Friday, September 11, 2015

CHAPTER SIX - CONTROL OR TOTAL ACCOUNTS



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                    20X6                     N
June              June
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   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         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
Goods  426         23,120                       23,120
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.

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