chapter 14

Question 1

control account

Answer 1

a memorandum account containing the totals of all transactions relating to trade receivables and trade payables; it checks the accuracy of the individual trade receivables in the sales ledger, and trade payables accounts in the purchases ledger. can be used in any parts of an accounting system, but most common are for the sales and purchases ledgers. it is prepared at the end of an accounting year and uses the totals from the books of prime entry. prepared using double entry bookkeeping principles

Question 2

memorandum account

Answer 2

ledger accounts that are not regarded as part of the main double-entry system even though they are produced using double-entry principles. They are produced to check the accuracy of parts accounting system.

Question 3

sales ledger

Answer 3

an account relating to one item for example, each credit customer will have its own sales ledger

Question 4

the balance of a control account

Answer 4

it should be equal to the balances in the ledger it controls

Question 5

two functions of a control account

Answer 5

as an arithmetical check on the accuracy of the bookkeeping
as a summary of the part of the accounting system, enabling one total balance to be entered into the trial balance rather than lots of balances

Question 6

why is a sales ledger maintained for each customer

Answer 6

it helps keep an accurate and up to date record of how much is owed and is a big concern for business that sell goods on credit. the accounts show the value of the asset represented by the amount that each customer owes

Question 7

what does balance brought down on the debit side mean

Answer 7

the amount that the customer owes

Question 8

sales ledger control account

Answer 8

summarizes the transactions involving sales on credit. since it is an asset account, the balance b/d figures should always be on the debit side. anything that increases what the customer owes will be a debit entry, while anything that reduces what the customer owes will be a credit entry. this account is about customers owing the business money and so only credit sales should be entered into the individual ledgers and the control account. only irrecoverable debts that are written off should be included in the individual sales ledgers and the control account

Question 9

how is a cheque payment recorded

Answer 9

debit: bank
credit: individual customer’s account
and the appropriate credit entry would be made in the relevant individual sales ledger

Question 10

how is a dishonored cheque recorded

Answer 10

the entries for a cheque payment have to be reversed
debit: individual customer’s account
credit: bank

Question 11

reasons for credit balances

Answer 11

overpaid their sales invoice

paid in advance or have paid a deposit before the delivery of the goods and the creation of the invoice

paid the invoice in full but a problem discovered later has resulted in a credit note being issued.

Question 12

contra (set-off)

Answer 12

an accounting entry used to record a transaction where balances on two accounts are being cancelled out against each other

Question 13

when are contra (set-off) used

Answer 13

it is possible that two business might supply goods or services to each other on credit so they owe each other money

Question 14

purchases ledger control account

Answer 14

summarizes the transactions involving purchases on credit. the balances on this account can then be compared (and reconciled) with the total of the balances on the individual ledger

Question 15

why is it important for businesses to keep a purchases ledger account

Answer 15

when a business buys goods on credit, it needs to know when the purchases were made and how much is owed to each supplier so that the right amounts can be paid at the right time. the business would like to total up individual balances so that one figure can be included. the bookkeeping has to be accurate and that this total figure for its trade payables is reliable

Question 16

errors and purchases ledge control account

Answer 16

it can be safely assumed that if the balance on the purchases ledger control account does not agree with the sum of the individual purchase ledgers, then there are errors that need to be investigated and corrected. it is also possible that errors have been made that do not cause any discrepancy, for example- a payment might be debited to the wrong suppliers account, which would result in two incorrect balances even if the total payables balance was still correct

Question 17

why does the purchases ledger and purchases ledger control account represent liabilities

Answer 17

the balances show how much money is owed by the business. items that increase what is owed will appear as credit entries and those that reduce the size of the liability are show as debits

Question 18

why can a ledger have a debit balance

Answer 18

the business has overpaid a purchase invoice

the business has paid in advance or paid a deposit before the delivery of the goods and the creation of the invoice

the business has paid the invoice in full but a problem discovered later has resulted in a credit note being received.

Question 19

why are control accounts regarded as memorandum accounts

Answer 19

they are there to check the accuracy of the individual trade receivables in the sales ledger and he individual trade payables on the purchase ledger

Question 20

why are individual sales and purchase ledgers needed to provide an accurate and up to date record of transactions

Answer 20

the right amounts of money can be collected from each customer and late payers can be chased for the correct amounts
the right amounts of money can be paid to the right supplier at the right time

Question 21

benefits of control accounts

Answer 21

indicating that errors have been made if the totals of the balances in the individual ledgers do not agree with the balances on the control accounts

indicating which part of the accounting system contains errors if there is a difference on a trial balance

if a business has a large number of credit customers and suppliers, then the trial balance will contain a few large control account balances rather than a huge number of small ones

improving internal control

The business accounts may not be maintained using a full double-entry system

Question 22

limitations of control accounts

Answer 22

they may contain errors

they do not guarantee the accuracy of individual ledger accounts, which may contain compensating errors

they may add to business costs as someone with specialist accounting knowledge is required to verify their accuracy

Question 23

error of omission

Answer 23

an error where the financial transaction has not been recorded

Question 24

error of original entry

Answer 24

an error where the amount entered from the book of prime entry is incorrect

Question 25

what needs to be done when there is a difference between the balance on a control account and the total balances in the ledger it controls

Answer 25

the cause must be found and the necessary corrections made. only when this has been done can the control accounts and the individual ledgers be said to have been reconciled

Question 26

why does error of omission not cause a discrepancy

Answer 26

this will not appear in either the individual ledger or the control account. both records will be wrong but out reconciliation will still agree

Question 27

why does error of original entry not cause a discrepancy

Answer 27

this will be repeated in both the individual ledger and the control account. both records will be wrong but out reconciliation will still agree

Question 28

errors that can cause discrepancy

Answer 28

if an item is copied incorrectly from a book of prime entry to an individual ledger or purchases ledger, the control account will not be affected, and an unsuccessful attempt to reconcile the total of the individual ledger balances with the control account balance will reveal that an error has been made

If a total in a book of prime entry is incorrect, the control account will be incorrect but the individual sales or purchases ledgers will not be affected. The unsuccessful attempt to reconcile the total of the individual ledger balances with the control account balance will reveal that an error has been made.

Question 29

how to reconcile control accounts with purchases ledgers

Answer 29

The purchases ledgers and the purchases ledger control account are recording liabilities. So all balances will be on the credit side.

There will be no irrecoverable debts or allowance for irrecoverable debts to deal with.

The trade payables figure in the statement of financial position will be the balance in the purchases ledger control account.

Question 30

auditor

Answer 30

a person authorized to examine, review and verify financial records to ensure that they are accurate and that the information provided by a business represents a ‘true and fair view’ of its performance and financial state.

Question 31

way of verification of balance: reconciliations with statements of account

Answer 31

it is quite likely that statements of account will be received from most, if not all, suppliers. The business can tick off items in the individual purchases ledgers against the statement of account to see if there are any obvious errors. Note that it is possible there will be some timing differences,

Question 32

ways of verification of balance: formal requests from suppliers and customers

Answer 32

auditors send out letters to credit suppliers and customers requesting information about the outstanding balance at a particular date. If there is a difference between that reported by the client and the balance according to the customer/supplier, then a reconciliation can be produced to ensure that the differences are due to timing differences rather than genuine errors.