What you'll learn
A control account is a summary account in the general ledger that should equal the total of all the individual accounts in a subsidiary ledger. The sales ledger control account should equal the sum of every customer's balance; the purchases ledger control account should equal the sum of every supplier's balance. A bank reconciliation does the same job against an outside record: it explains the difference between the balance in the firm's own cash book and the balance on the statement sent by the bank.
Both are checks, not part of the double entry that produces the financial statements. Their value is that they localise an error. If the sales ledger control account does not agree, the fault lies inside the sales ledger and nowhere else, so a clerk can be sent to one ledger rather than through the whole system. If the bank reconciliation will not complete, either the cash book is wrong or something has passed through the bank that the business does not yet know about.
By the end of this topic you should be able to construct both control accounts from the day book totals, identify which items belong on which side, prepare a bank reconciliation statement starting from either balance, explain the difference between a timing difference and an error, and say what each check does and does not prove.
Key terms and definitions
Control account — a general ledger account whose balance should equal the total of the individual balances in the corresponding subsidiary ledger. Also called a total account.
Sales ledger control account — the control account for trade receivables, built from the sales day book, the cash book and the returns inwards day book.
Purchases ledger control account — the control account for trade payables, built from the purchases day book, the cash book and the returns outwards day book.
Contra (set-off) — the offsetting of a balance owed by a customer against a balance owed to the same party as a supplier. It appears on the credit side of the sales ledger control account and the debit side of the purchases ledger control account.
Unpresented cheque — a cheque written and entered in the cash book but not yet paid out by the bank.
Outstanding lodgement — money received and entered in the cash book but not yet credited by the bank. Also called an uncleared deposit.
Direct debit and standing order — payments made by the bank on a standing instruction, which appear on the bank statement before the business records them.
Dishonoured cheque — a cheque received and banked that the paying bank refuses. The cash book entry must be reversed and the debt restored.
Timing difference — an item correctly recorded by both parties but not yet by both at the same date.
Core concepts
What goes into the sales ledger control account
The debit side records amounts that increase what customers owe: the opening balance of receivables, credit sales from the sales day book, any dishonoured cheques, and interest charged on overdue accounts.
The credit side records amounts that reduce it: cash and cheques received, discount allowed, returns inwards, bad debts written off, and contras set off against the purchases ledger.
Two items are commonly misplaced. Cash sales never enter the control account, because no receivable was ever created. The allowance for doubtful debts never enters it either, because the customers' individual accounts are untouched by an allowance — only a bad debt actually written off reduces the ledger.
What goes into the purchases ledger control account
The mirror image. The credit side records the opening payables balance and credit purchases; the debit side records payments made, discount received, returns outwards, and contras.
Because payables are a liability, the balance carried down sits on the credit side, which is the opposite of the sales ledger control account. Candidates who memorise one and assume the other is identical lose the presentation marks.
Why the control account is built from day book totals
The control account must be constructed from a source independent of the subsidiary ledger, or the check proves nothing. If the figures were copied from the individual accounts, the control account would agree with them by construction even when both were wrong.
So the totals come from the books of original entry — the sales day book total, the cash book column totals, the returns day book totals — while the individual balances come from the ledger. Two independent routes to the same figure is what makes the agreement meaningful.
What a disagreement tells you
If the control account and the sum of the personal balances differ, the error is in one of two places: a posting to an individual account that was wrong or omitted, or a day book total that was miscast before being posted to the control account.
Note that neither error disturbs the trial balance. A wrong day book total is posted once to the general ledger, so the debits still equal the credits; a wrong individual posting never reaches the general ledger at all. This is exactly why the control account exists — it catches errors the trial balance is structurally incapable of finding.
Why the cash book and the bank statement differ
Three causes, and separating them is the whole skill.
Timing differences — unpresented cheques and outstanding lodgements. Both records are correct; the bank simply has not caught up. These are adjusted for in the reconciliation statement, not in the cash book.
Items the bank knows and the business does not — bank charges, interest, direct debits, standing orders, dishonoured cheques, credit transfers received directly. These belong in the cash book, which must be updated and brought to a corrected balance before the reconciliation is prepared.
Errors — by the business or by the bank. The firm's errors are corrected in the cash book; the bank's are adjusted for in the reconciliation and reported to the bank.
The order of work
Update the cash book first, then reconcile. Preparing the reconciliation statement from an un-updated cash book is the most common structural failure in this topic, because the reconciliation is then trying to explain differences that are not timing differences at all.
The reconciliation statement then runs from the balance on the bank statement, adds outstanding lodgements, deducts unpresented cheques, and arrives at the corrected cash book balance — or it runs the other way, starting from the corrected cash book balance and reversing each adjustment. Either direction is acceptable provided it is labelled.
Worked examples
Example 1 — Sales ledger control account (7 marks)
At 1 January receivables were $86,000. During the year: credit sales $540,000; cash received from customers $498,000; discount allowed $9,000; returns inwards $14,000; bad debts written off $6,000; contra against the purchases ledger $3,000; a dishonoured cheque $4,000.
Debit side: $86,000 + $540,000 + $4,000 = $630,000.
Credit side before the balance: $498,000 + $9,000 + $14,000 + $6,000 + $3,000. Working: $498,000 + $9,000 = $507,000; + $14,000 = $521,000; + $6,000 = $527,000; + $3,000 = $530,000.
Closing balance carried down = $630,000 − $530,000 = $100,000.
