Control Accounts and Bank Reconciliation

Subject: Accounting
Topic: 6
Cambridge Code: 0452 / 0985 / 7707

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Control Accounts (Memorandum Accounts)

Control Account - An account used to summarize (control) many individual accounts and provide a total that can be checked against records

Purpose

1. Verify accuracy of individual accounts
2. Speed up trial balance preparation
3. Highlight errors in subsidiary ledgers
4. Provide control total
5. Used when business has many debtors/creditors

Types of Control Accounts

Receivables Control Account (Debtors Control)

Summarizes all individual customer accounts

Structure:

• Openings balance (opening receivables)
• Plus: Credit sales
• Plus: Cash received from sales
• Less: Bad debts written off
• Less: Discounts allowed
• Closing balance

Payables Control Account (Creditors Control)

Summarizes all individual supplier accounts

Structure:

• Opening balance (opening payables)
• Plus: Purchases on credit
• Less: Cash paid to suppliers
• Less: Discounts received
• Closing balance

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Preparing Control Accounts

Receivables Control Account

Receivables Control A/c

	$
Opening Balance	XXX
Sales on Credit	XXX
Interest Charged on Overdue Accounts	XXX
Total	XXX
Cash Received	XXX
Bad Debts Written off	XXX
Discounts Allowed	XXX
Closing Balance	XXX
Total	XXX

Payables Control Account

Payables Control A/c

	$
Cash Paid	XXX
Discounts Received	XXX
Returns	XXX
Closing Balance	XXX
Total	XXX
Opening Balance	XXX
Purchases on Credit	XXX
Total	XXX

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Bank Reconciliation Statement

Bank Reconciliation - Process of explaining difference between cash book balance and bank statement balance

Why Differences Occur

1. Timing Differences

   • Cheques written but not yet cleared
   • Cash deposited but not yet processed
   • Bank charges/interest not yet recorded

2. Book Errors

   • Cash book posting errors
   • Incorrect amounts recorded
   • Transactions omitted

3. Bank Errors

   • Unauthorized transactions
   • Incorrect amounts deposited
   • Interest calculated incorrectly (rare)

Reconciliation Process

Step 1: Check bank statement against cash book

• Tick off items that match
• Identify unmatched items

Step 2: Check timing differences

• Unpresented cheques (written but not cleared)
• Uncleared deposits (not yet processed)
• Bank charges/fees
• Bank interest

Step 3: Adjust cash book

• For items known by bank but not yet in books
• Correct any errors in cash book

Step 4: Prepare reconciliation statement

• Start with adjusted cash book balance
• Add: Uncleared deposits
• Less: Unpresented cheques
• Arrive at bank statement balance

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Bank Reconciliation Statement Format

BANK RECONCILIATION STATEMENT as at [Date]

	$
Cash Book Balance	X,XXX
Add:
Bank charges (not yet in cash book)	XX
Less:
Bank interest (not yet in cash book)	XX
Adjusted Cash Book Balance	X,XXX
Add:
Cheques not yet cleared	XX
Less:
Deposits not yet credited	XX
Balance per Bank Statement	X,XXX

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Worked Examples

Example 1: Control Account

Receivables Control Account for the year:

Opening balance of receivables: $15,000 Credit sales during year:$80,000 Cash received from customers: $75,000 Bad debts written off:$1,500 Discount allowed: $2,000

Receivables Control A/c

	$
Opening Balance	15,000
Sales on Credit	80,000
Total	95,000
Cash Received	75,000
Bad Debts	1,500
Discount Allowed	2,000
Closing Balance	16,500
Total	95,000

Example 2: Bank Reconciliation

Cash book shows bank balance of $8,500

Bank statement shows $9,200

Investigation finds:

• Cheques written but not cleared: $1,500
• Deposits sent to bank but not credited: $800
• Bank charges not in cash book: $50

Adjustments to Cash Book:

	$
Balance per cash book	8,500
Less: Bank charges	(50)
Adjusted balance	8,450

Bank Reconciliation Statement:

	$
Adjusted cash book balance	8,450
Add: Deposits not credited	800
Less: Cheques not cleared	(1,500)
Balance per bank statement	7,750

Note: This doesn't match. Need to review. Bank statement shows 9,200 but reconciles to 7,750. Issue: Starting balances or additional item not identified.

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Key Points to Remember

1. Control account summarizes multiple individual accounts
2. Receivables and payables accounts most common
3. Bank reconciliation explains differences between books and bank
4. Timing differences include uncleared cheques, unprocessed deposits
5. Adjust cash book for items unknown to business
6. Reconcile to bank statement for timing items
7. Regular reconciliation catches errors quickly

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Practice Questions

1. Prepare a receivables control account with:

   • Opening balance: $20,000
   • Credit sales: $50,000
   • Cash received: $45,000
   • Bad debts: $500
   • Discounts: $1,500

2. Bank statement shows $5,000 but cash book shows$5,500

   • Your cheques written but not cleared: $800
   • Deposits not yet credited: $300
   • Bank charges not in books: $50
   • Prepare bank reconciliation

3. Explain why bank reconciliation is necessary.

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Revision Tips

• Understand why control accounts are needed
• Learn the structure of receivables and payables control accounts
• Know the reconciliation process step by step
• Practice bank reconciliation statements
• Remember timing differences are normal
• Always identify source of differences