Presentation on theme: "1 Unit 8 Control accounts and error correction. 2 What is a control account (Total accounts) Is an account in the nominal ledger which summarizes the."— Presentation transcript:
1 Unit 8 Control accounts and error correction
2 What is a control account (Total accounts) Is an account in the nominal ledger which summarizes the transactions in a number of other accounts Examples of control accounts could include:- The sales ledger control account, which summarizes the individual customer accounts The purchases ledger control account, which summarizes the individual supplier accounts
3 Purposes of control accounts To act as independent checks on the arithmetical accuracy of the aggregates of the balances in the sales and purchases ledgers. To provide total of debtors and creditors quickly when a trial balance is prepared. To identify the ledger or ledgers in which errors have been made when there is a discrepancy between the total account and the sum of the individual ledger balances. To act as an independent internal check on the work of the sales and purchases ledger clerks, to detect errors and deter fraud. There should be segregation of duties of sales ledger clerks, purchase ledger clerks and those who maintain control accounts.
4 Control accounts are part of the double entry system Usually, control accounts i.e. the debtors total account and the creditors total account are an integral part of the double entry system. If this is so, then the sales ledger and the purchases ledger will only be memorandum accounts i.e. accounts which are not part of the double entry system and which are kept only for reference and control purposes.
5 Control accounts are NOT part of the double entry system In the rare cases where control accounts are memorandum only, the sales ledger and the purchases ledger would then be part of the double entry system. The debtors total account and the purchases total accounts would be kept for memorandum purposes only
6 Sales ledger control account (Debtors control account) Is used to control the ledger The entries in the sales ledger control account comes from the books of prime entry, not from the individual accounts in the sales ledger This provides a checking facility because, if information in the books of prime entry is posted directly to the individual accounts and also in the control account, a cross check can be made The balance on the control account should be the same as the total balances on the individual sales account. If they are not, then an error has occurred
7 Sales ledger control account Balance b/d(should tally with sum of sales ledger debit balances at end of previous period X Balance B/f (total of sales ledger credit balances b/f from previous period) X Credit sales ( total in sales day book) X Return inwards ( total of Return inwards book) X Dishonored cheques (Bank statement and cash book) X Bad debts (journal) X Cash received from debtors (Cash column on received side) X Cash discounts allowed ( total of discount column of cash book) X Balance c/d (should tally with sum of debit balance on the individual debtor accounts in the sales ledger) X
8 Example 1-Sales ledger control account 1 SeptMoney owed by customersRs 5,700 1 SeptMoney owed to customersRs SeptSalesRs 35, SeptReturn inwardsRs 1, SeptCheque payment by credit customers Rs 32, SeptCash payments by credit customers Rs 4, SeptMoney owed by customersRs 3, SeptMoney owed to customersRs 170
9 Credit balances on the sales ledger control account Such balances arise when The customer has overpaid Credit notes have been issued for fully paid for goods Payment is received in advance of raising invoices The Purchases ledger control account may show a debit balance for similar reasons
10 Purchase ledger control account or creditors total account Sometimes known as creditors control account Is used to control the purchases ledger which contains the accounts of individual suppliers who supply goods on credit Information needed to prepare the purchases ledger control account comes from books of prime entry
11 Purchases ledger control account Balance B/F (should tally with sum of purchases ledger debit balances at end of previous period) xBalance B/f (if any) (total of purchases ledger credit balances b/f from previous period) Credit purchases (total in purchases day book) x Cash paid to creditors (Payment column in cash book) xBalance B/f (if any) (total of purchases ledger credit balances b/f from previous period) Credit purchases (total in purchases day book) x Return outwards (total of Return outwards book) Cash discounts received (total of discount column of cash book) x x x x Balance c/d (should tally with sum of credit balances on the individual creditor accounts in the purchases ledger) x x xx
