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1 Control Accounts. 2 Functions of control accounts The control accounts help us to locate errors. The control accounts provide a summary. The total balances.

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Presentation on theme: "1 Control Accounts. 2 Functions of control accounts The control accounts help us to locate errors. The control accounts provide a summary. The total balances."— Presentation transcript:

1 1 Control Accounts

2 2 Functions of control accounts The control accounts help us to locate errors. The control accounts provide a summary. The total balances of the debtors and creditors can be derived quickly and easily. The control accounts are prepared by a different person than the one who prepares the sales and purchases ledgers, which also make fraud more difficult.

3 3 Form of control accounts It is usual to final control accounts in the same form as an account, with the totals of the debit entries in the ledger on the left-hand side of the control account, and the totals of the various credit entries in the ledger on the right hand side of the control account.

4 4 Sales ledger control account Sales ledger control account = Total debtors account

5 5 Sales Ledger Control Account 1996 $ Dec 1 Balance b/fa 31 Sales b 31 Cash / Bankc 31 Bankd 31 Bills receivable e 31 Interest receivedf 31 Bad debts recoveredg 31 Balance c/fh x 1996 $ Dec 1 Balance b/f i 31 Returns Inwardsj 31 Cash / Bankk 31 Bills receivablel 31 Set-offm 31 Discount allowedn 31 Bad debtso 31 Balance c/fp x

6 6 ItemsSources a. Total of opening debit balance of debtors Sales ledger b. Total credit salesSales journal c.Cash refund to a customer who has overpaid his account Cash book d. Dishonoured chequesCash book e. Dishonoured billsJournal f. Interest charged by us on overdue debts Journal g. Bad debts recoveredJournal h. Total of closing credit balances of debtors Sales ledger

7 7 i. Total of opening credit balances of debtors Sales ledger j. Returns inwardsReturns inwards journal k. Cash or cheques received from debtors Cash book l. Bills receivable from debtorsJournal m. Balances in sales ledger set off against credit balances in purchases ledger Journal n. Discounts allowedCash book o. Bad debts written off (not provision for bad debts) Journal p. Total of closing debit balances of debtors Sales ledger

8 8 Purchases ledger control account Purchases ledger control account = Total creditors account

9 9 Purchases Ledger Control Account 1996 $ Dec 1 Balance b/fa 31 Returns Outward b 31 Cash / Bankc 31 Bills Payabled 31 Set-offe 31 Discounts Receivedf 31 Balance c/fh x 1996 $ Dec 1 Balance b/f h 31 Purchasesi 31 Cash / Bankj 31 Bankk 31 Bills Payablel 31 Interest Expensesm 31 Balance c/fn x

10 10 ItemsSources a. Total of opening debit balances of creditors Purchases ledger b. Returns outwardsReturns outwards journal c. Cash or cheques paid to creditors Cash book d. Bills payable to creditorsJournal e. Balances in purchases ledger set off against debit balances in sales ledger Journal f. Discounts receivedCash book g. Total of closing credit balances of creditors Purchases ledger

11 11 h. Total of opening credit balances of creditors Purchases ledger i. Total credit purchasePurchases journal j. Cash refund from suppliers who have overcharged us Cash book k. Dishonoured cheques returned from creditors Cash book l. Dishonoured bills returned from creditors Journal m. Interest payable on overdue debts Journal n. Total of closing debit balances of creditors Purchases ledger

12 12 Types of Minority balances Temporary debit balances in total creditors account Temporary credit balances in total debtors account

13 13 Reasons for the occurrence of minority balances Returns after settlement of the accounts Claims for shortages of goods or for invoices overcharged after settlement the accounts

14 14 Minority balances on the balance sheet Balance sheet Debtors (debit balance of sales ledger + debit balance of purchases ledger) X Less: provision for bad debt (debit balance of sales ledger x percentage) X 八 Creditors (credit balances of purchases ledger + credit balances of sales ledger) X X

15 15 Contra item If the same firm is both a supplier (creditor) and a customer (debtor), inter-indebtedness is set-off Contra items(set-off) are shown on the credit side of the sales ledger control account and will appear on the debit side of the purchases ledger control account

16 16 The following information was extracted from the books of Lewell Ltd. On 1 March 1996: Purchases ledger control account 28,500 Sales ledger control account 67,300 During the month: Cash sales 12,000 Credit sales 20,000 Cash purchases 8,800 Credit purchases 14,000

17 17 Discounts received from suppliers 5,400 Discounts allowed to customers 4,200 Returns Inwards 900 Cash received from customers 25,000 Cash payment to suppliers 30,000 Returns Outwards 700 Bad debts written off 100 Bills receivable from customers 11,000 Dishonoured cheques returned to customers 500 Balances in sales ledger set off against credit Balances in purchases ledger 2,600

18 18 Example 1

19 19 Total creditors account 31/3 discount received 5400 Returns outwards 700 Set-off 2600 Cash Bal c/f /3 bal b/f /3 purchases Total debtor accounts 31/3 Bal b/f Sales Bank /3 discount allowed 4200 Returns inwards 900 Bad debts 100 Cash Bill receivable Set-off 2600 Bal c/f

20 20 Comparing Sectional Balancing and Self-balancing system

21 21 Self-Balancing system In larger organizations, control accounts are part of the double entry system, The sales ledger and purchases ledger (debtors and creditor accounts) are kept only on a memorandum purposes.

