KENYA METHODIST UNIVERSITY DEPARTMENT OF ACCOUNTING AND FINANCE PRINCIPLES OF ACCOUNTING 1

CONTROL ACCOUNTS Control account may be defined as a total account inserted in a ledger to make it self balancing. The balance of this account should be similar to the total of the detailed balances of the ledger giving proof of the arithmetical accuracy of the bookkeeping entries in the ledger. Control accounts represent total of all accounts in some other ledgers. the accuracy of these ledgers is proved by the control accounts and they are also called self balancing or adjustment accounts. Control accounts serve the purpose of trial balances which can be extracted for different types of ledgers like debtors ledger or creditors ledger. Control accounts can be debtors/creditors control accounts. Control accounts are helpful in enabling managers to detect the frauds and discrepancies. If a person in charge of any particular ledger wants to make some incorrect entries to disguise some frauds then control account will disclose such efforts. The principle on which control accounts operate is as follows: Total opening balances 1st Jan Add total entries which have increased the balances Less total entries which have reduced the balances Total closing balance *** *** (***) ***

Because totals are used , the accounts are often known as total accounts. Thus a control account for a sales ledger is known as a sales ledger control account. A control account for a purchases ledger is known as a purchases ledger control account. Control accounts are not necessarily a part of double entry but some large firms would incorporate them as part of double entry.

Sales ledger control account /debtors ledger control account. Format

DEBTORS/SALES LEDGER CONTROL ACCOUNT balance b/f at beginning total cash received(from cash book) total sales(from sales day book) total return inwards(from return inwards daybook) total of other charges on sales total bad debts w/o total discount allowed(from cash book) Balance c/d at end of period-normally a month

Example Sales ledger: Debit balances as at 1st Jan Total credit sales for the month Cheques received from customers in the month Cash received from customers in the month Return inwards from customers during the month Debit balances on 31st January as extracted from the sales ledger

1,894 10,290 7,284 1,236 296 3368

Solution
SALES LEDGER CONTROL ACCOUNT JAN 1 BAL b/d jan 31 sales 1,894 10,290 jan 31 jan 31 jan 31 bal c/d bank 7,284 cash 1,236 return inwards 296 3,368

12184

12,184

Similar totals means that the sales ledger was arithmetically correct. Purchases ledger control account/creditors ledger control account Format
CREDITORS/PURCHASES LEDGER CONTROL ACCOUNT total cash paid(from cash book) balance b/d at beginning total return outwards(from its day book) total purchases(from purchases day book) total discount received(from cash book) bal c/d

Example Purchases ledger Credit balances on 1st January Cheques paid to suppliers during the month Return outwards to suppliers during the month Bought from suppliers in the month Credit balances on 31st January from purchases Ledger Solution
CREDITORS/PURCHASES LEDGER CONTROL ACCOUNT jan 31 bank 3,620 jan 1 balance b/d 3,890 jan 31 return outwards 95 jan 31 purchases(from purchases day book) 4,976 bal c/d 5,151 8,866 8866

3,890 3,620 95
4976

5,151

Advantages of control accounts Locating errors. Fraud is made difficult. Management control.

Errors on accounts When entries are made in books of accounts some wrong postings or calculations are possible and these are known as errors. Errors may be divided into two types. Errors not affecting the trial balance Errors affecting the trial balance Errors not affecting the trial balance are as follows/errors not shown in trial balance: Errors of omission If any invoice or other document is lost then the entry will be omitted and it will not affect the agreement of the trial balance. Errors of commission This is an entry of a transaction in a wrong account of the same class. It cannot reflect in the trial balance because it is on the right side but in wrong account. Errors of principle Where entries of a transaction are posted in the wrong class e.g. capital posted in revenue or vice versa. Errors of original entry

This error arises when an entry is incorrectly made in a book of prime entry such as daybooks, cashbook. This amount is simultaneously posted to ledgers. Compensating errors This is an incorrect entry on the credit side which is by coincidence equalized by an incorrect entry on the debit side. Errors of complete reversal This error is made when both the debit and credit entries of a transaction are completely reversed .e.g. debiting a sales account and crediting customers account with same amount. The trial balance will agree. Error of duplication This error is committed when the same transaction is posted to the ledger twice along the correct principles of double entry system. Errors affecting trial balance/errors shown in trial balance. Arithmetical errors-result from wrong additions, subtractions in books of prime entry Transposition errors-when order of figures is reversed e.g. 34,000 written as 43000 Single entry errors-when double entry is not adhered to. Omission of ledger balances from trial balance-a balance either DR or CR is left out Misposting errors-happens when an account is debited instead of being credited, an amount being posted in an account twice, crediting expenses as income and debiting incomes as expense etc Kindly go through these questions before the next class Revision : Final accounts with adjustments Question 1 The following balances relate to the books of Samson Stevens, a trader as at 31st dec 2006.
capital purchases sales land and building plant and machinery motor vehicles wages and salaries rent and rates motor vehicle expenses repairs to buildings general expenses discount allowed discount received debtors 40,000 43,000 75,000 15,000 9,000 6,000 8,900 4,300 1,250 7,500 3,550 1,250 1,072 13,500

creditors drawings provisions for depreciation (i)plant and machinery (II)motor vehicles opening stock balance at bank

