Control accounts

If we sell or buy on credit terms, we will need to keep track of all our creditors and debtors. Yet we may find the business has hundreds or thousands of debtors. Surely we don’t want each individual account in the general ledger? That would break the pattern of one account for one type of transaction, as well as making it hugely unwieldy.

Subsidiary ledgers

The solution is to set up the individual accounts in a subsidiary ledger – sales subsidiary for debtors, and a purchases subsidiary ledger for creditors accounts. What goes in the general ledger will actually be summary data, and will go in a control account – sales ledger control account (SLCA) or purchases ledger control account (PLCA). This means that the subsidiary ledger exists outside of the double entry system. This is important to remember – we don’t want to count debtors or creditors twice.

Enter the Day Books

How do day books fit into the picture? They are the books of prime entry. Each credit sale or purchase will be entered into the appropriate day book, and then posted from there to the subsidiary and general ledger accounts.

Sales Day Book

As each credit customer is invoiced, the details are entered in the sales day book (SDB). The column labelled folio, is the account number of each customer in the subsidiary ledger. The amount net of VAT, the VAT and gross amounts are entered in their own columns. (If the business is not VAT registered, there will only be one amount – the net amount.)

Note that only credit sales are entered into a sales day book. If sales are paid for at the time of delivery, the details would be entered into the cash book instead.

Below shows how credit sales are entered into the sales day book.

Sales Day Book 1

Posting to the ledgers

The total amount on each line is posted to the subsidiary sales ledger. This ledger will contain an account for each debtor. Let's say that each invoice contains the terms: "2.5 % discount may be taken if account is settled within 14 days." The first point to notice is that the VAT amount is not 20% of the net amount. It is actually 20% x 97.5% of the net amount, because 2.5% discount must be deducted first.

Thus, on 1st January, P & J ltd – account number SL001 – is debited with £597.50. This continues on a line by line basis until some point in time is reached – usually at the end of the week, when the columns are then totalled, and posted to the general ledger as shown below

Post ledger 1

The double entry has therefore posted the total gross amount to the debit side of the SLCA. (SDB1 refers to page 1 of the SDB - that enables us to trace the posting back to the day book.) The net amount has been credited to sales while VAT credited to another control account - VAT control. If the business is not VAT registered, then there will only be two entries – both for the net amount.

Now you can see how the sales control account works. While the subsidiary ledger contains the individual accounts for each debtor, the control account contains the total debtors balance. Periodically, the subsidiary ledger should be compared with the control account. This process is called reconciliation.

Sales Returns

Sometimes goods are returned, and we need to account for that too. A day book is set up for just this purpose – hopefully, there won’t be too many entries. The basic principle is the same as for the sales day book but in reverse.

Each credit note that is issued for a customer is entered in a single line in the sales returns day book. The total (gross) figure for the customer is CREDITED to that customers account in the subsidiary ledger. At the end of the week, the columns for all the returns are totalled and the total gross figure is credited to the SLCA. Net amount is debited to a sales returns account and the VAT amount is debited to the VAT control account. This reduces the amount of VAT that the business owes to HMRC.

Example - Sales Return

Suppose that on 9 Jan, P & J ltd returns the item to us that we sold to them on 5 Jan, and we issue them a credit note. We would then record that transaction in the sales returns day book (SRDB). At the end of a period, this too is totalled an posted to the general ledger. In our example, there is only one return in that period.

SRDB_2 1
Sales return 1

Purchases and day books

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