Presentation on theme: "Control Accounts. After the end of this lesson, you should be in a position to, Describe control accounts Explain the importance of control accounts."— Presentation transcript:
After the end of this lesson, you should be in a position to, Describe control accounts Explain the importance of control accounts Draw sales control account Draw purchases control account Identify causes of differences between control accounts and subsidiary ledgers
Topic 6 lessons Accountants might make a number of errors in preparing financial statements Difference between errors and fraud is just that whereas errors are unintentional, fraud is deliberate Trial balance will not reveal all errors An environment where errors are not easily identified is likely to have high instances of fraud Control accounts are useful in detecting errors
Help to identify errors either in subsidiary accounts or the control account Due to segregation of duties between those handling control accounts and subsidiary ledgers, errors and irregularities might be identified Reduces workload in preparing final accounts and hence preventing errors at year end.
Identification of errors not revealed by the trial balance Provides a check that sales and purchases are properly posted
Two categories 1) Sales control ledger 2) Purchases control ledger
A summary of all; credit sales, sales receipts, sales returns discount allowed Interest surcharged to customers Any other transaction that affects customer accounts See the next slide for an illustration of a sales control ledger
XX Company Limited Sales control Account For the period ended XX Outstanding invoices at the beginning of the periodXX Add:-Total sales for the periodXX Any interest charges on overdue accountsXX Less:-Receipts(XX) Sales returns(XX) Discount allowed(XX) Balance at year endXX
Totals of all individual customer account balances should agree with the sales control ledger Differences should be reconciled on a regular basis In the next slide we summarize some of the causes of differences
o Completeness of the debtors listing. Some debtors could have been inadvertently omitted. o Some invoices might not have been posted in the control account. o Some credit might have been omitted in the control account. o Interest surcharges might not have been adjusted for in the respective customer’s accounts.
o Receipts for items other than sales, for example proceeds on sale of equipments, could have been posted in the sales control. o Summation of subsidiary account balances might be inaccurate. o Clerical errors might have been made in balancing subsidiary accounts. o Duplicate invoices and receipts could have been made in the subsidiary accounts.
A careful review of the above will help one appreciate the vast benefits derived from a sales control account To be useful; Preparers should have no input on the books of original entry Reconciliations should be done regularly
Is a control account for purchases Will contained transaction totals of accounts payables such as; Purchase returns Credit purchases Payments to credit suppliers Discount received Any other transaction with accounts payable Totals in this account should equal the sum totals of subsidiary accounts
XX Company Limited Purchase control Account For the period ended XX Opening bal. Of outstanding suppliers invoicesXX Add:-Total credit purchases for the periodXX Any additional costs such as transportXX Less:-Payments(XX) Purchase returns(XX) Discount received(XX) Balance at year endXX
Differences between the control account and the subsidiary ledgers could be caused by; Omission of credit notes in the control account or subsidiary ledgers Misposting of payments Misposting of purchase returns
Misposting of invoices from suppliers Clerical errors in recording transactions in the subsidiary accounts Computational errors in determining totals in the subsidiary accounts or the control account.
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
Sales and purchases control account could be part of the accounting system -Balances in these accounts are transferred to the trial balance Control 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
Quality of information provided by control accounts depends on; Frequency of the reconciliations Segregation of duties Review of reconciliations by a responsible company official Having well maintained control accounts will help not only to identify errors, but also deter frauds.