8,500 3,000 4,500 2,928 7,500 8,250

Additional information Stock as at 31st dec was shs 8500. Provide for depreciation on plant and machinery at the rate of 10% on cost and 20% on motor vehicle. The expenditure on repairs to buildings is to be capitalized by shs 5000. Required 1. Prepare a trial balance using the above information. 2. Prepare a trading profit and loss account and balance sheet as at 31st dec 3. Differentiate the revenue and capital expenditure as presented in the information above 1b) Explain in detail the accounting treatment of the following Accruals and prepayments Depreciation Provisions Bad debts 1c) why use a trial balance? It may not give a true picture of the business. Discuss Question 2 Books of original entry
July 1 balances b/f cash bank July 2 bought goods by cheque July 3 cash sales July 5 banked cash July 6 paid by cheque,in each case cash discount received 3%, john 3000,hofman 3000, Jackson 1400 July 7 received by cheque in each case discount allowed 5%,shaw shs 4000,benhim shs 3000,malthus shs 3200 2,500 7,400 2,000 1,800 2,000

July 10 bought office furniture by cheque July 15 cash drawings July 20 paid to eddy shs 800 less 3% July 22received cash from smith shs 1500 less 4% July 30 paid wages in cash

3000 500

1000

Use the above information and prepare a three column cash book b) What other books of original entry are you familiar with? c) What relationship exists between books of prime entry and control accounts? Topic Accounting theory Question 3 a) Write short notes on: International accounting standards International financial standards Accounting concepts b) Why are accounting concepts useful in business? Topic Final accounts with adjustments-bank reconciliation

Question 4
BANK STATEMENT debits balance deposits deposits cheque no 716 cheque no 717 deposits cheque no 719 bank charges cheque no. 721 unpaid cheque deposits cheque no 718 standing order credits 11,640 1,745 7,200 1,360 2,500 3,400 50 2,840 4,250 3,600 4,850 5,000 balance 8,400 20,040 21,785 14,585 13,225 15,725 12,325 12,275 9,435 5,185 8,785 3,935 1,065

DR

CASH BOOK-BANK COLUMN

CR

bal b/d deposits deposits deposits deposits

8,400 11,640 1,745 3,600 4,285

cheque no 716 cheque no 717 cheque no 718 cheque no 719 cheque no 720 cheque no 721 cheque no 722

7,200 1,360 4,850 3,400 2,610 2,840 3,180

REQUIRED a) Complete the cash book and prepare a bank reconciliation statement Why is the bank reconciliation relevant?

b) Describe the causes of differences in BAL as per cash book and bank statement.

Topic Introduction Question 5 a. b. c. d. What is accounting? Who uses accounting information and why? Why do we have the concept of double entry? Explain the detail in double entry

Prepare ledger accounts for mr kamau july 1 july 2 july 2 july 4 july 10 july 12 july 25 july 30 july 31 july 31 july 31 M Kamau started to deal in watches with capital in cash shs 5000 Bought 20 watches for cash sh 1000 Bought 10 watches for cash sh 750 Sold 5 watches for cash sh 700 Sold 10 watches to S Walker sh 1000 Bought 15 watches from smith and company for shs 200 paid general expenses in cash sh 200 sold 17 watches to william for sh 1500 paid wages to all employees sh 300 paid cash to smith sh 1200 received cash from walker 1000

Question 6: Final accounts The following trading profit and loss account contains some mistakes. Redraft correctly.
TRADING PROFIT AND LOSS ACCOUNT AS AT 31DEC 2009 Purchases 565,000 Sales 720,000 Return inwards 8,000 Carriage outwards 8,400 Closing stock 90,000 Opening stock 40,000 Salaries 60,000 Rent received 6,000 Gross profit c/d 51,400 774,400 774,400 Less expenses: Carriage inwards 5,000 Gross profit b/d 51,400 Advertising 1,200 Interest in bank loan 1,250 Printing and stationary 3,120 Discount allowed 1,500 Discounts received 3,280 Net loss c/d 19,450 Return outwards 16,000 Warehouse wages 9,440 Motor expenses 5,160 Bank charges 720 Electricity 2,880 Insurance 4,900 Rent and rates 12,000 Postage and telephone 3,600 Repairs and sundries 6,300 73,600 73,600 NET LOSS B/D 19,450

THE END

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