How to prepare the Trade Payables Control Account

Ledger

What you need

• The opening creditors balance (balance b/d) brought down from the previous accounting period.
• Total credit purchases for the period taken from the Purchases Journal.
• Total payments to creditors and discounts received taken from the Cash Book.
• Total returns outwards (purchases returns) taken from the Purchases Returns Journal.

Step by step

1. 1

   Identify the purpose and sources

   Understand that the Trade Payables Control Account is a liability account that checks the total owed to all creditors. Gather the figures from the books of prime entry. Example: Perniagaan Setia has opening creditors of RM8,000, credit purchases of RM12,000 for the month (Purchases Journal), payments to creditors of RM9,500 and discounts received of RM300 (Cash Book), and returns outwards of RM500 (Purchases Returns Journal).

2. 2

   Record the opening balance on the credit side

   Because creditors are a liability, the opening balance sits on the credit side. Enter 'Balance b/d RM8,000' on the credit side of the Trade Payables Control Account. This balance represents the amount still owed to creditors at the start of the period.

3. 3

   Record credit purchases on the credit side

   Credit purchases increase the liability, so they are recorded on the credit side. Enter 'Credit purchases RM12,000'. Warning: only credit purchases are included; cash purchases are NOT entered because they are paid immediately and create no debt to creditors.

4. 4

   Record payments to creditors on the debit side

   Payments reduce the debt, so they are recorded on the debit side. Enter 'Bank RM9,500'. The full double entry is: Debit Trade Payables Control Account RM9,500; Credit Bank RM9,500.

5. 5

   Record discounts received on the debit side

   Discounts received from creditors reduce the debt, so they too go on the debit side. Enter 'Discount received RM300'. Double entry: Debit Trade Payables Control Account RM300; Credit Discount Received RM300. Do not confuse this with discount allowed (which relates to debtors).

6. 6

   Record returns outwards on the debit side

   Goods returned to creditors (supported by a credit note, for example Credit Note 118) reduce the debt, so they are recorded on the debit side. Enter 'Returns outwards RM500'. Double entry: Debit Trade Payables Control Account RM500; Credit Returns Outwards RM500.

7. 7

   Balance the account

   Total the credit side: RM8,000 + RM12,000 = RM20,000. Total the debit entries: RM9,500 + RM300 + RM500 = RM10,300. Balance carried down (balance c/d) = RM20,000 − RM10,300 = RM9,700, written on the debit side so both sides total RM20,000. Then bring down 'Balance b/d RM9,700' on the credit side for the next period.

8. 8

   Interpret the closing balance

   The balance b/d of RM9,700 on the credit side is the total amount still owed to all of Perniagaan Setia's creditors at the end of the period. This figure should equal the sum of the individual balances in the payables ledger and is reported as a current liability in the Statement of Financial Position.

Second example

Consider Kedai Harmoni, which has an extra item: a set-off (contra). Opening creditors are RM5,000 (credit) and credit purchases are RM7,800 (credit), giving a credit total of RM12,800. On the debit side are: payments to creditors RM6,200, discount received RM150, returns outwards RM400, and a set-off of RM250 (an amount offset against the Trade Receivables Control Account because the same party is both a creditor and a debtor). The debit entries total RM7,000. So balance c/d = RM12,800 − RM7,000 = RM5,800, and balance b/d of RM5,800 is brought down on the credit side. This closing balance of RM5,800 is the current liability still owed to Kedai Harmoni's creditors at the period end.

Common mistakes

Related chapter: Ledger →

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