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Unit 8

Control accounts and error correction

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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

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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.

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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.

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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

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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

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Sales ledger control accountBalance 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

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Example 1-Sales ledger control account1 Sept Money owed by customers Rs 5,700

1 Sept Money owed to customers Rs 350

30 Sept Sales Rs 35,680

30 Sept Return inwards Rs 1,350

30 Sept Cheque payment by credit customers

Rs 32,360

30 Sept Cash payments by credit customers

Rs 4,300

30 Sept Money owed by customers Rs 3,190

30 Sept Money owed to customers Rs 170

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Credit balances on the sales ledger control account Such balances arise when

The customer has overpaidCredit notes have been issued for fully

paid for goodsPayment is received in advance of

raising invoices The Purchases ledger control account may

show a debit balance for similar reasons

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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

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Purchases ledger control accountBalance B/F (should tally with sum of purchases ledger debit balances at end of previous period)

x Balance 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)

x Balance 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

Return outwards (total of Return outwards book) Cash discounts received (total of discount column of cash book)

x x

Balance c/d (should tally with sum of credit balances on the individual creditor accounts in the purchases ledger)

x x

xx xx

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Example 2- Purchases ledger control account1 July Money owed to suppliers Rs 37,450

31 July Credit purchases Rs 231,600

31 July Return outwards Rs 12,900

31 July Total payments Rs 222,000

31 July Discount received Rs 6,770

31 July Money owed by suppliers Rs 560

31 July Money owed to suppliers Rs 27,940

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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

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Accounts of Simpson

01/06 Credit sales Rs 500

10/06 Credit purchases Rs350

Purchases ledgerSimpson

Sales ledgerSimpson

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Treatment of a contra entry

01/06 Credit sales Rs 500

30/06 Contra Purchases Ledger Rs 35030/06 Bank Rs 150

30/06 Contra Sales ledgerRs 350

10/06 Credit purchases Rs 350

Purchases ledgerSimpson

Sales ledgerSimpson

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Activity 1

Sales ledger control account and purchases ledger control account

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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

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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.

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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

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Activity 2

Amended sales ledger control account and revised debtor balance

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Suspense account and error correction

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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

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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)

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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 accountExample: 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

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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

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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.

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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.

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Example 4

Correction of errors

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Activity 3

Correction of errors (HW)