Chapter 10 - Control Accounts

Question 1

Division of the ledger

Answer 1

The ledger contains four main sections:

Receivables ledger, payables ledger, cash book, general ledger

Question 2

Concept of control accounts

Answer 2

The control account records the totals of transactions passing through the ledger accounts. The balance of the control account will always be equal to the total balances of the ledger accounts. Two commonly used control accounts are:

Receivables ledger control account

Payables ledger control account

Question 3

Receivables ledger

Answer 3

Records:

Sales made on credit to customers of the business

Sales returns by customers

Payments received from customers

Discounts allowed for prompt settlement

The total of the receivables ledger account balances should agree with the balance of receivables ledger control account in general ledger

Question 4

Payables ledger

Answer 4

Records:

Purchases made on credit from suppliers of the business

Purchase returns made by the business

Payments made to suppliers

Discounts received for prompt settlement

The total of the payables ledger account balances should agree with the balance of payables ledger control account in general ledger

Question 5

Cash book

Answer 5

Records all transactions for bank account and cash account

Often used for recording amounts of value added tax on cash sales and cash purchases

Cash book is included in the general ledger accounts for the purposes of a trial balance

Question 6

General ledger

Answer 6

The general ledger contains the other accounts of the business:

Sales account (cash and credit)
Purchases account (cash and credit)
Sales returns, purchases returns
Expenses and income
Loan
Capital or equity, drawings or dividends
Value added tax or sales tax
Non current assets
Other assets, eg inventory
Control accounts eg receivables ledger, payables ledger

Question 7

Receivables ledger control account

Answer 7

The balance b/d on the debit side of the control account represents the total of the balances of the trade receivables accounts in the receivables ledger.

If the balance is a credit balance the customers could have paid for the goods and then returned them or has overpaid in error.

Credit sales

Only credit sales are entered in the control accounts as only credit sales are recorded in the receivables ledger accounts.

Returned cheques

When a customer pays by cheque sometimes the cheque is returned unpaid by the bank. The double entires are:

Debit trade receivables account
Credit cash book

Irrecoverable debts

Debit irrecoverable debts account
Credit trade receivables account

When a transaction is debited or credit to the trade receivable account it will be treated the same in the control account

Question 8

Payables ledger control account

Answer 8

The balance b/d on the credit side of the control account represents the total of the balances of the individual trade payables accounts in the payables ledger.

If the balance is a debit balance the supplier may have been overpaid.

Credit purchases

Only credit purchases are entered in the control account

Question 9

Set off entires

Answer 9

Set Ofc entries occur when the same person or business has an account in both receivable and payable ledger.

To save having to send a payment to the other one account is set off against the other. It is always the smaller of the two amounts owing this is the set off amount.

Question 10

Control accounts as an aid to management

Answer 10

Immediate information of balance of total trade receivables or payables figure.

Control accounts are regularly checked which adds security within the accounting system.

Question 11

VAT control account

Answer 11

VAT control account brings together amounts of VAT from books of prime entry - the day books, the journal and cash book

The vat return is prepared from the various control account. The vat return shows: the money due to be paid when vat collected from sales is greater than the vat paid on purchases or the money amount due as a refund from HMRC when VAT collected from sales is less than the VAT paid on purchases

The balance of VAT control account must reconcile with the amount shown on the businesses vat return

If the balance of vat control account is a debit the amount due is a refund from HMRC

If the balance of vat control account is a credit the amount due is to be paid to HMRC

Question 12

Wages and salaries control account

Answer 12

Wages and salaries control account brings together transactions from payroll accounts

Wages expense is credited to the control account

Bank, HMRC, pension fund, trade union fees are debited

Question 13

Preparing reconciliations

Answer 13

We make adjustments to reconcile:

Receivables ledger control with receivables ledger

Payables ledger control account with payables ledger

Cash book columns with the bank statement

Whenever a difference is found it needs to be corrected by means of a journal entry

Question 14

Receivables ledger control account discrepancies

Answer 14

Credit sales, sales returns, payments received from trade receivables, discounts allowed to trade receivables, irrecoverable debts:

Omitted or understated
Entered twice or overstated

Other differences:

Set off entires omitted or understated/ entered twice, overstated

Debit amounts entered on credit side
Credit amounts entered on debit side

Question 15

Payables ledger control account discrepancies

Answer 15

Credit purchases, purchase returns, payments made to trade payables, discounts received from trade payables:

Omitted or understated
Entered twice or overstated

Other differences:

Set off entires omitted or understated/ entered twice or overstated

Debit amounts entered on the credit side
Credit amounts entered on the debit side

Question 16

Cash book bank columns

Answer 16

The bank columns of the cash book can be checked against the bank statement.

A bank statement is a record of customer transactions from the banks viewpoint.

A debit balance in cash book will be a credit entry on the bank statement. A credit balance in cash book will be a debit entry on the bank statement.

Appearing on the bank statements include a number of different forms of receipt or payment. These include:

Cheque

Bank transfers

Standing order

Discrepancies between the banks columns of the cash book and the bank statement include:

Unpresented cheques - cheques issued but not yet recorded on the bank statement

Outstanding lodgements - amounts paid into bank but not yet recorded on the bank statement

These two are timing differences and will correct themselves overtime

Other discrepancies:

Bank transfers, standing order payments , direct debit payments that have not already been recorded in the cash book

Unpaid cheques - cheques received and paid into bank that have bounced

Bank charges and interest