Introductory.—Reference to controlling accounts has been made several times in preceding chapters. It is purposed now to define them and explain their use. The separation of the various journals on the basis of an analysis of transactions frees the general journal of a vast mass of detail it formerly carried. This separation, however, in no way affects the underlying debit and credit scheme of the whole system. Each journal is an integral part of the whole; every entry therein has its equal debit and credit which are in due course posted to its proper account, thus maintaining the equilibrium of the ledger. The separation of the ledger into three or more special ledgers in the interest of economy of effort and ease of use has also been mentioned. Still, each of these special ledgers is an integral part of the whole ledger and the accounts in the special ledgers must be entered in the trial balance to secure proof of equilibrium.

The customers ledger is usually the most active of the various ledgers, i.e., more postings are made in it because the majority of business transactions involve dealings of various sorts with customers, and more accounts are required to keep the records with customers. It is usually, therefore, the largest part of the whole ledger, but its accounts are all of the same kind, viz., accounts receivable. When taking a trial balance, the total of the balances of the customers ledger accounts is usually set up under the title “Accounts Receivable,” leaving the details to a supplementary list or schedule.

Advantage of a Controlling Account.—The advantage of thus condensing the trial balance is apparent and suggests the desirability of obtaining the “accounts receivable” balance independently of the customers ledger. If this is done the bookkeeper in charge of the general ledger can not only draw up his trial balance without reference to the customers ledger, but has also the correct figure for the total of the account balances in the customers ledger. In other words, he has a figure which controls the customers ledger and which therefore furnishes him with a check on the accuracy of the ledger clerk or bookkeeper who keeps that ledger. The most convenient method of recording the accounts receivable figure is evidently by means of a formal account on the general ledger. When such an account is kept, the effect is to make it a summary account whose detail is carried in the customers ledger.

Controlling Account Necessitates Changed Idea of Ledger Equilibrium.—By having a customers controlling account (or “Accounts Receivable” as it is commonly called, though other terms are also used) in the general ledger, the customers ledger is no longer used as an integral part of the whole ledger and becomes a “subsidiary” ledger; that is, its function is reduced to that of a supporting schedule or list of detail for the summary controlling account. The equilibrium of the general ledger is now maintained by summary posting to the controlling accounts. Though the customers ledger has ceased to be a “ledger” in the proper sense of the term, it is still a vital part of the system, carrying as it does the detail of the summary controlling account. Moreover, it is linked up to the system by being provable against its summary account. Yet it should be borne in mind that its scheme of debit and credit is now an independent one and is not linked up to the debit and credit equilibrium of the general ledger; that is, the postings in the subsidiary ledger are merely memorandum entries of the detail posted in summary form to the general ledger. Thus the mathematical basis of the controlling account is simply that the whole is exactly equal to all its parts, the balance of the summary account being equal to the total of the balances of all the customers’ accounts of which it is the summary. To illustrate, if we have customers’ accounts whose balances are $1,000, $2,000, $3,000, $4,000, and $5,000 respectively, then the summary account must have a balance of $15,000.

Debits to the Controlling Account.—The principle and the purpose of the controlling account having now been explained, the next problem to consider is how best to gather the summary figures for its debits and credits. If every debit to a customer’s account must be posted also to the controlling account and every credit to a customer’s account must be shown as a credit in the controlling account the work involved would be almost doubled and little would be gained by thus duplicating the postings in another ledger. Therefore it is important to secure the figures for entry in the controlling accounts with the least effort, i.e., in the form of debit and credit summaries. Hence, to determine the sources of these debits and credits of the controlling account, analysis must be made of the sources of the debits and credits to the customers’ accounts.

Most of the debits to customers’ accounts are from the sales journal. Additional debits may be from the cash disbursements journal when cash payments are made as a rebate or a refund for overpayment or some other similar transactions; still others from the general journal for adjustments of various kinds. The debits to customers, however, for cash paid them are very few in number, because such adjustments usually are not made by means of cash payments. The sales journal, as usually operated, carries a column for credit sales, whose total represents in one amount the total of all detailed debits to customers’ accounts. The total of the credit sales column, therefore, controls the total debits to all customers on account of charge sales to them. In summarizing the sales journal the summary entry should show that this total is to be posted not only to the credit side of the Sales account but also to the debit of the controlling account in the ledger. This is so because the customers ledger has ceased to be an integral part of the general ledger, the controlling account having taken its place. Accordingly, the general ledger contains no record of either the debits or credits of the entire group of sales transactions until the end of the month, when this group must therefore be brought into the general ledger in summary form, both debit and credit.

Where the total sales in the sales journal include an analysis of sales into cash sales and credit sales, the following summary entry should be made:

• Accounts Receivable
• Cash
• Sales

The cash debit is set up only to show the equilibrium of the summary entry and is not posted, because it is entered also in the cash book and is posted from there. This debit posting to “Accounts Receivable” in the general ledger secures in one posting a debit amount equal to all individual debit postings to the customers ledger from this source. The controlling account in the general ledger is variously termed “Sales Ledger,” “Accounts Receivable,” “Trade Debtors,” “Customers,” etc.

The two other sources of debit posting to customers’ accounts are the general journal and the cash book. The debit side of the journal is provided with an Accounts Receivable analysis column in which, as explained in the previous chapter, debits to customers’ accounts are entered. At posting time the total of this Accounts Receivable column will therefore give in one figure a debit posting item to the general ledger Accounts Receivable account equal to all individual debit postings from the general journal to customers’ accounts in the customers ledger.

