6.0 Learning Objectives……………………………………………………………….
6.1 Introduction……………………………………………………………………….
6.2 The Nature and Functions of Control Accounts…………………………………..
6.2.1 Merits of Control Accounts………………………………………………………
6.2.2 Sources of Information for Control Accounts……………………………………
6.2.3 Receivables or Sales Ledger Control Accounts…………………………………..
6.2.4 Trade Payables or Purchases Ledger Control Accounts………………………….
6.2.5 Trade Receivables Statements or Statement of Account…………………………
6.3 Summary…………………………………………………………………………..
6.0 Learning Objectives
At the end of this chapter candidates should be able to:
• Explain control accounts and know their usefulness
• Know the main types of control accounts
• Prepare control accounts from given information
• Describe trade receivable statement or statements of account
• Prepare trade receivables statement or statement of accounts.
6.1 Introduction
In a small organisation it may be possible for one person to maintain all the ledger accounts. Where a business maintains a large number of accounts it will become necessary to divide the ledger into sections and to assign the recording of each section to different persons. The main areas to which such ledgers can be divided are in the subsidiary ledger, trade ledger, trade receivables ledger, trade payables ledger and general ledger.
In very large organisations, the sub-division may further be divided among employees.
Where this type of divisions takes place, it will be necessary to institute controls on the accuracy of the postings made to each ledger. This is achieved by maintaining total accounts for trade receivables and payables in the general ledger. These total accounts are referred to as control accounts.
6.2 The Nature and Functions of Control Accounts
A control account is an account, the balance of which reflects the aggregate balances of many related subsidiary accounts which are part of the double entry system.
It is a memorandum record only, it does not form part of the double entry system but it is kept using double entry principle. Control accounts can be kept in respect of customers (sales ledger) accounts, suppliers (bought ledger) accounts and expenses. Control accounts are maintained to facilitate easy detection of errors because they act as a check on the entries in the various ledgers. Where the Trial Balance totals are not equal, balances in each ledger can be added together and compared with the balance in the respective control accounts. Ordinarily the two should be equal, where there is a difference, such ledger that fails to reconcile with the control account will be investigated rather than all the ledger accounts.
Control accounts are also called self-balancing ledgers because the total trade receivables and total trade payables in the general ledger should be equal to the aggregate of the balances in the respective individual accounts in the subsidiary ledger.
6.2.1 Merits of Control Accounts
The merits of using control accounts can be summarized as follows:
• They can be used to locate errors more easily
• They make it difficult to commit fraud because they are normally under the control of responsible officers and their preparation is separate from the clerks who maintain the individual ledger accounts.
• They provide information about the total trade receivables and total trade payables thereby making management of the receivables and payables accounts easy.
They allow for account set-off
6.2.2 Sources of Information for Control Accounts
Information recorded in control accounts are obtained from:
• Receivables and Payables accounts
• Returns inwards and outwards accounts
• Bills payable and receivable accounts
• Dishonoured cheques
• Cash paid to payables and cash received from receivables (obtained from the cash book).
• Discount received and discount allowed accounts • Sales day book and purchases day book.
6.2.3 Receivables or Sales Ledger Control Account
Sales ledger control account is the account containing the summary of all trade receivables or customers‟ accounts. What is posted to the debit side of this account is the aggregate of all the items recorded on the debit side of the receivables accounts.
The same thing applies to the credit side of the account.
Summary of Entries
(i) Debit – (a) Credit Sales from sales day book
(b) Dishonoured cheques from customers
(c) Debit notes issued
Credits :( a) Cash received from receivables as recorded in the cash book.
(b) Discount allowed as recorded in the cashbook
(c) Returns inwards as recorded in the sales return day book.
(d) Set off between sales ledger control and purchases ledger control accounts
(e) Bad debts written off
6.2.4 Trade payables or Purchases Ledger Control Account
This is the account containing the summary of all the accounts of the creditors or suppliers in the purchases ledger.
Summary of entries in the Purchases Ledger Control Accounts
Debit entries
(a) Payment to customers obtained from the cash book
(b) Returns outwards
(c) Cheques paid to suppliers from the cash book
(d) Discount received from the memorandum column on the credit side of the
(e) cash book
(f) Credit notes
(g) Transfer between sales ledger control and purchases ledger control accounts.
Credit entries
(a) Credit purchases obtained from the purchases day book
(b) Cash refund from suppliers (c) Dishonoured bills payable
NOTE
Cash sales should not be debited to the sales ledger control account rather, cash sales should be debited to the cash book. Cash purchases should also not be credited to purchases ledger control account but should be credited to the cash book.
Illustration 6.1
Extracts from the books of JK Ltd. shows the following balances for the month of
June 20X6
N
Sales ledger balances – 1 June 20X6 4,702
Purchases ledger balances – 1 June 20X6 2,757
Sales journal balances – 30 June 20X6 37,437
Purchases journal balances – 30 June 20X6 40,800
Returns Inwards 910
Returns Outwards 749
Receipts from Customers – Cash 38,529
Discount allowed 1,345
Payment to Customers 35,415
Discount received 746
Bad debt written off 115
Sales ledger set off 209
Purchases ledger set off 110
On 30 June 20X6, it was discovered that a supplier was paid twice in error for N157.
The amount was refunded on that date.
