2 Learning outcomesAfter the end of this lesson, you should be in a position to,Describe control accountsExplain the importance of control accounts Draw sales control accountDraw purchases control accountIdentify causes of differences between control accounts and subsidiary ledgers
3 Difference between errors and fraud Topic 6 lessonsAccountants might make a number of errors in preparing financial statementsDifference between errors and fraud is just that whereas errors are unintentional, fraud is deliberateTrial balance will not reveal all errorsAn environment where errors are not easily identified is likely to have high instances of fraudControl accounts are useful in detecting errors
4 Importance of control accounts Help to identify errors either in subsidiary accounts or the control accountDue to segregation of duties between those handling control accounts and subsidiary ledgers, errors and irregularities might be identifiedReduces workload in preparing final accounts and hence preventing errors at year end.
5 Importance of control accounts Identification of errors not revealed by the trial balanceProvides a check that sales and purchases are properly posted
6 Types of control accounts Two categoriesSales control ledgerPurchases control ledger
7 Sales control ledger A summary of all; credit sales, sales receipts, sales returnsdiscount allowedInterest surcharged to customersAny other transaction that affects customer accountsSee the next slide for an illustration of a sales control ledger
8 Sales control account XX Company Limited Sales control Account For the period ended XXOutstanding invoices at the beginning of the periodXXAdd:-Total sales for the periodAny interest charges on overdue accountsLess:-Receipts(XX)Sales returnsDiscount allowedBalance at year end
9 Sales control ledgerTotals of all individual customer account balances should agree with the sales control ledgerDifferences should be reconciled on a regular basisIn the next slide we summarize some of the causes of differences
10 Causes of errors in sales control ledger Completeness of the debtors listing. Some debtors could have been inadvertently omitted.Some invoices might not have been posted in the control account.Some credit might have been omitted in the control account.Interest surcharges might not have been adjusted for in the respective customer’s accounts.
11 Causes of errors in sales control ledger Receipts for items other than sales, for example proceeds on sale of equipments, could have been posted in the sales control.Summation of subsidiary account balances might be inaccurate.Clerical errors might have been made in balancing subsidiary accounts.Duplicate invoices and receipts could have been made in the subsidiary accounts.
12 Sales control accountA careful review of the above will help one appreciate the vast benefits derived from a sales control accountTo be useful;Preparers should have no input on the books of original entryReconciliations should be done regularly
13 Purchases control ledger Is a control account for purchasesWill contained transaction totals of accounts payables such as;Purchase returnsCredit purchasesPayments to credit suppliersDiscount receivedAny other transaction with accounts payableTotals in this account should equal the sum totals of subsidiary accounts
14 Purchase control Account XX Company LimitedPurchase control AccountFor the period ended XXOpening bal. Of outstanding suppliers invoicesXXAdd:-Total credit purchases for the periodAny additional costs such as transportLess:-Payments(XX)Purchase returnsDiscount receivedBalance at year end
15 Purchases control account Differences between the control account and the subsidiary ledgers could be caused by;Omission of credit notes in the control account or subsidiary ledgersMisposting of paymentsMisposting of purchase returns
16 Purchases control account Misposting of invoices from suppliersClerical errors in recording transactions in the subsidiary accountsComputational errors in determining totals in the subsidiary accounts or the control account.
17 Tips for purchase control ledger Segregation of duties- Accountants in charge of the control account should not have an input in the purchase day books, purchase returns and other books of original entries relating to purchases- Reconciliations between the control account and subsidiary accounts should be done on a regular basis
18 Maintenance of control accounts Sales and purchases control account could be part of the accounting system- Balances in these accounts are transferred to the trial balanceControl accounts could be maintained outside the general ledger as memorandum accounts- Balances in the control accounts are used to provide a control check over the subsidiary account. In this case balances in the subsidiary accounts are transferred to the genera ledger
19 ConclusionQuality of information provided by control accounts depends on;Frequency of the reconciliationsSegregation of dutiesReview of reconciliations by a responsible company officialHaving well maintained control accounts will help not only to identify errors, but also deter frauds.