key Term: Control account
A summary account in the general ledger that aggregates transactions relating to receivables or payables, providing a control total for comparison with individual ledger balances.
The Role of Receivables and Payables Control Accounts
Control accounts for receivables (also known as the sales ledger control account) and payables (the purchases ledger control account) collectively record all transactions impacting credit customers and suppliers.
The receivables control account is debited with credit sales and credited with receipts, returns, irrecoverable debts, and discounts allowed. The payables control account is credited with credit purchases and debited with payments, returns, discounts received, and similar transactions.
Control accounts enable quick comparison with the sum of the individual customer or supplier accounts in the subsidiary ledgers. This regular check is a critical control to confirm data integrity and to ensure that errors are detected at an early stage.
Key Term: Subsidiary ledger
A detailed ledger containing individual accounts for each credit customer (receivables ledger) or each supplier (payables ledger), supporting the control account in the general ledger.
Purpose and Process of Reconciliation
Reconciling control accounts to subsidiary ledger totals involves comparing the balance from the control account (in the general ledger) with the total of all individual customer or supplier balances from the subsidiary ledger. Reconciliations should be performed at regular intervals (often monthly) to identify and resolve discrepancies promptly.
Common Causes of Differences
Discrepancies commonly arise from:
- Transactions entered in the control account but omitted from the subsidiary ledger (or vice versa)
- Items posted to the wrong accounts
- Mathematical errors in the list of balances
- Timing differences, such as cheques in transit or unrecorded returns
- Errors in journal entries affecting only the control account or only the subsidiary ledger
Prompt reconciliation reduces the risk of undiscovered errors affecting financial statements.
Key Term: Reconciliation
The process of comparing two sets of records (such as a control account and a list of individual ledger balances) and identifying, explaining, and correcting differences.
Error Tracing and Correction
When a difference arises, systematic investigation is necessary. The process typically includes:
- Comparing the opening balances in the control account and the list of balances
- Reviewing transactions processed during the period, checking for entries missing from either the control account or subsidiary ledger
- Verifying arithmetic by recalculating totals
- Examining unusual or irregular items (e.g., returned cheques, journal adjustments)
- Correcting errors using appropriate double-entry adjustments
Common errors and their correction approaches include:
- Omitting a transaction from either the control account or subsidiary ledger
- Double posting or misposting values
- Recording an item in the wrong ledger account, affecting only the total or individual balance
Systematically reviewing each possible cause ensures that errors are fully identified and rectified.
Worked Example 1.1
A bookkeeper enters a sales return for $600 in the individual receivables ledger account of Alex Lee but omits to record it in the receivables control account. At month-end, the control account balance is $600 higher than the total of the subsidiary ledger balances.
Question:
How should this discrepancy be corrected in the general ledger?
Answer:
The missing entry should be posted to the receivables control account:
Debit: Sales returns $600
Credit: Receivables control account $600
This brings the control account in line with the detailed ledger.
Worked Example 1.2
During the payables reconciliation, an accountant finds that the control account balance exceeds the sum of the payables ledger balances by $2,000. On review, they discover that a payment to a supplier was entered in the control account but accidentally not posted to the individual supplier's ledger account.
Question:
What is the double-entry needed to correct this error?
Answer:
Debit: Payables control account $2,000
Credit: Cash at bank $2,000 (already recorded)
Debit: Payables ledger (supplier’s account) $2,000
Credit: Payables control account $2,000 (to reverse the earlier control account posting and post correctly to the supplier ledger)
Typical Adjustments and Rectification Entries
Once an error is located, journal entries are required to rectify the mistake, ensuring both ledgers match and the financial statements are correct.
Key Term: Suspense account
A temporary account used to record differences or unidentified transactions until the correct posting can be determined and allocated.Key Term: Error of omission
An error resulting from failing to record a transaction in either the control account or subsidiary ledger.Key Term: Error of commission
An error caused by recording a transaction to the wrong account of the same category, such as entering a supplier payment to the wrong supplier's ledger account.Key Term: Error of principle
An error arising when a transaction is entered in the wrong type of account, such as posting a receivable to an expense account.
Exam Warning
Control accounts summarise totals only; they do not replace the supporting detailed records. Ensure all corrections are made in both the control account and the individual ledger where appropriate. Exam questions may test your understanding of which areas are affected by different types of errors.
Revision Tip
When reconciling, keep a checklist of all transactions that should affect both the control account and subsidiary ledger. Tick off each as you verify, and investigate any item not matched in both records.
Summary
Reconciling receivables and payables control accounts involves comparing the control accounts with the individual account balances, identifying any differences, and tracing errors systematically. Corrections are made using double-entry adjustments so that financial statements present accurate information. This process is a key exam area and supports internal control in accounting systems.
Key Point Checklist
This article has covered the following key knowledge points:
- The structure and purpose of receivables and payables control accounts
- How to perform reconciliations between control accounts and subsidiary ledgers
- Typical causes of discrepancies and the process to trace them
- Correction of differences and posting of rectification entries
- The effect of different errors on control account balances and ledger totals
Key Terms and Concepts
- Control account
- Subsidiary ledger
- Reconciliation
- Suspense account
- Error of omission
- Error of commission
- Error of principle