As the business grows in size, more than one ledger is required for recording its transactions which have also expanded with the business. Since the bulk of the entries are made in the accounts of debtors and creditors, these two classes of accounts are taken out of the General Ledger and put in separate ledgers - the Sales Ledger for debtors' accounts and the Purchases Ledger for creditors' accounts. There may be more than three ledgers but for simplicity, we shall limit the ledgers to three for the moment. The use of more than one ledger makes it possible to subdivide work and to obtain rapid accounting information when required.
When all accounts are kept in one ledger, a Trial Balance can be extracted to prove the arithmetical accuracy of the accounts therein. Any error revealed in the Trial Balance can be easily and quickly located since the number of entries in the ledger are comparatively less in a small business.
When several ledgers are used, it would be very tedious to look for any error revealed in an overall Trial Balance because we have to check all the ledgers before we can locate the error. If something like a sectional Trial Balance can be constructed for each ledger, then we only have to search for the error in the ledger whose Trial Balance totals do not agree.
It is obvious that the totals of a Trial Balance, extracted from any one of the three ledgers in use, will not agree since some of the accounts are missing. The debtors and creditors are missing from the General Ledger . To make the General Ledger complete by itself, two Control Accounts, one to take the place of all the debtors and one to replace all the creditors are constructed and incorporated within the General Ledger. The General Ledger is, therefore, made self-balancing by the use of Control Accounts, sometimes called Total Accounts.
A Debtors Control Account to represent all the debtors in the Sales Ledger is sometimes known as the Sales Ledger Control Account or the Total Debtors Account.
If an analysis of all the debtors, in the Sales Ledger is carried out and totals are computed for each item such as the total of opening balances, total sales, total cash and cheques received, etc., then an account made up of these totals can be constructed to represent all the entries made in the Sales Ledger. Such an account is called the Debtors Control Account. The closing balance of this Debtors Control Account should agree with the sum total of the closing balances, of all the debtors' accounts in the Sales Ledger.
The Debtors Control Account is a summary of all the debtors' accounts in the Sales Ledger and the entries are all in totals, hence the name, Total Debtors Account. The construction of this account is the same as a debtors' account. The debit entries are those found on the debit side of a debtor's account and the credit entries are those on the credit side.
It would be very laborious to add up all the entries made in the Sales Ledger in order to obtain the total for each item. These totals can be obtained directly from sources other than the Sales Ledger, i.e. the subsidiary books. The following shows a diagram to identify the sources of information for the Debtors Control Account:
The Creditors Control Account, also called the Purchases Ledger Control Account represents all the creditors in the Purchases Ledger. Since the accounts of the creditors are not in the General Ledger, a Control Account to represent them has to be constructed and included in the General Ledger to enable a Trial Balance to be drawn up.
The construction of the Creditors Control Account follows the same principle as the Debtors Control Account. The Totals for the entries in the Creditors Control Account are obtained from subsidiary books with reference to the Purchases Ledger.
A Control Account serves as a check on the accuracy of the work of the ledger concerned. Since the information for the Control Account is obtained elsewhere, independently of the ledger, a comparison can be made between the two. For instance, if the closing balance of the Debtors Control Account does not tally with the total balances in the Sales Ledger, an error must have been made in either the Control Account or the Sales Ledger.
Information can be obtained rapidly. Since the balances in the Control Accounts are equal to total debtors and total creditors, it is not necessary to wait for the lists of balances to be extracted from the individual accounts in the Sales Ledger and Purchases Ledger.
Sometimes, a customer of a firm is also a supplier, i.e. the same person is a debtor for the goods he has bought and a creditor for the goods he has supplied. His accounts can be settled by a transfer (or contra).
Generally, debtors' accounts contain debit balances and creditors' accounts contain credit balances. But at times, some debtors may have small credit balances and creditors may have small debit balances.
Take the case of the Sales Ledger. After settling their accounts, some debtors may return empty containers which have been charged or they may have been overcharged for goods bought. When these items are credited to their account at balancing time, there are no debit balances to offset them. As a result, these debtors will have credit balances for the time being.
Control Accounts contain all the debtors in the Sales Ledger and all the creditors in the Purchases Ledger. They are included in the General Ledger to take the place of debtors and creditors and thus make the double entry in the General Ledger complete. This enables the extraction of a Trial Balance from the General Ledger.
The closing balance in the Debtors Control Account stands for total debtors' balances, and the balance in the Creditors Control Account stands for total creditors' balances.
The entries in the Control Accounts are exactly the same as entries in the personal accounts (debtors and creditors) except that they are in totals.
Debtors Control Account contains in total form all transactions which have been posted as individual items to the Sales Ledger as illustrated in the diagram below:
Diagram Illustrating How Sales Ledger Control Account is Prepared
Diagram Illustrating How Purchases Ledger Control Account is Prepared