Kestrel Supplies: a control account that nearly agrees
At 1 April the sales ledger control account of Kestrel Supplies had debit balances of £41,280. During April: credit sales £186,540; receipts from credit customers £179,320; discounts allowed £2,840; sales returns £3,150; bad debts written off £960; a contra settlement of £1,200 with the purchase ledger; interest of £75 charged on an overdue account; and a £130 refund cheque sent to a customer who had overpaid. At 30 April the total of the list of sales ledger balances was £40,735, and the bookkeeper noted that one customer's account carries a credit balance of £90 which has been included in that total.
1. Prepare the sales ledger control account for April and state the closing balance.
Read the worked answer
Sales ledger control account
| Debit | £ | Credit | £ |
|---|---|---|---|
| Balance b/d | 41,280 | Receipts | 179,320 |
| Credit sales | 186,540 | Discounts allowed | 2,840 |
| Interest charged | 75 | Sales returns | 3,150 |
| Refund to customer (Dr customer, Cr bank) | 130 | Bad debts written off | 960 |
| Contra with purchase ledger | 1,200 | ||
| Balance c/d | 40,555 | ||
| Total | 228,025 | Total | 228,025 |
| Balance b/d | 40,555 |
Closing balance: £40,555 debit.
Two entries are the ones candidates most often get wrong:
- The contra reduces the sales ledger, so it is a credit in this account (and a debit in the purchase ledger control account).
- The refund to an overpaying customer debits that customer's account and therefore increases the debit balance of the control account - it is not a receipt and must not be netted off.
2. The bookkeeper suggests two possible explanations for the £180 difference between the control account and the list: (a) discounts allowed of £180 were omitted from the control account; or (b) the £90 credit balance has been included in the total of debit balances. Which is consistent with the figures, and what should be done?
Read the worked answer
Option (b) is the one that fits.
A credit balance of £90 belongs on the credit side of the reconciliation. If it has been added to the total of debit balances, the list is wrong twice over: it is overstated by the £90 that should have been deducted from the debit balances, and by a further £90 because the credit balance itself is wrong in direction. 2 × £90 = £180, which is exactly the difference.
Option (a) does not fit. If discounts of £180 had been omitted from the control account, the control account would be understated by £180 and would read £40,375 - it would still be £180 away from the list, but the list would need no correction, and the wording of the difference gives no support for that figure. The arithmetic of 2 × the credit balance is the tell.
Corrected reconciliation
- Total of debit balances: 40,735 − 180 = £40,555
- Total of credit balances: £90, to be shown separately as a liability (a customer in credit - usually an overpayment or an unapplied receipt).
- Control account: £40,555 - agrees.
Do not simply write the difference off to a suspense account; establish the cause first.
3. State the double entry for the contra settlement and for the bad debt write-off, and explain the effect of each on the purchase ledger control account and on profit.
Read the worked answer
Contra settlement, £1,200
- Dr Purchase ledger control £1,200 (the amount Kestrel owes the supplier falls)
- Cr Sales ledger control £1,200 (the amount the customer owes Kestrel falls)
Effect: it settles a payable and a receivable between the same trading partner. No effect on profit - no income or expense arises; it is purely a balance sheet reclassification within working capital. The purchase ledger control account falls by £1,200.
Bad debt written off, £960
- Dr Irrecoverable debts expense £960
- Cr Sales ledger control £960
Effect: the receivable is removed and an expense is recognised, so profit falls by £960. The sales ledger control account falls by £960. There is no effect on the purchase ledger control account.
Common error to avoid: crediting the bad debt to the sales account. Writing off a debt does not reverse the sale; the sale was genuine. Charging it to sales would overstate the reduction in gross profit and understate the separate expense line that the owner needs to see.