Week 8 Chapters 17

1. Week 8Chapters17 Control Accounts

2. Chapter 17 Control Accounts • After this lecture, students should be able to: • describe the division of the general ledger into several different ledgers; • explain the nature of control accounts; • prepare debtors’ ledger control and creditors’ ledger control accounts; • Identify and correct errors and omissions relating to the different personal ledgers and control accounts.

3. Division of the General Ledger 1. Personal ledgers: (a) Sales/debtors ledger - contains debtors personal accounts. (b) Purchases/creditors ledger - contains creditors personal accounts. • Impersonal ledger/General ledger: contains all other accounts

4. Control Accounts A control account is an account in the impersonal (general) ledger which represents the total of the entries in some other ledger (eg sales/debtors ledger control, purchases/creditors ledger control). Control accounts are written up periodically (usually monthly) from the totals of the relevant books of prime entry. The balances on the control accounts are entered in the trial balance.

5. Purposes of Control Accounts • To provide a check on the accuracy of the personal ledger it represents. The balance on the control account should equal the total of the balances in the personal ledger. • To facilitate the location of errors highlighted in the trial balance by pinpointing which personal ledger (or control account) is likely to contain the error(s). • To deter fraud and the misappropriation of cash. 4. To facilitate the preparation of periodic/final accounts since the total values of the debtors and creditors are immediately available in the control accounts.

6. Information for control accounts Total Debtors’ Control Sources of information List of debtors’ balances drawn up at the end of the previous period. Total from the Sales Journal Total of the returns Journal Cash Book: Bank column on the debit side • 1 Opening debtors 2 Credit sales 3 Returns inwards 4 Cheques received

7. Cont: Total Debtors’ Control Sources of information Cash Book: cash column on the debit side Total of discount allowed column in the cash Book List of debtors’ balances drawn up at the end of the period. • 5 Cash received • 6 Discount allowed • 7 Closing debtors

8. Total Creditors’ Control Account Total Creditors’ Control Sources of information List of creditors’ balances drawn up at the end of the previous period Total from Purchases Journal Total of the Returns Outwards Journal Cash Book: bank column on the credit side • 1 Opening creditors • 2 Credit purchases 3 Returns outwards • 4 Cheque paid

9. Cont: Sources of information 5 Cash paid 6 Discount received 7 Closing creditor Cash Book: cash column on credit side Total of discount received column in the Cash Book List of creditors’ balances drawn up at the end of the period Total Creditors’ Control

10. Control accounts as part of the double entry In some organisations, it would be normal to find that control accounts are an integral part of the double entry system. The debtors and creditors controls accounts are kept in the General Ledger.

11. Cont’ Control account as part of the double entry system In this case, the personal accounts are being used as SUBSIDARY records and the Sales and Purchases Ledgers are memorandum books outside the double entry system.

12. The books of Copper Tree Ltd include three ledgers comprising an impersonal ledger, debtors’ ledger and creditors’ ledger. The impersonal ledger contains debtors’ ledger and creditors’ ledger control accounts as part of the double entry. Example 17.1 (modified)

13. The following information relates to the accounting year ended 30 June 20X8: $ Debtors’ ledger control account balance on 1 July 20X7 (debit) 5,740 Creditors’ ledger control account balance on 1 July 20X7 (credit) 6,830 Sales 42,910 Purchases 38,620 Cheques received from debtors 21,760 Cheques paid to creditors 19,340 Returns outwards 8,670 Returns inwards 7,840 Carriage outwards 1,920

14. Carriage inwards 2,130 Discount received 4,560 Discount allowed 3,980 Bad debts 1,640 Amounts due from customers as shown by debtors’ ledger, transferred to creditors’ ledger 950 Cash received in respect of a debit balance on a creditors’ ledger account 810 You are required to prepare the debtors’ ledger and creditors’ ledger control accounts.

15. Creditors’ ledger control $ $ Bank 19,340 Balance b/d 6,830 Returns outwards 8,670 Purchases 38,620 Cash 810 Discount received 4,560 Transfer from debtors 950 Balance c/d 12,740 46,260 46,260 Balance b/d 12,740

16. Bad debts 1,640 Transfer to creditors 950 Balance c/d 1 2,480 Debtors’ ledger control $ $ Balance b/d 5,740 Bank 21,760 Sales 42,910 Returns inwards 7,840 Discount allowed 3,980 48,650 48,650 Balance b/d 12,480

17. Example 17.2 The books of C. Hand Ltd include three ledgers comprising an impersonal ledger, debtors’ ledger and creditors’ ledger. The impersonal ledger contains debtors’ ledger and creditors’ ledger control accounts as part of the double entry. The Debtors’ ledger control account balance on 1 May 20X7, was $8,460, and the Debtors’ ledger account balance on 30 April 20x8 was $9,460.

18. The following information relates to the accounting year ended 30 April 20X8: $ Cheques received from debtors 27,690 Cheques paid to suppliers 17,000 Sales 47,320 Purchases 35,000 Credit notes received on returns outwards 12,860 Credit notes issued on returns inwards 7,170 Cash received from debtors 8,650 Discount received 5,710 Discount allowed 2,830 Bad debts 970 Carriage inwards 1,130 Carriage outwards 2,170 Amounts due from customers as shown by debtors’ ledger transferred to creditors’ ledger 830 a. You are required to prepare the debtors’ ledger control account at 30 April 20X8.

19. Debtors’ ledger control $ $ Balance b/d 8,460 Bank 27,690 Sales 47,320 Returns inwards 7,170 Cash 8,650 Discount allowed 2,830 Bad debts 970 Transfer to creditors 830 Balance c/d 7,640 55,780 55,780 Balance b/d 7,640

20. b. After the preparation of the control account the following errors were identified:1. The total of the sales returns day book has been overcast by $3602. A cheque received for $225 has been entered on the wrong side of the debtors’ personal account.3. The total discount allowed column in the cash book is shown as $2,830 when it should be $3,820.4. A sales invoice for $2,000 has been entered in the sales day book as $200 in error.

21. Required: • Prepare a statement showing the amended balances on the debtors’ ledger and the debtors’ ledger control account. Compute the amount of any remaining undetected error.

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