12 Example 2- Purchases ledger control account 1 JulyMoney owed to suppliersRs 37, JulyCredit purchasesRs 231, JulyReturn outwardsRs 12, JulyTotal paymentsRs 222, JulyDiscount receivedRs 6, JulyMoney owed by suppliersRs JulyMoney owed to suppliersRs 27,940
13 Contra entries Contra entries or set off entries arise if a business sells goods to, and also buys goods from, the same trader Example- On 01 June Nigel sells Rs 500 of wood to Simpson On 10 June Nigel buys 1chair from Simpson for Rs 350 In this case, Simpson will have an account in both the sales ledger and purchases ledger of Nigel
15 Treatment of a contra entry 01/06 Credit sales Rs 50030/06 Contra Purchases Ledger Rs /06 Bank Rs /06 Contra Sales ledgerRs /06 Credit purchases Rs 350 Purchases ledger Simpson Sales ledger Simpson
16 Activity 1 Sales ledger control account and purchases ledger control account
17 What errors can be detected by control accounts Casting errors are errors of addition.Example when total sales for the period in the sales day book are added incorrectly A transposition error is an error in which two digits are transposed. Example Rs 1,375 may be written as Rs 1,735 An error can arise if a transaction is recorded in the control account and not in the other account, or vice versa
18 How are errors corrected in control accounts Step 1: Identify what entries, if any, have been made in the accounts. Step 2: Identify what entries SHOULD have been made. Step 3: Identify what entries are required to correct the error.
19 Example 3 At the end of December, the sales ledger control account of John was balanced and the amount carried down was Rs 24,700 The total debtors according to the list of debtors in the sales ledger was Rs 21,300. The following errors were detected after investigation A bad debt of Rs 500 was written off in the sales ledger but not recorded in the control account A debit balance of Rs 2,700 from a customer account was not included in the total of debtors list Discounts allowed to the value of Rs 200 were recorded in individual accounts but not the control accounts An invoice of the sales of Rs 2,600 to Raj was completely omitted from the records
21 Activity 2 Amended sales ledger control account and revised debtor balance
22 Suspense account and error correction
23 What is a suspense account A suspense account is an account in the general ledger in which amounts are temporarily recorded. There are two reasons why a suspense account could be opened: a bookkeeper is unsure where to post an item and enters it to a suspense account pending instructions there is a difference in a trial balance and a suspense account is opened with the amount of the difference so that the trial balance agrees (pending the discovery and correction of the errors causing the difference). This is the only time an entry is made in the records without a corresponding entry elsewhere We are going to concentrate on the second reason for opening a suspense account
24 Summary of errors that do not affect trial balance and do not involve suspense account Error of Omission – a transaction is not recorded at all Error of commission – an item is entered to the correct side of the wrong account (there is a debit and a credit here, so the records balance) Error of principle – an item is posted to the correct side of the wrong type of account, as when cash paid for plant repairs (expense) is debited to plant account (asset)
25 Summary of errors that do not affect trial balance and do not involve suspense account (Cont…) Error of original entry – an incorrect figure is entered in the records and then posted to the correct account Example: Cash £1,000 for plant repairs is entered as £100; plant repairs account is debited with £100 Reversal of entries – the amount is correct, the accounts used are correct, but the account that should have been debited is credited and vice Compensating errors – do not affect trial balance but involves suspense account
26 Errors that require correction through suspense account Addition errors – figures are incorrectly added in a ledger account Posting error an entry made in one record is not posted at all an entry in one record is incorrectly posted to another Trial balance errors – a balance is omitted, or incorrectly extracted, in preparing the trial balance Compensating errors – two equal and opposite errors leave the trial balance balancing
27 Effect of errors on profit Some of the errors will have meant that the original profits calculated will be wrong. Other errors will have no effect on profit For instance if errors affect items only in the balance sheet, then the original calculated profit will not need altering.
28 Errors which do affect profit calculations If the error is in one of the figures forming part of the trading and profit and loss account, then the original profit will need altering. Once the error has been corrected in the journal, a statement of corrected net profit for the year should be drafted.