That $100,000 should equal the total of the individual customer balances in the sales ledger. One mark for each correctly placed item, one for the balance.
Example 2 — Purchases ledger control account (5 marks)
At 1 January payables were $52,000. Credit purchases $310,000; payments to suppliers $295,000; discount received $6,000; returns outwards $8,000; contra $3,000.
Credit side: $52,000 + $310,000 = $362,000.
Debit side before the balance: $295,000 + $6,000 + $8,000 + $3,000 = $312,000.
Closing balance carried down = $362,000 − $312,000 = $50,000, a credit balance, because payables are a liability.
Note the $3,000 contra appears in both control accounts — on the credit side of the sales ledger control account in Example 1 and on the debit side here. It is one transaction seen from two ledgers.
Example 3 — Updating the cash book (5 marks)
The cash book shows a debit balance of $31,400. The bank statement reveals: bank charges $850; a standing order for insurance $2,400; a credit transfer received from a customer $7,000; a dishonoured cheque $1,900.
Corrected balance = $31,400 − $850 − $2,400 + $7,000 − $1,900.
Working: $31,400 − $850 = $30,550; − $2,400 = $28,150; + $7,000 = $35,150; − $1,900 = $33,250.
All four items belong in the cash book because the business genuinely did not know about them. None of them is a timing difference.
Example 4 — Bank reconciliation statement (5 marks)
Continuing from Example 3, the corrected cash book balance is $33,250. The bank statement balance is $41,800. Unpresented cheques total $12,300 and outstanding lodgements total $3,750.
Starting from the bank statement: Balance per bank statement $41,800 Add outstanding lodgements $3,750 → $45,550 Less unpresented cheques $12,300 → $33,250
This agrees with the corrected cash book balance, so the reconciliation is complete. If it had not agreed, the residual difference would be an error still to be found — in the cash book, in the reconciliation, or by the bank.
Common mistakes and how to avoid them
Putting cash sales in the sales ledger control account. Only credit sales create a receivable.
Putting the allowance for doubtful debts in the control account. An allowance is an estimate that leaves the individual accounts untouched. Only a bad debt written off belongs there.
Forgetting that the contra appears in both control accounts. One transaction, two entries, opposite sides.
Preparing the reconciliation before updating the cash book. Update first, always.
Adjusting the cash book for unpresented cheques. They are already in the cash book — that is what makes them unpresented. They belong in the reconciliation statement only.
Getting the direction of the adjustments wrong. Work it through logically rather than memorising: an unpresented cheque means the bank has not yet taken money the business has already deducted, so the bank's balance is higher.
Treating a dishonoured cheque as a timing difference. It is not. The cash book entry must be reversed and the customer's debt restored.
How this links to your Internal Assessment
Control accounts and bank reconciliations are the strongest internal control evidence an Internal Assessment can carry, because they are checks a small business can actually perform. If the business you have chosen keeps a sales ledger, prepare the control account from its day books and reconcile it — and if it does not agree, say so and investigate, because a documented investigation earns more than a clean figure with no working behind it.
The bank reconciliation is usually easier to obtain, since the bank statement is an external document you can reproduce as evidence. Show the un-updated cash book, the updating entries, and the reconciliation statement as three separate stages so the moderator can see the method rather than only the result.
Where the business has no control accounts, that is a finding, not a gap. Recommend them, state precisely which error they would catch that the trial balance cannot, and say who would perform the check and how often. A recommendation with a named control and a frequency attached is worth considerably more than one that says the records should be improved.
Exam technique for control accounts and bank reconciliation
Questions usually give a list of figures and ask for the control account, or give a cash book balance and a bank statement and ask for the reconciliation. In both cases the marks are allocated item by item, so enter everything you are confident about even if you cannot complete the account.
For a control account, rule it as a T account with the correct heading, and label the balance b/d and c/d on the correct sides. A frequent trap is an opening credit balance on the sales ledger control account — a customer in credit because they overpaid — which sits on the opposite side to the main opening balance and must not be netted off silently.
For a reconciliation, state clearly which balance you are starting from. Examiners accept either direction, but an unlabelled statement leaves them unable to award the method marks.
Watch the command words. Prepare means produce the account or statement in proper form. Explain why a control account is maintained wants the control and error-localisation argument, not a description of its layout. Distinguish between an unpresented cheque and a dishonoured cheque wants the contrast made explicit: one is a timing difference requiring no cash book entry, the other is a reversal requiring one.
Quick revision summary
- A control account summarises a subsidiary ledger and must be built from independent day book totals, or it proves nothing.
- Sales ledger control debit side: opening receivables, credit sales, dishonoured cheques, interest charged.
- Sales ledger control credit side: receipts, discount allowed, returns inwards, bad debts written off, contras.
- Purchases ledger control is the mirror image, with the closing balance on the credit side.
- Cash sales and the allowance for doubtful debts never enter either control account.
- A contra appears in both control accounts, on opposite sides.
- Neither a miscast day book total nor a wrong individual posting disturbs the trial balance — which is why control accounts exist.
- Bank differences have three causes: timing, items only the bank knows, and errors.
- Update the cash book for bank charges, interest, standing orders, direct debits, dishonoured cheques and credit transfers — then reconcile.
- Unpresented cheques and outstanding lodgements go in the reconciliation statement, never in the cash book.
- From the bank statement: add lodgements, deduct unpresented cheques, to reach the corrected cash book balance.