Control Accounts 1 Functions of control accounts The

Control Accounts 1

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. 2

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. 3

Sales ledger control account = Total debtors account 4

Sales Ledger Control Account 1996 $ Dec 1 Balance b/f a Dec 1 Balance b/f 31 Sales b 31 Returns Inwards j 31 Cash / Bank c 31 Cash / Bank k 31 Bank d 31 Set-off m 31 Interest received f 31 Discount allowed n 31 Balance c/f h 31 Bad debts o x 31 Balance c/f p i x 5

Items Sources a. Total of opening debit balance of Sales ledger debtors b. Total credit sales Sales journal c. Cash refund to a customer who has overpaid his account Cash book d. Dishonoured cheques Cash book e. Dishonoured bills Journal f. Interest charged by us on overdue debts Journal g. Bad debts recovered Journal h. Total of closing credit balances of debtors Sales ledger 6

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

Purchases ledger control account = Total creditors account 8

Purchases Ledger Control Account 1996 $ Dec 1 Balance b/f a Dec 1 Balance b/f h 31 Returns Outward b 31 Purchases i 31 Cash / Bank c 31 Cash / Bank j 31 Set-off e 31 Bank k 31 Discounts Received f 31 Balance c/f h 31 Interest Expenses m x 31 Balance c/f n x 9

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

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

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

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 13

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

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 15

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 Credit purchases 8, 800 14, 000 16

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 17

Example 1 18

Total creditors account 31/3 discount received 5400 31/3 bal b/f Returns outwards 700 31/3 purchases Set-off 2600 Cash 30000 Bal c/f 3800 42500 Total debtor accounts 31/3 Bal b/f Sales Bank 67300 31/3 discount allowed Returns inwards 20000 Bad debts 500 Cash Bill receivable Set-off Bal c/f 87800 28500 14000 42500 4200 900 100 25000 11000 2600 44000 87800 19

Comparing Sectional Balancing and Self-balancing system 20

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 21

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 22

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

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

Transaction recording 25

Seller’s book 26

Transactions A Credit sales B Receipts from debtors Self-balancing System Sectional Balancing System Dr Sales Ledger Control Dr Debtors Cr Sales Dr Cash / Bank Dr Cash/Bank Cr Sales Ledger Control Cr Debtors C Return inwards Dr Return Inwards Dr Return Cr Sales Ledger Control inwards Cr Debtors D Discount Dr Discount Allowed Dr Discount allowed Cr Sales Ledger Control Allowed Cr Debtors 27

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

Buyer’s book 29

Transactions Self-balancing System Sectional Balancing System Dr Purchases Cr Creditor A Credit purchases Dr Purchases Cr Purchases Ledger Control 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 Purchases Ledger Control Cr Discount Received Dr Creditors Cr Return Outwards Dr Discount Allowed Cr Debtors D Discount received 30

Correction of Errors 31

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

c. Sales of $120 incorrectly entered in sales journal as $100 Dr sales Ledger Control Cr Sales Dr Debtors Cr Sales d. Sales journal undercast. Dr Sales ledger Control Cr Sales Dr Suspense Cr Sales (increase the debtors ledger listing. ) (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. ) e. Sales of $120 Dr Suspense incorrectly Cr Sales entered as $100 in sales account (Debit the sales ledger control account. ) Dr Suspense Cr Sales 33

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

j. Balance of sales ledger control account has been incorrectly put to the wrong side of the trial balance. Cr. Suspense No entry 35

Example 2 36

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

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

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

Statement showing the Revised Balance of Purchases Ledger Listing $ Original Balance 17, 135 Less Balance overstated 635 Revised Balance 16, 500 Statement showing the Revised Net Profit for the year ended 31 Dec 1996 $ Net Profit as per accounts Add Sales undercast Discounts Received undercast $ 11, 200 530 1, 050 1, 580 12, 780 Less Returns Outwards overcast 3, 200 Revised Net Profit 9, 580 40

John Chan Balance Sheet as at 31 Dec 1996 $ Fixed Asset $ 12, 000 Less Prov. For Depn. $ Capital 5, 000 Balance as at 1 Jan 96 7, 000 Add Net Profit Current Assets 38, 000 9, 580 47, 580 Stock 16, 000 Current Liabilities Debtors (32360+1420) 33, 780 Creditors(16500+2950) Bank (7000+1000+2250) 10, 250 19, 450 60, 030 ______ 67, 030 41