22 22 Sectional Balancing System In small firms, debtors and creditors accounts are regarded part of the double-entry system The control accounts should be kept only for memorandum purposes

23 23 Original documents Sales/Purchases Journals General ledger Sales and purchases a/c Sales/purchases ledgers Debtors/Creditors Trial Balance Double-entry system For memorandum purpose Sales Ledger control a/c Purchases ledger control a/c Sectional Balancing System Note: posting extracting

24 24 Original documents Sales/Purchases Journals General ledger Sales and purchases a/c Sales/purchases ledgers Debtors/Creditors Trial Balance Double-entry system For memorandum purpose Sales Ledger control a/c Purchases ledger control a/c Self-Balancing System Note: posting extracting

25 25 Transaction recording

26 26 Seller’s book

27 27 TransactionsSelf-balancing SystemSectional Balancing System A Credit salesDr Sales Ledger Control Cr Sales Dr Debtors Cr Sales B Receipts from debtors Dr Cash / Bank Cr Sales Ledger Control Dr Cash/Bank Cr Debtors C Return inwardsDr Return Inwards Cr Sales Ledger Control Dr Return inwards Cr Debtors D Discount allowed Dr Discount Allowed Cr Sales Ledger Control Dr Discount Allowed Cr Debtors

28 28 TransactionsSelf-balancing SystemSectional Balancing System E Bad debts written off Dr Bad debts Cr Sales Ledger Control Dr Bad debts Cr Debtors F Bad debt recovered Dr Sales Ledger Control Cr Bad debts recovered Dr Cash / Bank Cr Sales Ledger Control Dr Cash/Bank Cr Debtors

29 29 Buyer’s book

30 30 TransactionsSelf-balancing SystemSectional Balancing System A Credit purchases Dr Purchases Cr Purchases Ledger Control Dr Purchases Cr Creditor B Payment to creditors Dr Purchases Ledger Control Cr Cash/ Bank Dr Creditors Cr Cash/Bank C Return outwards Dr Purchases Ledger Control Cr Return Outwards Dr Creditors Cr Return Outwards D Discount received Dr Purchases Ledger Control Cr Discount Received Dr Discount Allowed Cr Debtors

31 31 Correction of Errors

32 32 ErrorsSelf-balancing SystemSectional Balancing System a. Credit sales invoice omitted Dr Sales ledger Control Cr Sales (Increase the debtors ledger listing.) Dr Debtors Cr Sales (Debit the sales ledger control account.) b. Sales omitted in journal Dr Sales Ledger Control Cr Sales (Increase the debtors ledger listing.) Dr Debtors Cr Sales (Debit the sales ledger control account.)

33 33 c. Sales of $120 incorrectly entered in sales journal as $100 Dr sales Ledger Control Cr Sales (increase the debtors ledger listing.) Dr Debtors Cr Sales (Debit the sales ledger control account.) d. Sales journal undercast. Dr Sales ledger Control Cr Sales (The debtors ledger listing remains constant, because only the total figure is wrong. This does not affect the debtors accounts, the figures for which are entered individually.) Dr Suspense Cr Sales (Debit the sales ledger control account.) e. Sales of $120 incorrectly entered as $100 in sales account Dr Suspense Cr Sales Dr Suspense Cr Sales

34 34 f. Sales understated in sales ledger control account Dr Sales Ledger Control Cr Suspense No entry (Debit the sales ledger control account.) g. Sales of $120 incorrectly debited to debtor account as $100. No entry (Increase the debtors ledger listing.) Dr Debtors Cr Suspense h. Balance of sales has been incorrectly put to the wrong side of the trial balance. Dr Suspense i. Balance of debtors has been incorrectly put to the wrong side of the trial balance. No entryCr Suspense

35 35 j. Balance of sales ledger control account has been incorrectly put to the wrong side of the trial balance. Cr. SuspenseNo entry

36 36 Example 2

37 37 John Chan The Journal DrCr 1996 $ $ Dec 31 Sales Ledger Control 530 Sales Suspense 1,050 Discount received 1, Returns Outwards 3,200 Purchase Ledger Control 3, Purchases Ledger Control 120 Sales Ledger Control Bank 1,000 Sales Ledger Control 1, Bank 2,250 Suspense 2,250

38 38 Suspense Account $ Balance b/f 1,200 Discounts received 1,050 2,250 $ Bank 2,250 _____ 2,250 Sales Ledger Control Account $ Balance b/f 30,000 Sales 530 Balance c/d 2,950 33,480 Balance b/d 32,360 $ Bank 1,000 Purchase Ledger Control-set off 120 Balance c/d 32,360 33,480 Balance b/d 2,950

39 39 Statement showing the Revised Balance of Sales Ledger Listing $ Original Balance 32,000 Add Invoice understated360 Revised Balance 32,360 Purchases Ledger Control Account $ Sales Ledger Control-set-off 120 Balance c/d 16,500 ______ 16,620 Balance c/d $ Balance b/d 12,000 Returns Outwards 3,200 Balance c/d 1,420 16,620 Balance b/d 16,500

40 40 Statement showing the Revised Balance of Purchases Ledger Listing $ Original Balance 17,135 Less Balance overstated635 Revised Balance 16,500 Statement showing the Revised Net Profit for the year ended 31 Dec 1996$ Net Profit as per accounts 11,200 Add Sales undercast 530 Discounts Received undercast 1,050 1,580 12,780 Less Returns Outwards overcast 3,200 Revised Net Profit 9,580

41 41 John Chan Balance Sheet as at 31 Dec 1996$ Fixed Asset 12,000 Less Prov. For Depn. 5,000 7,000 Current Assets Stock 16,000 Debtors ( ) 33,780 Bank ( ) 10,250 60,030 67,030 $ Capital Balance as at 1 Jan 96 38,000 Add Net Profit 9,580 47,580 Current Liabilities Creditors( ) 19,450 ______ 67,030


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