Once you have a good understanding of debits and credits and the basics of double-entry bookkeeping, then you may be ready to understand and start using control accounts. If you are still new to bookkeeping and accounting, I suggest you take my free bookkeeping course.
Cash Sales and Cash Purchases
When you account for any financial transaction of a business, company, or other entity, you always need a debit entry and a corresponding credit entry...
If someone enters a shop and purchases an item with physical cash, the debit entry will be posted to the cash account and the credit entry will be posted to the sales account. Pretty straight-forward? Perhaps reviewing the PEARLS acronym will help refresh your memory...
Debits - PEA
Purchases
Expenses
Assets
Credits - RLS
Revenue
Liabilities
Sales
Let's have a look at another double entry example...
This time the business buys some office stationery online using the company debit card. What would the debit and credits be? Debit the office expense or stationery expense account and credit the company bank account. Did you get it? If not, perhaps try one of my free bookkeeping or accounting courses.
Why are Control Accounts needed?
The examples above are very basic and are standard double-entry accounting transactions. But what happens when no physical cash is transferred? Let's say a business sells an item on credit. The sale will be recorded as a credit entry (as normal) but what about the corresponding debit? It would not be posted to the bank account as no physical cash has gone to the bank account, or the petty cash account...
When we account for any entity, we are recording what has actually happened. That is what double-entry bookkeeping is - accounting for transactions that have happened within a business or company.
No cash exchanged hands, so where does the debit entry go? Welcome to the world of control accounts...
The video below will cover what has been taught so far in this post but will also demonstrate the basics of using control accounts. Please watch the video and then scroll down to learn more about control accounts...
Control Accounts 101
When a purchase or sale is on credit, you need to use a control account. A control account will help identify what is outstanding - what is owed to the business (asset) and what the business owes (liability). Controls accounts also allow you to record both sides of an accounting transaction (the debit and the credit).
For credit sales, the control account is often referred to as the sales ledger or sales ledger control account (SLCA).
For credit purchases, the control account is often referred to as the purchase ledger or purchase ledger control account (PLCA).
Let's have a look at some examples... But first I strongly suggest you watch the video at the bottom of this page, as it may help you learn and understand control accounts much more efficiently.
Example 1 - A sale on credit to a customer
Cash sale
Debit - Bank or cash account
Credit - Sales account
Sale on Credit
When sale is made (invoice date)
Debit - Sales ledger control account (an asset account. Balance will be shown as money owed to the business)
Credit - Sales account
When invoice is paid (payment date)
Debit - Bank or cash account
Credit - Sales ledger control account (this clears the amount outstanding on the sales ledger)
Example 2 - A purchase on credit from a supplier
Cash sale
Debit - Purchase account
Credit - Bank or cash account
Purchase on Credit
When purchase is made (invoice date)
Debit - Purchase account
Credit - Purchase ledger control account (liability account. Balance will be shown as money owed to suppliers)
When invoice is paid (payment date)
Debit - Purchase ledger control account (this clear the amount outstanding on the purchase ledger)
Credit - Bank or cash account
Please watch the video below to gain a much better understanding of control accounts.
I do offer bookkeeping and accounting email support. Learn more here.