You are required to determine the sales and purchases ledger balances at 1 July 20X6.
(Adapted from ATS ICAN)
Solution to Illustration 6.1
JK Ltd.
Sales Ledger Control Account
20X6 N 20X6 N
June June
1 Bal b/f 4,702 30 Cash 38,529
30 Sales 37,437 30 Returns inwards 910
30 Discounts allowed 1,345
30 Bad debts 115
30 Set-off 209
______ 30 Bal c/d 1,031
42,139 42,139
1 July Bal b/d 1,031
Purchases Ledger Control Account
20 x 6
June N 20X6 N
June
30 Returns outwards 749 1 Bal b/f 2,757
30 Cash 35,415 30 Purchases 40,800
30 Discount received 746 30 Cash refund 157
30 Set-off 110
30 Bal c/d 6,694 _____
43,714 43,714
July 1 Balance b/d 6,694 Illustration 6.2
Aji Father Enterprises controls his Trade payables accounts by drawing up monthly, a Trade Payables Ledger Control Account in two parts A and B.
The following figures are available at January 31 2006 when there is a difference on the Trial Balance of N2,000.
A B
N N
Jan 1 Balances on Trade Payables (credit side) 18,400 13,600
Jan 1 Balances on Trade Payables Ledger (debit side) 150 184
Jan 1 – 31 Purchases 114,512 17,372
Jan 1 – 31 Returns 11,000 1,652
Jan 1 – 31 Sundry charges by suppliers 1,200 144
Jan 1 – 31 Cheques paid to suppliers 17,980 13,420
Jan 1 – 31 Discount received from suppliers 1,420 1,180
Jan 31 Balances carried down to debit side 150 132
The book-keeper in charge of the A Ledger makes his accounts total N103,712 while the clerk in charge of the B Ledger makes his Ledger balances total N16,812.
Draw up the two Control Accounts and draw any conclusion you can from them.
Solution to Illustration 6.2
AJI Father Enterprises
Ledger Control Account A
2006 N 2006 N
Jan Balance b/d 150 Jan 1 Balance b/d 18,400
1 – 31 Returns 11,000 1 – 31 Purchases 114,512
1 – 31 Bank 17,980 1 – 31 Sundry charges 1,200
1 – 31 Disc. Received 1,420 31 Balance c/d 150
31 Balance c/d 103,712 _______
134,262 134,262
Feb 1 Balance b/d 150 Feb 1 Balance b/d 103,712
Trade Payables Ledger Control Account B
2006 N 2006 N
Jan Balance b/d 184 Jan 1 Balance b/d 13,600
1 – 31 Bank 13,420 1 – 31 Purchases 17,372
1 – 31 Disc Received 1,180 1 – 31 Sundry charges 144
1 – 31 Returns 1,652 31 Balance c/d 132
1 – 31 Balance c/d 14,812 _____
31,248 31,248
Feb 1 Balance b/d 132 Feb 1 Balance b/d 14,812
The Control Accounts reveal that there is a difference of N2,000 between the Control Account for the B Ledger (N16,812 – N14,812) which is the total discovered by the book keeper in charge of that Ledger. The A Ledger seems to be correct. The obvious solution is to check the Ledger entries in the B Ledger very carefully.
6.2.5 Trade Receivables Statements or Statements of Account
Trade receivables statements are documents sent periodically, usually once a month, by a seller to his customers showing the position of their accounts up to a certain date. Each statement gives the particulars of the invoices, debit notes and credit notes that the seller has sent to the customer during a month, payment made and how much the customer owes the seller and when the amount will be due for payment. The statement is often a copy of the customer’s account in the seller’s books.
The statement may be kept for reference purpose or returned to the seller with the customer’s cheque. In either case neither the customer nor the seller records the statement in his books.
Illustration 6.3
The following transactions took place between Sisi Eko Enterprises of 2, Balinga Street, Lagos and her customer Ambrose & Co of 10 Dennis Avenue, Ikeja in January 20X1.
2 Jan 20X1 Invoiced goods worth N23,120 on invoice number 426
9 Jan 20X1 Invoiced goods worth N16,240 on invoice number 489
16 Jan. 20X1 Ambrose & Co paid a sum of N25,140 with cheques
22 Jan. 20X1 Invoiced goods worth N52,910 on invoice number 563
25 Jan. 20X1 Credit note number 1326 for N6,000 was sent Required:
Prepare a Trade Receivables Statement to show these transactions
(ATS ICAN)
Solution to Illustration 6.3
SISI EKO Enterprises
2, Balinga Street, Lagos
Ambrose & Co January 20X1
10, Dennis Avenue, Ikeja
Date of Details Invoice/ Debits Credits Balances
Invoice Credit Note No
January N N N
2 Goods 426 23,120 23,120
9 Goods 489 16,240 39,360
16 Payment Cheque 25,140 14,220
22 Goods 563 52,910 67,130
25 Credit note 1326 6,000 61,130
Amount due on January, 31 61,130 Cash discount terms: 5% for payment within 15 days
6.3 Summary
In this chapter we have explained the importance of control account in detection of error and in the management of the subsidiary accounts. We also showed, through illustration, how errors in a Trial Balance that does not “balance” can be detected easily through the control account. We also described the receivables statement and how they are prepared.
Thanks for posting this!
ReplyDeleteSmall Business Tax