Usually it is not necessary to provide an Accounts Receivable column on the credit side of the cash book, since debit postings from there to customers’ accounts are very infrequent. Hence no total or controlling figure for entry in the Accounts Receivable account can be obtained. Every item which is posted from this source to the debit of a customer’s account must be also posted—item by item—to the debit of Accounts Receivable in the general ledger. This is of course a double debit posting, but one of these debits is to a subsidiary ledger which is no longer a part of the equilibrium scheme and therefore does not throw the general ledger out of balance. Great care must be exercised to make sure that each of these items is posted both to a customer’s account and also to the Accounts Receivable account.

Credits to the Controlling Account.—An analysis of the credits to customers’ accounts shows four main sources:

Accordingly, analytic columns for accounts receivable are provided in the cash receipts journal and the general journal. The totals of their columns are posted to the credit of Accounts Receivable, and the detailed amounts to the credit of the various customers’ accounts. The credit postings from these sources to the customers ledger accounts and to the general ledger Accounts Receivable account are therefore the same so far as totals are concerned. The sales returns journal is summarized at posting time by means of an entry similar to that in the sales journal, as follows:

• Sales Returns
• Accounts Receivable

In this case the credit posting to the Accounts Receivable account is equal to the detailed credits to customers’ accounts.

Similarly, a summary entry for the notes receivable journal secures a controlling figure for Accounts Receivable. If the notes are all received from customers to apply on their accounts, the summary entry is:

• Notes Receivable
• Accounts Receivable

the amount being the total of that journal.

In this way the total of all debits and of all credits to the individual customers’ accounts is represented by the summary items entered in the general ledger controlling account, Accounts Receivable. Consequently, the balance of this single account is equal to the balance of the customers ledger. For the trial balance, therefore, one account takes the place of hundreds or even thousands of customers’ individual accounts. As a result of this, much time is saved and the possibility of error on the general ledger is greatly reduced.

Proving the Customers Ledger.—The use of a controlling account in the general ledger, however, does not eliminate the necessity of proving the accuracy of the customers ledger. It merely makes it possible to take a trial balance without bringing the numerous customers’ accounts into it. It is just as much a part of the proof of the work to make a list of customers’ accounts balances and check it against the balance of the Accounts Receivable general ledger account, as it is to prove the general ledger by means of a trial balance. If there is a discrepancy between the subsidiary ledger and its controlling account on the general ledger that discrepancy does not necessarily prevent a trial balance of the general ledger, but it does show error in the work which must be searched out and corrected.

Accounts Payable Account.—A similar arrangement will make possible a controlling account on the general ledger for the creditors or purchases ledger. This account is variously termed Accounts Payable, Purchase Ledger, Creditors, or Trade Creditors account. Its mechanism is the same as for Accounts Receivable. Analysis of credit postings to creditors’ accounts shows the purchase journal as their main source. Other credits come through the general journal and a very few through the cash receipts journal. The summary entry for the purchase journal is:

• Purchases
• Accounts Payable
• Cash

This shows a debit to the Purchases account for the total amount of the purchases, a credit to Accounts Payable for the liability to creditors, and to Cash for the amount paid on cash purchases. The cash item is not posted. The Accounts Payable column total on the credit side of the journal, and the separate items from the cash receipts journal, furnish the other credits to the Accounts Payable account in the general ledger.

The debits come from the Accounts Payable columns in the cash disbursements journal and in the general journal, and the summaries for the notes payable and purchases returns journals.

Basic Principle as to Postings to Controlling Accounts.—In the handling of controlling accounts, the one fundamental requirement is to make sure that every entry in books of original entry which affects any account in the subsidiary ledger is reflected in the postings to the controlling account in the general ledger. This principle resolves itself into the mathematical axiom stated above that a whole is equal to all—not just some—of its parts. Only thus can a true control be established.

Making the Subsidiary Ledger Self-Balancing.—Through the use of the two controlling accounts explained above, the trial balance is relieved of a large number of accounts, and the general ledger is made independent of the subsidiary ledgers. On the other hand, the subsidiary ledgers are dependent for their proof on the controlling account balances in the general ledger. In an effort to make every ledger “self-balancing,” a further refinement of the controlling account idea is frequently incorporated in each subsidiary ledger. It is accomplished in the following manner: An exact duplicate of the controlling account on the general ledger is set up in the subsidiary ledger, with this difference, that the sides of the account are reversed so that the subsidiary ledger account has for its debits the credits of the general ledger account, and for its credits the debits of the general ledger account.

Take the Accounts Receivable controlling account for illustration. On the general ledger its balance is of course a debit balance representing the total outstanding accounts due from customers. Similarly, the schedule or list of customers’ accounts taken from the sales ledger will represent debit balances whose total is the same as the controlling account balance. If, then, the controlling account itself is placed on the customers ledger as an additional account, the sides being reversed, the balance of this one account will be a credit equal to the total debit balance of all the other accounts in the customers ledger. Therefore, if the customers ledger is correct, its own balance will be offset exactly by the credit balance of the one additional account, and the ledger then is said to be self-balancing. There is no theory or principle of debit and credit involved in this; the device is simply introduced in order that the ledger may provide an internal proof of its correctness. The title of the balancing account on the subsidiary ledger is “Adjustment” or “Balance” and has no significance other than that mentioned. In a similar manner any subsidiary ledger may be made self-balancing.