Topic Seven

1. Topic Seven Control Accounts

2. Learning outcomes • 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

3. Difference between errors and fraud • 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

4. Importance of control accounts • 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.

5. Importance of control accounts • Identification of errors not revealed by the trial balance • Provides a check that sales and purchases are properly posted

6. Types of control accounts • Two categories • Sales control ledger • Purchases control ledger

7. Sales 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

8. Sales control account

9. Sales control ledger • 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

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 account • 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

13. Purchases control ledger • 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

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 ledgers • Misposting of payments • Misposting of purchase returns

16. Purchases control account • 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.

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 balance • Controlaccounts 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. Conclusion • 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.

20. Questions • Q&A