1. Control accounts and error correction
Unit 8
Control accounts and error correction

2. 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

3. 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.

4. 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.

5. 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

6. 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

7. Sales ledger control account
Balance 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)
Credit sales (total in sales day book)
Return inwards (total of Return inwards book)
Dishonored cheques (Bank statement and cash book)
Bad debts (journal)
Cash received from debtors (Cash column on received side)
Cash discounts allowed (total of discount column of cash book)
Balance c/d (should tally with sum of debit balance on the individual debtor accounts in the sales ledger)

8. Example 1-Sales ledger control account
1 Sept
Money owed by customers
Rs 5,700
Money owed to customers
Rs 350
30 Sept
Sales
Rs 35,680
Return inwards
Rs 1,350
Cheque payment by credit customers
Rs 32,360
Cash payments by credit customers
Rs 4,300
Rs 3,190
Rs 170

9. Credit balances on the sales ledger control account
Such balances arise when
The customer has overpaid
Credit notes have been issued for fully paid for goods
Payment is received in advance of raising invoices
The Purchases ledger control account may show a debit balance for similar reasons

10. 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

11. Purchases ledger control account
Balance 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)
Cash paid to creditors (Payment column in cash book)
Return outwards (total of Return outwards book) Cash discounts received (total of discount column of cash book)
Balance c/d (should tally with sum of credit balances on the individual creditor accounts in the purchases ledger) xx

12. Example 2- Purchases ledger control account
1 July
Money owed to suppliers
Rs 37,450
31 July
Credit purchases
Rs 231,600
Return outwards
Rs 12,900
Total payments
Rs 222,000
Discount received
Rs 6,770
Money owed by suppliers
Rs 560
Rs 27,940

13. 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

14. Accounts of Simpson 01/06 Credit sales Rs 500
Sales ledger
Simpson
01/06 Credit sales Rs 500
10/06 Credit purchases Rs350
Purchases ledger
Simpson

15. Treatment of a contra entry
Sales ledger
Simpson
01/06 Credit sales Rs 500
30/06 Contra Purchases Ledger Rs 350
30/06 Bank Rs 150
30/06 Contra Sales ledgerRs 350
10/06 Credit purchases Rs 350
Purchases ledger
Simpson

16. Activity 1
Sales ledger control account and purchases ledger control account

17. 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

18. 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.

19. 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

21. Activity 2
Amended sales ledger control account and revised debtor balance

22. Suspense account and error correction

23. 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

24. 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)

25. 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 account Example: 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

26. 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

27. 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.

28. 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.

29. Example 4
Correction of errors

30. Activity 3
Correction of errors (HW)